By Ramesh Kanitkar
The sharp dip in the growth rate in the last quarter raises the possibility that Dr. Manmohan Singh who is deservedly associated with putting India on a high growth path could also be at the helm when that growth phase ends. The success that Manmohanomics had in the 1990s is clearly on the wane.
The easy explanation for this phenomenon is to point to the difficulties of coalition politics. But the political situation in the early 1990s was not particularly easy either, with the Babri Masjid crisis reaching its peak.
A more meaningful explanation would lie in the nature of Manmohanomics itself. At the heart of Dr. Manmohan Singh’s approach to the economy, as indeed to everything else, is an effort to make the essential changes without rocking the boat.
A pragmatist to the core, he was never known, even as an academic, to be too closely associated with any ideological position. This approach melded easily into the middle- of- the- road approach of the then prime minister P. V. Narasimha Rao.
Dr. Singh’s approach to the 1991 foreign exchange crisis was to bring about the changes that were essential to deal with the crisis while leaving the rest of the system in place. He opened up the Indian economy to force Indian manufacturers to compete with the best in the world.
This was supposed to make Indian products competitive in the global market and create an export boom that would more than pay for the increased imports.
The pragmatist in Dr. Singh recognised that while there were some sectors where the competitiveness would increase this alone may not be enough. He therefore took sufficient care to ensure that the stock markets were changed in a direction that made them attractive to foreign investors. These changes meant that the old link between the small local investors and the stock market would be broken.
But small investors were never powerful enough to rock the boat.
Dr. Singh also took care to separate the political from the real economy. He never changed the labour laws since that would have meant taking on the Left.
But he turned a blind eye to the fact that workers in the liberalised sectors of the economy were often, attracted by higher salaries, working far more hours than was legally authorised. He was also the finance minister who introduced the MPs Local Area Development Fund, indicating that elected representatives would be better off taking care of the local needs of their constituencies rather than messing around with policy.
To be fair to Dr. Singh he did not suggest that he was doing more than he actually did. In his 1991 Budget speech that launched the economic reforms he repeatedly stressed the continuity from the past.
Both in the specifics and in its tone that speech suggested that India’s infant industry, including its public sector, had now become an adolescent and had to be exposed to the world. The state as the parent would remain but its role had to change.
In the excitement over the reforms this aspect of his 1991 Budget speech was ignored. People read what they wanted into it. And the reticent Dr. Singh let them.
The popular mind insisted this was a movement from a state dominated economy to one dominated by private capital.
Dr. Singh did not confirm that perception, but he did little to change their minds either. In 1990- 91 the outlays of the Centre, the states and the Union Territories together accounted for a third of GDP. Two decades later the figure was just around one percentage point lower.
But if people wanted to think that liberalisation had reduced the dominance of the government in the economy, Dr. Singh was not going to stop them.
This approach to the economy had its rewards. There were specific sectors where globalisation led to rapid growth. The IT services industry found a place for itself in the world. Foreign capital changed the face of the Indian automobile industry.
And the availability of a wider variety of imports saw a rapid growth in trade.
Underlying this growth, however, was an imbalance that was being quietly brushed under the carpet. While industry located in India was getting more competitive leading to a rapid growth in exports, imports were growing even more rapidly.
FII inflows into stock markets kept this from becoming a foreign exchange crisis.
But with nearly a quarter of domestic demand being met by imports, domestic production was going to be hit sooner or later. And the latest growth figures suggest that time has come.
Given the reputation Dr. Singh’s economic strategy has gained in India there is a clamour for more of Manmohanomics to meet this challenge. What is not being recognised is that the problem is the result of this approach, and not because of a pause in it. A further opening up of the markets will increase the share of imports, thereby leaving even less space for production in India. Indian capital which has already begun to prefer other locations will then fly out even faster.
And a slowdown would make Dr. Singh’s clean separation of the economy from the polity more difficult to maintain.
This can already be seen in the Maoist challenge as well as the politicised resistance to land acquisition. The time has now come to find more innovative means based on a deeper understanding of the Indian reality.
Dr. Singh ended his 1991 Budget speech by citing Victor Hugo to the effect that no power on earth can stop an idea whose time has come. He may now have to come to terms with the fact that no power on earth can protect an idea whose time is past. INAV