‘India headed for economic doom’, prominent US think tank says

By March 5, 2013 October 7th, 2014 Blog

India is heading straight for economic failure post-Chidambaram’s budget as a direct result of the lack of meaningful economic reform, saysHeritage Foundation, an important conservative thinktank in the US. Assessing finance minister, P Chidambaram’s budget, Derek Scissors of the Washington-based organization said that it “leaves India on the same, failing course it’s been on of undisciplined spending and unrealistic expectations”.

The Indian economy is in dire health, he said, not only because Indians’ incomes have stagnated, income growth slowed and consumer inflationis high, but because manufacturing that should lead the Indian economy that would create jobs for the swelling ranks of young Indians is refusing to take off.

“Services lead in large part because the labour market is more flexible in services industries than in manufacturing. Rather than labour market reform, the Indian government offers a state-led infrastructure program. But the infrastructure program has no chance to succeed while property rights to land remain so ill-defined,” he explained.

Mr. Gerard Colaco: Financial journalism these days appears revel in alternating between unjustified euphoria of the “India Shining” variety we had a few years back, and the gloom, doom and ruin variety we have in the Times of India article referred to by you. Generally, in a country as large and diverse as India, neither scenario comes true. I am not saying that the US think tank called the Heritage Foundation is not comprised of extremely intelligent individuals. I am sure it is.

But it is not the only think tank in the US. I will not be surprised if I find other think tanks that state the opposite. We must understand the mindset of citizens of the US, Western Europe and other advanced countries versus the Indian mindset, where relations with the government are concerned. In the advanced countries, to a very large extent, their citizens have enjoyed an environment of very low corruption, encouragement to free enterprise and generally liberal, good governance.

As a result, most people of these countries, including individuals, tend to veer round to the belief that their governments are everything. The end result is that citizens start depending upon the government for a variety of services and aid, including medical services, retirement benefits, old age pension, unemployment doles and the like. That is why, when recession strikes and the government introduces austerity, there is a shocked response. Human misery reaches an all-time high and people just cannot cope with the new situation when their governments fail them.

Now contrast this with India, where we are born, live and perish secure in the knowledge that our government will fail us. We know that the government mainly exists not to develop the country but to feather the nests of politicians and bureaucrats. We do not depend upon the government for help. In fact, most of the time we are thrilled if the government gets out of the way and does not interfere.

Even our much vaunted liberalisation which was kick-started in 1991, was not because either politicians or bureaucrats wanted to develop the country. It was to extricate itself from a huge balance of payments problem, which would have resulted in India defaulting on payment for its international purchases, especially crude oil. So, economic activity in this country does not have a high dependence on government policies. That is why the country keeps ticking, regardless of whether the budget is good or bad and regardless of the size of scams that occur with a regularity that is almost monotonous.

Of course, the right policies of decontrol, downsizing of government, reforms including labour reforms, privatisation, cutting of red tape, greater integration with world markets, etc., can result in the Indian economy growing at a much faster rate. But there are interests that are too deeply entrenched in the present third-rate system to allow this. So, there is a lack of will at various levels to implement swingeing reforms.

On the other hand, if politicians think that fiscal and monetary recklessness will help them win the next election, they will not hesitate to venture down this path of profligacy, without giving a damn about the either the country or its finances. We are in an election year, but Mr Chidambaram has refrained from this kind of irresponsible behaviour in the 2013 budget. For this, we must be grateful.

The Indian economy will certainly not turn in any outstanding performance in the near future. But neither will the doomsday predictions of the Heritage Foundation come true. We will continue to cheerfully muddle along, with bad laws, myopic vision and mediocre performance. Indian citizens and businesses will of course be driven by the profit motive to constantly improve their performance. If our businesses think that they cannot achieve satisfactory performance in this country, they will take their capital abroad and do business there. To that extent, Indian shareholder will be benefited.

There is an old saying about the four ‘V’s of a vibrant economy, which are Volume, Velocity, Variety and Versatility. We have variety and versatility, no matter how poor or illiterate our citizens are. We can also produce the necessary volumes whether in India or abroad, as our software services industry has shown. What we lack is the velocity needed to propel the economy forward, which must come from the government, which we unfortunately do not have.

To conclude, the dire forecasts Heritage may have been made without a proper foundation. They will not frighten me, just as the old predictions of India Shining in 2007 and early 2008 did not excite me. India appears to be a country where, with apologies to Shakespeare, if you are not born a stoic you will either achieve stoicism or have it thrust upon you!

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