What is India’s economist-in-chief doing?

Inflation high, foreign reserves dipping and Manmohan Singh moots private sector job reservations?

To a question on the contentious issue of reservations in the private sector, Singh indicated that a more far-reaching Mandalisation process may be in the offing. ‘‘We do feel that opportunities for the scheduled castes, scheduled tribes, OBCs and similarly placed disadvantaged groups in the private sector has to be enlarged.’’[IE]

Inflation has shot up to over 8%. Foreign exchange reserves have fallen for the first time in several years. The rupee is sliding against the dollar for all the wrong reasons.

India’s foreign exchange reserves fell $1.37 billion to $117.52 billion in the week to August 27 as the central bank intervened to support a shaky rupee on the back of thinning foreign capital inflows and a rising dollar.

Data from the central bank on Saturday showed foreign exchange reserves fell for the third straight week and analysts say it could drop further as the Reserve Bank of India digs deeper to bolster the rupee and cushion the economy from the high prices of crude oil, India’s biggest import.

Foreign exchange reserves hit a record $121.1 billion in mid-July, but have shrunk steadily as the central bank stepped in to support the local currency, which is partially convertible.

The rupee, has lost 6 percent since a 51-month high in early April, hit by rising U.S.interest rates, spiralling oil prices and the election victory of a communist-backed, Congress-led coalition in May.

The shock election outcome spooked foreign investors, who had pumped a record of nearly $8 billion into Indian assets in 2003. But foreign capital inflows have dwindled since May, weighing on the rupee as investors fret over India’s growth prospects due to insufficient rainfall. [Reuters]

Amid signs such as this, one would expect India’s economist Prime Minister to get serious about tackling the potential woes ahead. Instead of calming the nerves of the industry, the good economist just defended the lunatic policy of job quotas that his non-economist colleagues are attempting to foist on the Indian economy.

Even without responsible-looking economists in charge, India’s foreign reserves and economic growth rates were happily rising even during the stand-off with Pakistan. One line of reasoning held that peace with Pakistan (at any cost) was essential for India’s prosperity. Yet in the absence of travel advisories, doomsday headlines and frequent visits by Richard Armitage, it took such things as the loony Left’s pronouncements, truckers’ strikes, failed monsoons, and rising oil prices for economic indicators to register negatives. Quite obviously, Manmohan Singh has to to tackle these growth inhibitors head on. If he allows the political steamroller of job-reservations to gain momentum instead, he risks taking the Indian economy back to the place he himself rescued from once. Come to think of it, that seems like a long while ago.

9 thoughts on “What is India’s economist-in-chief doing?”

  1. Seeing how the Singh government has (mis-)governed in the last three+ months in office, I wonder if we give too much credit to Manmohan Singh for the 1991 reforms, without giving adequate credit to the person at the helm (Narasimha Rao) for silently combating all criticism and allowing the FM a free hand to implement his policies.

  2. I think many of the points made are unfair here. After all a lot of the factors that are negatively affecting the economy are what economists like to call ‘exogenous’ ones; Manmohan Singh can hardly be blamed for the high oil prices, poor rains, changing interest rates – these are outside his control. The remedies that should be in place to deal with some of them, are not, the Oil Pool Account meant to stabilise short-term fluctuations being one of them. Unfortunately, successive govts have seen fit to plunder this to shore up their weak fiscal stances and cover up both revenue shortfalls and expenditure splurges. We are now going to pay the price for this.

    I also don’t see the great fuss over dipping forex reserves; the one we have are well in excess of what is needed as a cushion and while some armchair economists like to strut about with ballooning reserves as some sort of machismo indication of economic health; this is not appropriate to the Indian economy which has capital controls, low external debt ratios and no history of default. These reserves have accumalated also as a policy of the RBI of sterilising capital inflows to prevent a rupee appreciation and in the wake of an admittedly small surplus on the BoP current account for the preceding three years. The point is not the quantum of reserves or capital inflows but how they are used and where they are allocated; if they mainly fund just govt consumption or speculative bubbles, they aren’t all that productive in the long run.

    As for Reservations, my response on this is ambivalent. Certainly something needs to be done for both STs and SCs who still face pervasive discrimination in the labour market but I am unsure that quotas are the answer; one of the problems is that while economic returns to white-collar employment has soared compared to other segments of the labour market, job creation here has not kept up with new entrants into the labour pool leading to growing unemployment. Educational qualifications seem to act as screening devices, along with private coaching, fluency in English, social networks and access to information about opportunities. Given the growing disparity between demand and supply in this part of the market, education and other qualifications in themselves frequently cannot provide access to these jobs and other mechanisms such as nepotism, empahsis on language personal contacts and cultural markers become important in deciding the final allocation of posts. While I don’t see anything wrong in some form of affirmative action for SC/ST communities under current conditions this would be dividing a stagnant pie into ever smaller portions and will not increase productivity nor equity. It would be far better to concentrate on policies that can revive job-creating growth and improve employment elacticities in the organised sector, which have tended either to fall or even become negative, leading the problem of jobless growth.

    There are problems to address which the PM and FM need to get a handle on; we have seen several hundred farmers commit suicide after the crisis of indebtedness in the rural sector has reached epic proportions and we have also lost in one state alone over 1,000 children through starvation. These are problems which have been building for some time but which have been ignored; they deserve to be tackled head on without being distracted by diverting attention towards superficial interpretations of economic indicators.

  3. Conrad,

    Whether the problems are of the Manmohan Singh government’s doing or not is a separate debate.

    The question is, is it proper of a responsible leader, an economist-to-boot, to plug an agenda stitched together by the most retrogressive elements of Indian politics?

    If India did indeed have to suffer the lunacy of job-reservations, why not elect someone like Laloo Yadav as PM? Why should we raise Manmohan Singh onto a pedestal (because he is a reforming economist) only to have him do a Laloo act on the country?

  4. Nitin,

    I am afraid I must disagree with you here on several points. While it is fair to say that the economic problems affecting the current UPA govt are self-caused or not is a separate debate; its does overlap with any criticism being made of the govt. Or to put it another way – why criticise the govt for what it can’t control as opposed to what it can? It seems odd to me to raise criticisms over things like the ER or the price of crude oil, given the position of our economy in the global capital market. If we were the USA these criticisms would have some validity as the US can influence oil prices and international capital flows/interest rates; as we clearly are not the US, we can’t exert the same influence. There are mechanisms in place to deal with some of the problem such as the OPA for oil price effects on the real domestic economy and buffer stocks for shortfalls in the monsoon; and there are criticisms to be made over how both have been handled – the OPA has been abused, ironically by Singh himself when he was Finance Minister in Rao’s govt and this has been continued by every successive govt when the need arose and the buffer stocks have been completely mismanaged by the preceding NDA govt. But these are structural problems in the political economy of how policy is made in India and can’t be placed at the door of any one party or coalition, as pretty much all are guilty of neglect or abuse of the system.

    Secondly, I find it odd that these are the things Singh, is criticised for when there are real problems the govt can do something about; the fact that hundreds of our farmers are committing suicide and more than a thousand children dying of starvation and that the govt is in a much more powerful position to do something about this through re-structuring rural debt and financial institutions and redirecting the PDS and targeted poverty alleviation schemes. It seems to me that it is more sensible to criticise the govt for what it can do and influence as opposed to what it can’t or influence only weakly. Not forgetting that fact that the basic duty any nation-state has towards its citizens is assuring them a right to life, any occurrence that sees large numbers dying in otherwise avoidable circumstances can only be regarded as a failure. We spill much ink and feel much anger when lives are lost through terrorist attacks and insist that the state do more to prevent such incidents; should not a greater amount of attention and insistence also be directed towards preventing larger numbers of deaths through other means as well?

    Thirdly, we seem to have some odd ideas about political leadership and I mean ‘we’ as a nation. I don’t think the attributes that make a great thinker or professional are the same that makes a good or great politician – or indeed leader. The fact that Singh is a capable economist doesn’t necessarily mean that he will make or is a capable PM. There is also the fact that unlike the Rao admin, he is currently heading a diverse coalition, with little ideological consistency across the spectrum of opinion and interests it represents, so he will not always be able to set the agenda or carry out policy as he wishes. Believe me it makes a great deal of difference when one has a single party govt with a comfortable majority to insulate one from political pressures; than heading a complicated coalition where a defection of only a few members can topple to govt. Also I don’t know who exactly here is ‘raising Manmohan Singh on a pedestal’ I have respect for him as an economist and having read his thesis and academic work, I can see he is competent. But he is by far nowhere near the best nor the most brilliant economist we have produced; I know he is idealised by the pro-market sections of the urban middle classes, but this is a reflection of their own politics and view of the world, not of reality. He deserves credit for the 1991 reforms which were executed competently; but one expects nothing less of a country like India with its resources in producing administrators and technocrats trained in the Social Sciences; the change in policy was ultimately a political decision, made by the relevant actors at the time and the groundwork for it had been prepared by the various liberalisation measures taken throughout the 1980s.

    Lastly, a word on the ‘lunacy of job reservations’ I won’t say too much about this because it is not an issue I have examined in depth or know a lot about in terms of its outcomes and operations. The one thing I do know is that it will not really help the situation of SCs or STs much at all and I think a case should be made that if there are reservations introduced these groups are unsuitable candidates for it as their problems will only be addressed through other more broad-based measures. Whether it can help the OBCs or not is a moot issue, and this is the constituency that Laloo represents, I have my doubts about this but I can’t say. I remain sceptical of the anti-Mandal crowd; both because they don’t understand that this is a debate that is about power not about equity or about productivity and so should be thought of in those terms and because wild allegations about outcomes are made by its opponents. We were all assured that the sky would fall in on our heads if Mandal was implemented and all sorts of disasters ensue; needless to say this hasn’t really happened. Many countries from the USA to Malaysia have some sort of affirmative actions policies working in the private sector and it hasn’t destroyed their economies as yet. Like so many things I think much depends on how these measures are implemented as opposed to whether are put into place and it is here that my problems with reservation as a policy arises, as unlike most upper caste critics it is not the existence of such a policy but its abuse and mis-appropriation that I feel is the real problem.

  5. Communists disguising themselves as democrats don’t fool me.

    If the Communists did actually decide to waste their time, fooling you, I hardly think it would be difficult to do. Given the actual behaviour of Communists in India, I don’t think anyone intelligent needs to worry about their ‘democratic’ credentials. But by all means please don’t let this keep you from your vigilance of the Great Communist Conspiracy.

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