The Economic Crisis India Needs
My article in Bloomberg Businessweek, on India’s economic crisis–its worst in over two decades.
For Manmohan Singh, India’s octogenarian prime minister, the summer of 2013 must seem depressingly familiar. In June 1991, as the nation’s newly installed finance minister, Singh found himself staring down the worst economic crisis to hit India since independence. The nation’s foreign exchange holdings were reduced to just a few weeks’ worth of imports; its gold reserves were airlifted to London, collateral for an International Monetary Fund loan.
Singh was brought in by a minority government to rescue the faltering economy. Although many others played a part, he’s widely credited as the architect of reforms that transformed the nation. By Independence Day in 2006, Prime Minister Singh could stand upon the ramparts of the Red Fort in New Delhi and celebrate an economy that was among the fastest-growing in the world. “The going has never been as good for India in the past as it is now,” he said.
That national mood of optimism—and, along with it, Singh’s reputation—is being tested as never before. Growth has slowed to a 10-year low of just above 5 percent. Inflation is stubbornly persistent, defying the high interest rates that are choking investment. The nation’s fiscal and current-account deficits are precariously wide. And in recent weeks the rupee has crumbled: It’s now down more than 17 percent against the dollar—making it the worst-performing currency this year in Asia.
On the ground, the impact is already being felt. Companies that had borrowed in foreign exchange are facing bankruptcy. In the wake of new government guidelines restricting outflows of currency, individuals and families are finding it hard to meet travel, education, and other expenses. Worse is yet to come, as the price of imported goods—everything from cell phones to olive oil—will surely rise.
India isn’t the only emerging market in trouble. Across what used to be called the developing world, from Brazil to South Africa to Indonesia, once-surging economies are being brought down to earth. Nor are India’s problems solely of its own making. Much of the money leaving India is simply being drawn to the U.S. by the prospect of tighter monetary policy there.
Even so, India finds itself in a particularly tight situation for at least two reasons. First, the nation’s current-account deficit, at 4.8 percent, is one of the largest among major emerging markets. With growth down, and exports subdued because of lower demand in China and Europe, that deficit is becoming harder to service. Second, any attempt to raise interest rates to tame inflation could further stifle investment and growth.
A dangerous—and dangerously self-reinforcing—narrative is taking hold. While policymakers tout the nation’s solid fundamentals, there’s a growing sense that they’re essentially helpless. There is talk of a possible credit downgrade; rumors abound (vigorously denied by the government) that India might eventually need an IMF loan. “Signs of panic,” editorialized theFinancial Express, one of India’s leading dailies.
India’s problems are certainly real. The country’s facing what is widely acknowledged to be its most severe crisis since 1991. But as dismal as the situation appears, India could yet emerge stronger, if not quite unscathed, from its troubles. In fact, a case could be made that India’s struggles are just the medicine its economy requires.
In a fascinating book published last year, Accidental India, the journalist Shankkar Aiyar explores the conditions under which “wide or deep systemic change” has historically taken place in post-independence India. He considers seven case studies—including the Green Revolution of the 1960s, the economic liberalization of 1991, and the rise of the nation’s software sector later in the ’90s. Change in each of these instances was transformative, and in each instance the trigger was a crisis. “India’s ascent has been fueled by serendipity,” he writes. “Change has come about as a consequence of circumstance and crisis, and has always been a result of an exogenous force. Most often, that force has been a crisis.”
There are reasons to think that India’s current plight could similarly bring positive reform. For all the nation’s economic problems, its most serious challenge—and the underlying source of its current woes—is one of governance. The nation’s corruption, indecisiveness, and policy flip-flops are notorious among global investors. Last year, the Hong Kong-based Political and Economic Risk Consultancy rated India’s bureaucracy the worst in Asia. Vittorio Colao, the chief executive officer of Vodafone, which is locked in a tax dispute with the Indian government, recently said the nation’s bureaucracy was “clearly damaging” the country.
Many of these problems can be attributed to venality, and many to sheer ineptitude. Some are the result of a lingering anti-capitalist ideology: Although the process of economic liberalization is now irreversible, a distinct segment of the nation’s leaders and thinkers remains enthralled to what John Kenneth Galbraith once called India’s culture of “post office socialism,” a faith in bureaucratic control and a disregard for the goals of profit or efficiency.
There’s also a more generous explanation for the polity’s slow-moving, indecisive style (although not for its corruption). Outside observers sometimes fail to appreciate the extent to which India’s leaders are engaged in a fragile balancing act between competing economic, regional, ideological, and sectarian interests. The nation’s frustratingly slow pace of change is frequently the result of a natural—and perhaps even commendable—caution in a messy, diverse democracy. India’s plodding method is the manifestation of a consensus-driven model of governance that, often against the odds, has held this maddeningly pluralistic nation together.
Eventually, of course, the aversion to decision-making has a cost. And, as Aiyar told me, “What happens when there is a crisis is that the choice to do nothing is wrenched away. A combination of fear, shame, and the momentum of the crisis” work to break through the natural stasis of the system. A crisis is often the catalyst for an enforced national consensus, and for the decisive policymaking that is otherwise so rare in India.
There are signs, in fact, that something along these lines may already be happening—albeit to a limited extent. Late last year, as India confronted the prospect of a credit-rating downgrade, the government reduced diesel subsidies and opened up several sectors, including retail and airlines, to more foreign investment. Earlier this summer, the government pushed through a further set of “big bang” reforms, lifting foreign investment caps in a number of areas, including previously taboo industries like defense. Such moves failed to avert a selloff by investors. But they remain among the most significant reforms enacted by the government in its nearly 10 years in power.
The jury is still out on whether India’s policymakers can go even further—whether the panic gripping financial markets might translate into a more fundamental rollback of subsidies and bureaucracy that many feel the country requires. India’s national elections, likely to be held in early 2014, could complicate matters. Although the opposition Bharatiya Janata Party (BJP) will probably make gains at the expense of the ruling Congress party, the outcome will most likely be a fractured parliament, with no single party possessing a clear majority. On the other hand, the reforms of 1991 were implemented by a minority government. Several other watershed moments—including the advent of the Green Revolution, and the passage of a landmark Right to Information Act in 2005—also came about amid political instability and uncertainty.
India’s long-term strengths and underlying potential remain huge; eventually, it will emerge from the current slump. At that point, the country will need to confront its dysfunctional (and certainly hair-raising) style of governance. “Any fool can face a crisis; it’s day-to-day living that wears you out,” Anton Chekhov, a man less known for his administrative expertise than for his insights into the human condition, once wrote. Character is destiny. It’s a lesson India would do well to heed after it weathers this latest storm.