The budget was nothing to write home about. The ritual debate on it has died out. While the chief economic adviser wrote an inspired first volume of the Economic Survey brimming with bright ideas for new reforms, it was all Greek and Latin to the finance minister, who ignored it in his budget. From his high-altitude throne in Mumbai, the Delhi scene must look pretty flat to the governor of the Reserve Bank of India. If he had been his own master, he would have gone off to Lofoten in Norway and dived into the Arctic ocean. The air temperature there is freezing, but the sea temperature is five degrees centigrade because of the Gulf Stream. So divers there prefer to stay underwater.
However, such luxuries are beyond the governor for now. So he has taken to reading reports of the International Monetary Fund and the Organization for Economic Cooperation and Development that he gets free. His thoughts on what is happening to the globe found expression in a lecture The Indian Express invited him to give in honour of its founder.
Israel has a powerful ally in the United States of America. The Arab countries watched Israel thrash Egypt in 1967. Much as they might have liked, they could not find a way of licking Israel. So in 1973, they quadrupled the price of their oil to teach the white friends of Israel a lesson. To the people of those rich nations, used to driving to the neighbourhood store for a sandwich, that was a shock. Growth slowed down across the entire industrial world. This was noted first by Steven Englander and Andrew Gurney in a brief, plodding paper they did for OECD in 1994. They showed that across the industrial world, business sector (that is, non-government) growth rates had fallen after 1973. Employment growth had continued undiminished. In other words, productivity growth had slowed down.
Just when they finished their study, the cycle reversed, and growth perked up in the US. It led the world in innovation in miniature computers, which turned later into laptops and smartphones, and their embedded software. The boom was so huge that American firms came to India, collected all the software engineers they could find, and flew them off to California. Unemployment in the US fell to four per cent of the labour force.
The terrorist attacks in September 2001 brought the long boom of the 1990s to an end. Then, Federal Reserve pumped in liquidity and reduced interest rates to revive the economy. That left banks with mountains of cash they did not know what to do with; so they showered mortgage loans on poor Americans, who were happy to buy the houses in which they had lived on rent. But they did not have the income to service the loans. Widespread defaults brought that boom to an end in 2008.
Since then, the IMF has repeatedly made cheerful growth forecasts and then downgraded them, according to Raghuram Rajan, the governor of the RBI. The debt overhang that led to the Great Recession of 2008 continues; and economic growth seems to have slowed down because of low productivity growth and the ageing population. Growth in industrial countries could perhaps be revived by means of structural reforms to intensify competition, stimulate innovation and institutional repair, but their governments cannot face the political costs of doing so. So they keep using monetary policy and releasing cash in their economies. The glut of funds and low interest rates in industrial countries lead financial institutions to look for higher returns abroad; there are surges of portfolio investment into India, which rushes out equally suddenly when monetary conditions tighten abroad. How should the Indian economy be managed in this unstable global environment?
Rajan first took his audience through some basic statistics. Exports of goods and services have been more or less stagnant since the middle of 2012; he showed that this was true not only of India, but of emerging market countries, once called less developed countries, in general. Since the beginning of 2015, however, our exports have done slightly worse than emerging markets'; their exchange rates have also depreciated more than India's against the US dollar. India's trade-weighted nominal exchange rate has been more or less flat: depreciation against the dollar has been balanced by appreciation against the euro.
But then, inflation in India is higher than that abroad, so has not the real effective exchange rate improved? Rajan showed that the answer varies according to the time period of comparison: it has improved since September, but is about the same as a year ago. But what matters is not the prices firms receive, but profits - that is, prices minus costs. Rajan thinks that firms' costs have been falling, presumably because of a fall in their input-output ratios. This fall in costs has balanced the decline in export prices resulting from an appreciating real exchange rate. What is the evidence for this view? That while company financial figures show sales to be pretty flat, manufacturing gross domestic product has been rising pretty fast.
Altogether, Rajan thinks that he and his cohabiters in the government have managed the economy very well, and brought it macroeconomic stability in an unstable world, with 7 per cent growth, low inflation and a low current account deficit. So he was quite annoyed with "the economic sirens, seeking to lure the economy onto the shoals of economic distress, [who keep calling]... 'Lord, give us stability, but not just yet'".
Rajan argues against those economists who call for rupee depreciation, and who want everything to be made in India. Exchange rate undervaluation is a good idea for small economies with weak domestic firms. India's is a large economy; deliberate undervaluation would attract retaliation. And Indian firms are strong enough to become competitive with their own efforts. It is better to maintain a stable exchange rate, give foreign investors an expectation of stability, and attract long-term capital.
Finally, Rajan referred to the big shots of Delhi who go to international conferences and rail against the domination of big powers. They do not realize that India itself is a big power; it does not know how to demonstrate its big power status, but it has arrived. The dominance of other big powers, whom the big shots encounter in the Group of 20, IMF-World Bank meetings and other conclaves, does not arise from their larger size, but from the power of their ideas. India needs to make an investment in economic analysis, to generate ideas about how to use the global economy for its own advancement, and to make allies that would help it do so.
That was a refreshing, intellectually enriching speech for someone who has to follow the mindless oratory that pours out of the Delhi government. I do not know if Rajan will have any influence on national economic policies; the Delhi power elite live in their own world of prejudice, and do not have much respect for dissent. But at least, they will not dare call Rajan a seditionist, or send him to jail. He may not have much time left in his present post; he should use the few weeks left to him to knock some sense into the power elite of Delhi.
