The Telegraph
Tuesday , November 13 , 2012
Since 1st March, 1999
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- This time industry has led the decline in growth

Indians are wont to regard Pakistan as a politically unstable nation, but that is because we ignore instability if it is the result of a stable process. Elections are, by and large, held when they should be; if they lead to frequent changes in the parties in power and in the ruling classes behind them, we do not consider that instability. But those little revolutions are extremely upsetting for the parties involved.

Consider the first upset — the exit of the Indira Congress. Indira Gandhi minded it greatly, and did her worst to prevent it. She threw out her opponents from the Congress; when that did not suffice, she jailed the entire Opposition for a while. It was only when she thought her machinations had worked that she held elections, and unexpectedly, lost. This episode is seen as one of conflict within the Congress; what is missed is that the ground underneath had shifted. A rising proportion of the population disapproved, not so much of Congress policies, but of their consequences, especially the persistent food shortages it created and the way it dealt with the resulting distress. When people can more or less bear with what comes to them and have some freedom of manoeuvre in dealing with the future, they forget the government and get on with their lives. An increasing proportion of the population could not do that in the 1950s and 1960s. Families were large, the work available was not increasing fast enough, and the work required to feed the family increased dramatically with the famine of 1965. The population and the labour force were growing twice as fast then as now, and even if employment had grown to keep them occupied, marketed surplus of agriculture was not growing fast enough to feed them. The crop failure of 1965 only dramatized this situation; it had been worsening for many years before that. That particular problem was unexpectedly and rapidly resolved by the green revolution; in a matter of four years from 1967 to 1971, it erased the food deficit. But the problem of slow growth of incomes and employment was not resolved thereby. The political instability of the 1970s was seen as being related to the oil crisis; but it was also due to the continuation of inadequate growth.

Just as the crisis of the 1960s is seen as a food crisis, the crisis at the end of the 1980s is seen as a balance of payments crisis. But the balance of payments cannot run into deficit unless finance is available to bridge the deficit; no one remembers where the foreign exchange to finance it came from. It came largely from Japan, which was running enormous payments surpluses and accumulating foreign exchange, and whose companies needed to find some way of investing it. So they gave samurai loans to Indian public enterprises. When our finance secretary faced a problem financing the payments deficit, he encouraged public enterprises to take samurai loans; thus, the short-term interests of Japanese banks and the Indian government coincided to create the crisis. Japanese banks lent money to Indian government companies because they could not find other borrowers. The oil crisis had made Arabs extremely rich. They put their money in banks in New York, and asked them to find borrowers. New York banks lent it to Latin American countries, which consequently went bankrupt one by one through the 1980s. By the late 1980s, India was the only solvent borrower left; soon after, it joined the Latin American bankrupts. Payments crises can always be blamed on the governments of the countries in crisis; but the whirlwinds in the world financial markets unleashed by the oil crisis were equally important.

The next crisis was not a payments crisis; it was a crisis of growth. Just around the turn of the century, the growth rate fell under 5 per cent for three years. It was shocking for two reasons. First, it followed the reforms of the early 1990s; so it was natural, especially for the lefties, to spin out stories about failed reforms. And second, growth slackened after the Bharatiya Janata Party came to power, so the politically minded were inclined to see a relationship with a change of regime and ideology. But in all the three years of low growth, agricultural output fell or stagnated. It was largely accidental. In fact, growth jumped to 8 per cent and higher soon after; it was just the BJP’s bad luck that it lost the 2004 election and the Congress got credit for which it had done nothing.

Now, however, we may see something for which the Congress will find it difficult to avoid responsibility since it has been in power for eight years. Growth is declining rapidly, and we may soon see such low levels as we have not seen in 30 years. It is a thought Congressmen find quite unwelcome; after growth began to slow down, both the prime minister and the finance minister assured everyone that it would soon bounce back to 8 per cent and beyond. But if growth obeyed the wishes of the rulers, we would have been in the seventh heaven long ago.

The rulers may be right, and we may be back up to 8 per cent growth soon; if it happens, I will look silly. But it may happen that growth will fall even further, and will continue to be low for some years. Why should it happen? Because of the causes underlying the spectacular boom of 2003-2010 and its termination. It is difficult to be sure about its cause, because growth during the boom was remarkably broad-based: industry grew rapidly, so did some of the services, and there were some spectacular years of agricultural growth. But the bust is clearly led by industry. As a result, investment has collapsed, and growth throughout the economy is going down. For industrial slumps to end, one or both of two things are necessary. First, innovations must create new products or processes or industries — like the information technology industry which led growth in the 1990s. Second, the surplus capacity created in the previous boom must be exhausted. That generally takes a few years. I do not see any major innovations on the horizon. In their absence, surplus capacity may take three to four years to be absorbed. Above all, the world economy looks set for a bad time. Economic helmsmen of industrial countries keep dreaming up stimulus packages; but stimuli do not create steady growth. Worse, India is running a huge payments deficit, which will worsen if the world economy slackens. So I forecast at least low growth till 2017. That is an optimistic forecast. We could also have a crisis in addition. Quite possibly, India will run through its reserves, a good many firms will turn turtle, and the banks will be loaded with bad debts. If they are, the crisis will be made worse by the inclination of the government to play it down. Our only hope is that Bollywood will make some super-starrers which will sweep the world, make mankind forget its woes, and solve our payments crisis. Such miracles happen in films; there is no reason why they should not in reality.