Goldman Sachs and Indian PM get growth drivers wrong
October 24, 2012, 5:56 pm

 Professor Radhika Desai says liberalising reforms are not key to economic growth

As growth slowed worldwide as well as in the BRIC economies, Indian Prime Minister, Manmohan Singh announced a slew of new liberalising reforms last month.

Business voices, both in India and abroad, hailed the proposed reforms in one voice. “Manmohan gets his mojo back” declared the Financial Times; “A Welcome Boldness”, observed The Economist’ and Indian business leaders urged the PM to remain steadfast in the face of opposition fury. And Indian stock markets staged an impressive rally.

Singh’s announcements seemed to salvage something from a lost summer. Despite a tough ‘fiscal consolidation’ budget in March, Standard & Poor downgraded India’s sovereign debt to junk status, presumably disbelieving the budget’s optimistic revenue projections. A 2-day power failure in July dented the image of ‘emerging India’ on which so much of Singh’s reputation, as the man who put India on the road to liberalizing reforms and kept it there, rested.

That was followed by the Comptroller and Auditor General (CAG)’s reports about irregularities in the government’s conduct, including that of the Coal Ministry, then, part of Singh’s own portfolio. Opposition parties demanded the PM’s resignation and paralysed the monsoon session of parliament.

At its end, however, Singh came back fighting. In a tough-worded statement he blamed opposition parties for the “wasted session” and the ‘”mockery of parliamentary democracy”. When “the world is passing through an exceptionally difficult phase” and “our economy is also experiencing problems” it was important to return India’s economy to its a high growth path.  Insisting that “the Government must act wherever it can without the benefit of Parliamentary guidance”, he announced that his ministers would “accelerate their consideration of critical issues where decisions are needed to get the economy moving again”.

Iffy reforms

The reforms Singh announced included a cut in diesel subsidies which, it was claimed, would help address India’s fiscal deficit and opening India’s retail, energy, domestic broadcasting and domestic aviation to foreign investment.

Singh easily gained the upper hand in the brief political confrontation that followed. Although the opposition parties – from the right-wing party of Hindu nationalism, the Bharatiya Janata Party (BJP) to the Communist Party of India, Marxist (CPI-M) – initially promised to fight the measures through political agitation, and nation-wide protests took place, particularly against the reduction in diesel subsidies and the opening of the retail sector, little came of them. Singh, it appeared to some, had snatched a future of growth from the jaws of the legendary unruliness of Indian politics.

But had he? The reforms, the government’s fanfare and the opposition’s clamour notwithstanding, were hardly momentous. Worse, as a major newspaper editorialised, none of them were quite what they seemed. The cut in diesel subsidy would only scratch the surface of the deficit.

State governments would actually determine whether FDI in retail is actually permitted and its employment effects are expected to be so negative that can be doubted that many state governments would be rash enough to incur the inevitable unpopularity that would follow. And permitting FDI in aviation is unlikely to find much response among investors anytime soon.

The theatrical announcement of paltry and iffy reforms was a cosmetic exercise to improve India’s credit ratings so that foreign capital will flow in and generate growth. However, even if India’s credit ratings are revised – and here is considerable evidence that the ratings agencies are not impressed – it is doubtful that capital will flow in and if it does, that it will recharge growth in India.

Liberalising reforms

When Jim O’Neill of Goldman Sachs formulated his BRICs thesis in 2001 he claimed that liberalising reforms had powered growth in the BRICs. This is also the rut Indian economic policy has been in for two decades at least. However, productive growth in India has had other roots.

The strongest and most sustained growth has taken place in economies with the most successful developmental states which, even during the neoliberal period, retained large government roles in production and its regulation and in protecting the economy from exogenous, particularly financial, shocks.

Singh is keeping Indian economic policy in the old rut just when the reasons to get out of it are multiplying fast. For neoliberal policy either fails, thanks to the inability of fickle investors to trust the wayward politics of a poor democratic country, or it succeeds in bringing in only short-term capital which, rather than generating productive growth, merely augments the ability of the wealthy to sustain their foreign-exchange guzzling lifestyles and Indian multinationals make acquisitions abroad while expanding inequality and poverty in India.

Even such growth, whose merits can be debated, has been running on the advantages created by its Nehruvian developmental state. The current growth slowdown is probably the sign that they have probably taken it as far as it can go. Real, sustainable economic growth requires productive investment, encouraged and, if necessary, undertaken by the state, combined with determined effort to expand India’s internal market to make it sustainable.

Until the collapse of Lehman Brothers, even fairly state-controlled economies could export to the US market. However, the Great Recession is severely limiting the US’s capacity to be the world’s consumer of last resort and emerging economies must grow by finding alternative markets. And, for the larger among them, where better than in an expansion of domestic demand, especially among the poorest?

Such a growth pattern was always more likely to be self-sustaining than the export-led patterns of the neoliberal past with their destabilising trade and financial imbalances and credit-fuelled consumption of wealthy classes and nations. Growth based on expanding employment and demand among the poor will create a wider, deeper and longer prosperity.

That this is so, is recognised, at least, by parts of the Communist Party leadership in China, and there have been clearly policy moves – such as permitting exceptional wage increases in recent years – in this direction. In other BRIC countries, however, the need for such a policy re-orientation, for getting economic policy out of the neoliberal rut, remains far from acknowledged by the political classes.