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A K Bhattacharya: Dangers of wrong diagnosis


A K Bhattacharya  |  New Delhi 

In evening gatherings these days, it has become quite fashionable to extol the virtues of the Indian government’s cautious and prudent economic policies that have evidently limited the adverse impact of the global financial turmoil on the Indian economy. The common refrain is if only we had been as adventurous and fast-paced in our reforms process as many of our south-east Asian friends, India would have been hurt even more than it is today!

This is not an entirely incorrect assessment. A few instances would help understand this better. In contrast to the US and other developed countries, India continues to attract huge investments in a large number of relatively safe and secure instruments that are floated by banks and financial institutions. Investments in these instruments earn for an individual a decent rate of interest that at least protects him against inflation and even gives him some additional return over and above that.

Indeed, there are a large number of Indian tax-payers who consider parking their money in public provident fund schemes or even the state-owned employees’ provident fund not only to save on tax but also to earn a decent tax-free return on their investments. No tears are usually shed for those who invest in the stock markets and lose their money.

The argument is that buying equity is a high-risk investment and therefore investors should be prepared to accept a fall in their asset value. Not surprisingly, stock markets continue to be explored by only those who look for much higher returns in a short time. And they continue to account for less than three per cent of the country’s total population. The point to be noted is that the lack of an equity culture and the presence of relatively safe and remunerative investment options have kept a large number of Indians protected against any adverse impact of the global financial turmoil.

What the aam aadmi or the common man is worried about is not the meltdown in the stock market, but inflation, job losses, unsafe financial institutions and low deposit rates in banks. The current deposit insurance laws take care of the bulk of depositors in Indian banks. That Indian banks and financial institutions are seen to be safer than those in the western world is evident from the fact that more and more non-resident Indians are parking their money in India, not just because of better interest rates and a depreciating rupee, but also because of their belief that the banking regulatory system in India is strong and will not allow a bank to go under.

It is the same prudent and conservative banking regulatory system that raised the interest rates in India even as the sub-prime crisis hit the US and the Indian inflation rate began climbing. Looking back, that cautious policy, resulting in a higher interest rate regime, is giving the Indian system and the current regulators some extra headroom to bring down the interest rates now and provide much-needed relief to the system. The Indian authorities are obviously not faced with any dilemma of the kind that the banking regulators in the US may be experiencing. The US Fed may now be wondering how many more times can it reduce the interest rates now that they are already down to a per cent or a little more. But no such worries for the Reserve Bank of India!

Similarly, increasing public investments is one of the solutions being prescribed by governments in many countries to combat the current slowdown. And many of these governments are exploring ways to create institutions to channel such public investments. In India, the task of pump-priming the economy is relatively easy, again thanks to our years of slow work on privatisation. India is still blessed with many giant public sector organisations, quite apart from the Indian Railways, which can be used to ramp up public investments in projects to create more jobs and more demand in a slowing economy.

Once again, India’s advantages may be flowing from its cautious and prudent policies, aided and abetted by a slow and halting pace of economic liberalisation. But are these real advantages that will stand in good stead for the Indian economy and help it achieve sustainable growth in the years to come? The danger here is that the political establishment may draw the wrong lessons from these “advantages” and argue in favour of a roll-back or a halt to the reforms process. That is a real danger. Yes, our current prudent regulatory system has minimised the impact of the global downturn on our economy. But that cannot be an argument for junking the entire reforms agenda. Instead, now is the time to decide what reforms will best suit the country’s needs to prepare the economy to face the next downturn with greater strength and resilience.

First Published: Wed, November 19 2008. 00:00 IST