The grip of a self-fulfilling prophecy.
If there were any doubts in anyone’s mind about the complete failure of the second United Progressive Alliance (UPA) on the economic front, the events of the last month will have firmly laid them to rest. Through inaction, waffling and economic moves solely aimed at winning the next Lok Sabha elections at any cost, this government has placed the Indian economy strictly now in the domain of self-fulfilling prophecies. And that is very dangerous territory. Because when people—in this case, investors, bankers and businessmen—strongly believe that something is going to happen, what they do based on that belief make their expectations come true. And that process is extremely difficult to halt. Depositors who lose confidence in the bank they have kept their savings in, and start withdrawing their money in droves, fail to understand that this very act is making the bank collapse. It’s the same with the Indian economy now.
Except that, though the classical definition of a self-fulfilling prophecy says that the process is set off by a “misconception” which grips people, in India’s case, that part does not fully apply. For four years now, the world has watched the Indian government turn its back on all that was achieved since 1991, and return to a dole economy reminiscent of the disastrous 1970s, calling it “inclusive growth”. The net result has been some inclusion, but at enormous cost to the economy, and growth has plunged. Someone up there missed the point that you cannot have sustained inclusion without growth, and you can’t have sustained growth if you increase food subsidies threefold through a creaking and corrupt delivery system, and recklessly force banks to raise agricultural credit sevenfold (government statistics from the start of the UPA regime in 2004 and including budget estimates of 2013-14).
You can’t have foreign investment coming in when you scare the hell out of transnational corporations by overruling Supreme Court judgements and proposing laws backdated by half a century to tax investors. This, while you are running up a trade deficit of $190 billion and pinning all your hopes on foreign investment to take care of a current account deficit that’s going off the charts. And you can’t enthuse Indian businessmen when you do not respond to repeated appeals by captains of industry to get a move on, except through empty homilies.
Since 15 July, the government and the Reserve Bank have announced a slew of measures to tackle the free fall of the rupee. Most of them have a strong pre-liberalization echo—using 1970s weapons to fight a 21st century war (A 36% import duty on flat-screen TVs that Indians may bring in from abroad—what archaic madness is this?). The measures have had exactly the opposite effect of what they intended to achieve.
Meanwhile, Chinese soldiers keep coming in and have picnics in Ladakh and Arunachal Pradesh, and the government calmly terms them “non-events”.
With all trust and faith in the government gone, we are seeing the classic self-fulfilling prophecy of a run on the Indian economy working itself out.
On 24 July 1991, Manmohan Singh presented his first Union budget as finance minister, and that budget is generally credited as the watershed event that turned India around.
The truth is slightly different. Singh’s speech called for urgent “structural reforms”, but the budget itself was not a very radical document. The truly dramatic event that put India on the reforms path and make the world sit up, took place a few hours before Singh rose in Parliament to present the budget.
That event was prime minister P.V. Narasimha Rao announcing the New Industrial Policy. In one fell swoop, Rao scrapped industrial licensing in nearly all sectors, increased the limit of foreign equity to 51% in many areas, cleared the way for foreign trading houses and easier import of foreign technology and sharply circumscribed and redefined the role of the public sector. It was an awesome piece of carpet bombing, and the rest is history.
In the world we live in today, the rupee cannot be defended through short-term policy measures like bringing back capital controls. Neither can foreign investors be convinced to open their cheque books through tweaking some rules piecemeal. The only way to halt a self-fulfilling prophecy in its tracks is to go out there and do something path-breaking and far-reaching, and shake the doomsayers up, like Rao did that July morning 22 years ago. That can trigger off another self-fulfilling prophecy, this time one that will work for India, grow the economy and make the nation confident again. The time for small-arms fire is over. We need to roll out some ballistic missiles. Sonia Gandhi, Manmohan Singh, please stop plotting about 2014 for a few days, and do what a country expects its leaders to do. Stand and deliver. It could even win the elections for you.
, nobody else can survive while doing anything remotely high-tech which requires raw materials imports.