Losers can cheer themselves up by reading our prime minister’s speeches. For example, this is what he said in Qatar on November 10: “The present international economic and financial situation has clouded some of the prospects of growth in the near term. I am however confident that the long term outlook for our economy remains strong and robust. Our inherent strengths, the large size of our markets, the diversified industrial base we possess, and the strong and dynamic private sector will eventually allow us to return to a 9% growth trajectory.” He believes that the economy is a yo-yo which bobs up and down around a nine-per cent growth line. The worse things get, the better they are going to get.

The prime minister lives mostly in his executive jumbo 39,000 feet above us, so he may have only a bird’s-eye view of our troubles. The finance minister is closer to us. Minutes before the gong went in stock markets on October 13, he told us: “We must remain confident and respond to the situation in a cool and mature manner. We must banish fear. Especially, depositors have nothing to fear because their deposits in banks are safe. Investors must take informed decisions. Before you sell, you must remember that for every seller there is a buyer. You must ask yourself why the buyer is buying in these times of perceived uncertainty and, therefore, ask yourself the further question whether there is a need to act in haste or in panic. In my view, there is no reason at all to act in haste or to give room for panic. If all the players in the economy remain confident and take informed decisions, I have no doubt that the Indian economy will weather the current storm and emerge stronger.” He obviously did not mean that investors must remain confident that the economy is going to collapse; he is the original inventor of the nine per cent mantra. So he was saying, don’t sell, stock prices will go up one day. The market went up immediately after he spoke — and went down the next day. It has gone down further since. He has gone strangely silent since then; if only he would speak minutes before the gong went every day!

Meanwhile, imports in April-September were $154.7 billion — 38 per cent more than a year earlier. Exports were $95 billion — 31 per cent higher. The trade deficit was $59.7 billion, two-thirds of the deficit for all of 2007-08; exports paid for only 61 per cent of imports. But that, the prime minister would say, does not matter, for we export services which pay for imports of goods. The Reserve Bank of India produces balance of payments figures with a delay of four months, so we do not have figures after June. But in April-June, we earned $20.9 billion from invisibles. The current account balance deficit was $10.7 billion. The quarterly deficit has gone up from last year’s $6.3 billion; but the increase does not seem too drastic. Since India is a dynamic, rapidly growing economy with sound fundamentals, foreigners must be hurrying to invest in it; capital inflows would pay for the deficit on current account.

But net income payments to foreign investors went down from $6 billion in 2006-07 to $5.2 billion in 2007-08; in the April-June quarter they were less than a billion. Maybe foreign investors are leaving more of their profits in India, and taking less of them home; or they are making less profit; or they have reduced their investments in India. Which of these is correct? None of them. The RBI has no idea of reinvested profits, so it has repeated last year’s figure in the latest quarter. Foreigners increased their withdrawals of profits and dividends. Foreign direct investment was $19.4 billion in the whole of 2007-08, and $12.4 billion in April-June 2008.

What happened was that Indian companies increased by a billion dollars the profits they brought in from abroad. Clearly, as they ran short of money, they took it from their subsidiaries abroad. Why did they run short? In 2007-08, they had borrowed $22.3 billion abroad; their borrowings came down to $1.5 billion in April-June 2008. Their direct investments abroad were $19.4 billion in 2007-08; in the April-June quarter they were down to $2.3 billion. And foreigners? They had made net portfolio investments of $29.3 billion in 2007-08; in the April-June quarter their disinvestments exceeded investments by $4.2 billion.

So the picture emerging from balance of payments figures is one of shortage of money: Indian companies have been bringing in profits and investing less abroad to access money, and foreign companies have been selling their portfolio investments in India to take money home. Their common liquidity shortage has led to flows of money in opposite directions.

What then was the net result of these two-way flows? Foreign exchange reserves peaked at $304.9 billion at the end of May. In the next five months, they fell by $2.5, $6.4, $11.8, $6.5, and $24.7 billion. This fall of over $50 billion should have reduced money supply by at least Rs 2 lakh crore. Banks increased their loans to the commercial sector by Rs 2.5 lakh crore to replace the liquidity lost in falling reserves.

In 2002-07, we saw rising reserves increasing money supply and the RBI sucking it off by selling market stabilization bonds. Since May, we have seen the reverse process: a fall of $50 billion in reserves being countervailed by an increase in bank credit. At the average rate of fall of reserves since May, the remaining reserves can last two years; at the rate of fall in October they can last 10 months.

The government’s rhetoric asserts that there is a short interruption in ever rising growth. But the reality reflects a trade cycle generated by external factors. The Bush-era fiscal deficits led to a flood of international liquidity and sent our reserves soaring. Now the American crisis is leading to liquidity shortages and shrinkage of demand in the West, which is reducing our reserves. If the cycle were symmetrical, we should be back at a payments crisis in a year or two.

The last payments crisis developed at leisure because there was no effective government to deal with it. The governments of V.P. Singh and Chandra Sekhar stood by as the crisis unfolded. We may get equally feckless governments after the general election. Till then, we have a leadership incapable of taking correct action because it lives in hope and is not reading the reality right.