Trade imbalance, the excess of imports over exports, a perpetual irritant to many financial pundits and industrialists, has made India the second largest contributor to global demand as per the international trade data of the last five years and on the larger canvas of factors conducive to global economic growth, “it’s the countries like China and Germany which have done a disservice to global economy with their insistence on export led growth”, said Arvind Virmani, a renowned economist and former executive director of International Monetary Fund during a speech at the Madras School of economics while explaining the global contours of India’s economic growth.
However, the “scary data” of the last two years- expanding fiscal and current account deficit, fall in corporate investment and slump in manufacturing- also shows that India’s position as one of the fastest growing economy is under serious threat. “Growth is not God given. Only because the economy grew in the last decade does not mean it will continue to do so….the last two years are probably exhibiting the decline after the peak in growth,” he said.
Did India simply hitch-hike on a buoyant global economy during the 90s and is now in a slump as the global economy is decelerating? Presenting the aggregate growth data since 1950s, Virmani showed that till 1980s India’s per capita Gross Domestic Product was consistently and significantly below the global average and the gap was widening. Following the 1991 reforms India finally rose above the global average rate. “It was our efforts which boosted our economy..India’s growth story is rooted in domestic factors.” He said.
In a speech replete with graphs and metadata, Virmani tried to settle the argument in favour of more broad based reforms. Following the reforms of 1991 India’s economic status has improved. “The trends in the per capita Gross Domestic Product (PCGDP) of India and China show convergence,….we are finally catching up.” he said.
To understand the present economic doldrums one needs to supplant the data with historical insights and well grounded economic theories. Virmani divided the Indian economic history in three main periods, most terrible of those was the period of the “license and quota raj” which lasted till 1980s. “The extreme forms of control during this period were unparalleled across the world except a few communist countries.” he said upon re-election in 1979, Indira Gandhi some of her own “terrible policies.” A small yet key reform of this period was the abolition of controls on the imports of capital goods which immensely benefited the economy. “Till then we could only import from Soviet Union..a failing country and possibly the worst producer of capital products.” He said.
This period of selective de control was followed by the broad based reforms of 1991. “People often forget to credit late Prime Minister Narsimha Rao for these reforms…he has been almost deleted from national narrative” Virmani said.
The post reform period did not experience high growth rates till the next decade. Virmani attributed this delayed realisation of growth i.e. J curve of growth- to the adjustments necessitated by new factors and competition and obsolescence of certain existing technology. “Growth was not immediately visible and the full impact of reforms was realised a little later.” He said.
Emphasising that the policies which realise growth are not the ones that can sustain it, Virmani spoke in favour of further reforms, most importantly opening up the agriculture sector to external competition. The range of corporate behaviour which can be inimical to society’s long term interests needs to kept under check by the regulating power of the state. “The state has the monopoly over the police powers..it can not shirk its responsibilities and then blame it on the market. One needs to understand the difference between competitive market and crony capitalism. Even the China growth story can turn into a tragedy if the Chinese fail to rein in party cronyism”He said
On issues of governance he also said that the policy makers need to stand against certain trends of the market. In periods of heightened capital inflows caution is required and certain controls need to be installed. “Once the capital starts fleeing you will be hurt very bad.” He said. He also termed the attempts to squeeze the tax- payers during periods of lower tax revenue highly detrimental to the economy and recommended simplified tax system instead.
Not happy with the Food Security Act Virmani said, “It is illogical to provide food security to two- thirds of the population when only one percent of it is actually hungry… this will open up new channels of corruption.” He cautioned against adherence to any ideology. “One needs to be pragmatic and adopt what works,” he said.