For the last three years, the Indian economy has been on a roll. This was too much good news for too long. India has always had a way of reversing good news by doing something that makes it go away. It is about to do so again.
The gross domestic product has grown at a minimum of 6 per cent each year . Foreign exchange reserves have been piling up as the world marches to invest in Indian stocks, projects and brains. The rupee appreciated every day. Inflation was the lowest in two decades. The balance of payments on current account was showing a surplus while even the balance of trade deficits appeared to be on the verge of becoming positive. Industrial production is rising, particularly of capital goods. The construction boom in most cities along with the roads programme started by the National Democratic Alliance and continued by the United Progressive Alliance government has stimulated demand in the economy. Our relations with Pakistan have improved and the United States of America is about to admit us to the fringes of the nuclear club. No wonder the Indian stock markets climbed to unprecedented levels. Growth was here for good.
The world came in the way through rising oil prices and poor fiscal management by developed economies, They allowed their deficits to climb, kept interest rates low, continued excessive government expenditures; the profligacy reaching unsurpassed levels in the US. The dollar was in decline but not enough to improve their BoPs. A big debtor is more of a problem. The big holders of US treasury bonds like Japan, China, Korea, the oil-rich countries of west Asia, could not move out of them in a hurry. This allowed US consumer and government profligacy to continue.
Meanwhile, the euro went into decline after the rejection of the proposed new European constitution by France and stagnation in major European economies. That left the dollar unchallenged as the only acceptable world currency. This kept US growth at higher levels, riding on the big inflows of funds that kept interest rates low and fuelled a real estate, housing and stock market boom. The American consumer, feeling rich because of rising asset values, borrowed increasingly to finance growing consumption expenditures. These trends were unsustainable. Nemesis has hit European countries and the US.
Signs of inflation, rising interest rates and declining asset values will slow the world economy. India will also be affected. But India exports only 8 per cent of GDP and so the impact will be softer than for China that exports over 25 per cent. But our net fund inflows might lessen as investors find higher interest rates in the US.
In India the decline is already visible. After two years of a surplus BoP, we are again in deficit because of very high import costs of oil and gas and other items (like coal or capital equipment) to feed the domestic boom in the economy. Steel and other commodity prices are dropping as the Chinese rein in their over-consumption. The rupee is again in decline. The stock markets are taking a much needed pause for 'correction'. The soaring market of the last few months has reversed to sharp decline and will not recur quickly. The government deficit is unlikely to fall because of the huge social expenditures on education, roads and rural employment. Interest rates are being talked up but we can expect some action soon to keep them in line with world trends.
Meanwhile the communists have held up many reforms for opening the economy. Government deficits are a concern despite better collection and new taxes on services and fringe benefits. The value-added tax might stimulate trade and state government revenues. The new administrative reforms commission should over three years reduce red tape and improve administrative delivery. Even if there is considerable leakage, the new social programmes will stimulate the economy by adding to purchasing power. A small rise in interest rates may do no harm to the industrial economy.
India is a growing investment destination because of world demographic trends and the Indian information technology story. That has woken the world up to India's potential as a source of cheap brainpower that can contribute from within India because of modern telecommunications. Overseas investments will grow in manufacturing as investors take advantage of the low-cost, skilled Indian work force. The pressure on BoP due to the steep rise of world oil and gas prices may also have reached its limit, especially as there is a slowing of demand in the West. So the declining world economy might affect us a little but not much.
What will affect us adversely is our own inability to remain consistently and single-mindedly focussed on growth and reforms. Communists may not pose as much of an obstacle as they have after the West Bengal elections. But the major crisis will be a direct result of the Supreme Court judgment on the dissolution of the newly-elected Bihar assembly on the advice of the Bihar governor.
The lawful responsibility is that of the prime minister and president. The prime minister advised president's rule and dissolution of the new assembly even before it was sworn in. The president as the ultimate repository of all authority signed the order almost immediately. As decent and upright men, one or both may decide to go.
If the prime minister resigns, the Congress leadership, busily preparing the gaddi for a reluctant heir, might give us incompetent but docile politicians as prime ministers ' Shivraj Patil or A.K. Antony. The former has been a poor home minister and the latter was a failure as Kerala's chief minister. But they will as prime minister, act as required and leave when asked unlike the other senior and more able politicians like Pranab Mukherji or Digvijay Singh. Patil or Antony are amenable to party orders like Manmohan Singh, but unlike him do not enjoy the high respect he is held in nor his administrative and economic ability. Their prime ministership, even for a short period, will destroy confidence in India and slow the economy.
If the president resigns, it will be a catastrophe, because he has convinced the people of India of his sincerity and integrity. It will lead to major political agitation as the Bharatiya Janata Party and the NDA protest about 'their' president and others rise to defend a Muslim president (though his religion has never been foremost in the people's perception of him). It will almost certainly lead to a fresh national election and an intervening period of political and therefore economic instability. An election may not restore stability and growth.
So, India is again getting ready to shoot itself in the foot. The way out is for the president on the advice of the prime minister to dismiss Buta Singh as governor of Bihar and for Manmohan Singh to apologize for his bad advice. The president must never in future act in haste on such advice from the government. Laloo Yadav, the instigator of this sorry drama, must be dropped from the cabinet and the UPA must seek other allies, even if they are from the NDA.
Unfortunately for India, none of this will happen. The UPA will continue, with belligerent communist support, as will Laloo. The Nehru family will cling to its inherited property, namely India. The setback to the economy will take a few years to be overcome. We will resume the 'drunkard's walk' to economic growth and development of past decades.