Friday, August 23, 2013


A Long and Dark Journey

Our country’s economy is being run aground, and there’s little serious effort to revive it

Here's an excerpt from his article

Let’s use a medical analogy for what is happening to our country’s economy. The global financial crisis of 2008 was like an infectious disease that spread rapidly. India was hit too, but we probably had better immunity than many others. On the other hand, India’s current economic crisis is like a cancer. Treatment is possible but it’s difficult and expensive and has a lot of harmful side effects. But the biggest problem is the doctor himself seems disinterested in the cancer. Instead, he and his assistants seem intent on fighting other incidental symptoms with treatments that will actually make the cancer worse.

However, the decline of the rupee is merely one symptom of the underlying disease. The core problems are that on one hand, the government’s expenditure is out of control and on the other, we are less and less competitive in the world. There’s a cascade of causes and effects that are interconnected in a web in which we are trapped. Excess government expenditure means huge borrowings. Government borrowing crowds out industry. Massive consumption expenditure by the government drives up inflation. Poor infrastructure and labour quality constraint supply and therefore make inflation out of control. High domestic inflation means that to remain competitive, the rupee must fall.

The relaxation of FDI limits is based on the notion that low limits are what is holding back investors. This is a fantasy. Poor infrastructure, corruption, red tape and a hostile regulatory and tax environment are the actual problems. If ownership limits were the issue then we wouldn’t have seen so many Indian business houses so interested in investing abroad.
I’m sorry for taking such a pessimistic view, but there are only a few silver linings and things will get worse before they get better.

No comments: