All the lefties in India — please note I do not call them left-liberal intellectuals as they are not liberal and are far from being intellectual — are having a field day predicting that India is about to repeat a Sri Lanka. These lefties have friends ensconced in US universities who urged Union finance minister Nirmala Sitharaman to spend more during the days of Covid-19 pandemic. Thank God she did not listen to them. We are all beneficiaries of her sobriety and fiscal rectitude.
One can argue that the Reserve Bank of India (RBI) could have raised interest rates a little sooner. But quite frankly, this is a fatuous argument. One can never time matters like these perfectly. Incidentally, a study done 10 years from now might end up strongly endorsing everything that the RBI has done so far. Suffice it to say that the RBI has on balance been quite sensible, smart and admirably transparent. The last point on transparency is not a trivial one. It has a direct impact on financial markets.
Much as lefties may not like financialisation, trust me financial markets are pretty accurate predictors of coming events. Countries that lose the respect of financial markets will suffer awful consequences in their real economies. That is why we must respect Chandra Shekhar, S. Venkitaramanan, C. Rangarajan and company. They took the risk of mortgaging our gold. But they respected financial markets. Latin American countries and now Sri Lanka who have chosen default over honour doom their citizens to decades of volatility and poverty.
Coming back to today or for that matter to the next few months and quarters—are we staring at an abyss? We have problems. Who does not have problems? And as an aside, left countries like Venezuela seem to have the worst problems. And lefty Joe Biden’s America, which has penalised fracking and closed pipelines, has created problems for itself and the whole world. But a Sri Lanka-type abyss is so far-fetched that one has to dismiss it as a lefty fantasy and then wonder whether lefties actually desire it. After all, their hero Comrade Lenin believed in deliberately exacerbating crises in order to discredit the bourgeois State.
Sri Lanka reduced indirect taxes. This ended up actually making imports cheaper. Sri Lanka was hit by terrorist attacks on churches. They could and should have launched a global advertising campaign conveying the message that these terrorist acts were strategically calculated to hurt tourism. They should have appealed to international tourist solidarity to counter the terrorists’ plans. They just did not learn from the Bali experience. Indonesia today gives work visas easily for people who want to work remotely from Bali. Sri Lanka never thought of imaginative responses like this one. And then Sri Lanka listened to quixotic western NGOs who are pushing poor countries to go in for organic farming even as their own countries opt for GM crops.
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India’s balanced approach
India’s sobriety and balanced approach has been a complete contrast to Sri Lanka and ranks as one of the better national economic policies anywhere in the world. Does this mean we are one hundred percent certain that we will not get into trouble? There are no certainties in economics or in political economy for that matter.
I am a little worried about a possible misguided approach to inflation. The idea that we should cut indirect taxes on petroleum products to curb inflation is a misplaced one. A country with our kind of current account deficit would do well to keep gas and gasoline prices high. One hopes that despite the pressures on her, Sitharaman reverts to this position.
The idea to not let the rupee weaken too much because a weak rupee leads to inflation is another joke. I am sure that RBI governor Shaktikanta Das is well acquainted with Paasche and Laspeyres indices. He knows that a weak rupee alters relative prices of products and cannot by itself raise prices all around. Because our statistical traditions involve measuring the prices of static predetermined consumption baskets, we can easily fall into the trap of this fallacy. A weak rupee is good. All countries that have had good growth rates have maintained undervalued currencies. Actually, a weak rupee is the simplest way to encourage exports and discourage imports. The current account deficit is better addressed by simple price signals than by intrusive administrative actions. In fact, one can make the case that Sri Lanka could and would have survived all its mistakes if only their central bank had devalued aggressively. But that is another story.
I am a tad happy that I live in a country where lefties, who are enormously influential elsewhere, and who used to be influential here also, are being ignored. Let this approach continue. Writing in 2052, economic historians will hopefully write about how post-Covid India managed to avoid eddies and whirlpools and keep moving ahead.
Jaithirth Rao is a retired businessperson who lives in Mumbai. Views are personal.
(Edited by Prashant)