Contention & Missed Opportunity

Contention & Missed Opportunity


Jon Fine, presently a Columnist with BusinessWeek, wrote, earlier this month, on the art of contention, defined, but not quite described, as a “heated disagreement”, by the Oxford Concise English dictionary. Fine wrote: “The opportunities you eye and ignore, can one day end up eyeing you…from a much different perspective.”

Putting it more plainly, the smouldering young Marlon Brando, as Terry Malloy in the 1954 classic On The Waterfront, reprised brilliantly in India as Parinda, (1989), summed up the poignancy of missed opportunity: “I could have had class. I could have been a contender.”

In other, more economic, words; if India ignores the free-market growth option, that is staring her in the face, in favour of a futile and out-of-date monetarism; then she is destined to lose control of her vital economic parameters. We must realise, and learn to accept, that our localised financial policy manipulations will be swept away by global macro whirlwinds beyond our control.

Monetarism, as in cash-reserve-ratio (CRR), tweaking, to reduce money supply or “liquidity”, and raising of inter-bank and borrower-lender interest rates, to suppress “demand”, and hence growth, is out-of-date; now that the walls of national economies are breached and porous to each other. Money flows from any “cheap money” environment around the world, with low, or lower, interest rates, to a “high interest” haven in a manner akin to the law of magnets. So our quaint, old-fashioned monetarism ends up attracting suitors without intending to. After all, just how much “liquidity” can the Reserve Bank of India (RBI), suck out of the economy at the local banking end while attracting ever more and more at the foreign exchange end?

The RBI’s other yesterday-brand trick, of using some of these burgeoning foreign exchange reserves,(over USD 300 billion and counting), to artificially weaken the rupee, is not only wasteful but backfiring in the face of a sharply rising import bill, particularly for petroleum at an all-time high.

It is true that China does use part of its USD trillion plus reserves to keep the Yuan down; but this is because it is a largely export dependent economy. Conversely, it makes no sense for India to subsidise some 12% of export economy, using up dollar reserves to no gain, at the expense of the rest of our economy which is firmly “domestic” in nature.

Also, toy as we may, with the notion of a Sovereign Fund of the type that petro-dollar rich economies have created, or indeed China has; to also strategically deploy our dollar reserves abroad; we need to be mindful of a few items of urgent business to take care of first, before realising this particular ambition!

Impossible as a dream as it may seem, particularly in terms of present government think; it is better by far to increase income; build infrastructure; create jobs and spending money in millions of hands. Rural India, that 60% of the populace that every government cynically invokes whenever it suits, needs infrastructure, not handouts. It is infinitely better to boldly reach out to double-digit gross domestic product growth (GDP). Much better than trying to control expenses and demand to force a drop in antiquated wholesale price indexes.

It seems impossible to dream like this, because, true to our malingering ways, we “liberalised” only when forced to do so, in 1991, under IMF and World Bank dictation, rescued thereby from the brink of national bankruptcy. And once again, by a fortuitous circumstance, happily, well beyond empty dreaming; we may be forced to take a different view on the management of our economy by the growth forced by infrastructure development. And even the most bristle-moustached Stalinist can’t have anything ideological against “development to benefit the people”.

It is a sneaky little Trojan Horse still, but thank God for it. Consider, that our economy, as it stands, develops wobbles every time it nears the 9% mark of GDP growth, because any acceleration beyond this gets choked off by inadequate infrastructure to support it. The Socialists and Red elements in the government, or outside it, are unable to come up with a good enough argument against better roads, ports, power, bridges, railway and aviation infrastructure etc. etc. And hence the Union Cabinet has passed billions of dollars worth of infrastructure projects and many of these are already under implementation.

We may have taken the last bus to infrastructure development, but at least we have managed to board it! We will spend over USD 500 billion over the next few years, in formats including a Public Private Partnership (PPP); the Build-Operate-Transfer (BOT) mechanism; and the one with the greatest potential--that of “market finance” involving diverse groups of investors. These will include Initial Public Offers (IPO’s), and other return visits to tap public finance, via stock exchanges, both here and abroad.

Since over USD 100 billion worth of infrastructure spending is in the works already, the government, the impending election watching element in it, that is, can’t stop growth in favour of a moribund, low inflation regime, akin to the Nehruvian and Indira Gandhi years; even if it wants to. Further, it is increasingly doubtful if even short term inflation control by monetarist measures is possible beyond a few weeks.

Besides, the murmurs about how unrepresentative the Wholesale Price Index (WPI), really is, are clearly audible to all those who want to hear. But the UPA Government seems to think forcing a dip in the WPI will make everything well, even though the inflation rates on the high street and in the mandi tell us a very different story. Let us remember that the last round of interest rate and CRR hikes caused a very temporary dip in the WPI index before inflation came back with a vengeance. So why are we trying a recently failed strategy yet again?

If I were an Aborigine, I’d lie on my back, the better to go into “Dreamtime”. I’d imagine the RBI Governor, the Laughing-Buddha-like YV Reddy, was something of a Lee Kuan Yew modernist; instead of a genial, clean-shaven Stalinist, with hawkish but mistaken ideas of “action”. But I’d be smiling anyway, dreaming past government folly to contemplate the inadvertent good it does. I’d dream of better roads, and ports, and trains, and planes, knowing Dr. Reddy can’t stop this dream even if he tried.

(1050 words)

By Gautam Mukherjee
Friday, 18th April 2008

Published in print/web on 19th April 2008 as "How not to fight inflation".Leader Edit on Edit Page.The Pioneer. www.dailypioneer.com