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Unit 12: Privatisation and Economic Reforms

This section believes that the present crisis may be worse than that of 1991 but the government Notes
this time round is much more complacent, and less inclined to implement drastic reforms to
revive growth.

12.4.1 Then and Now

Of course, not everyone agrees with the narrative that the India of 2013 is worse than it was in
1991. Actually it is not. And more of the same kind of reforms is perhaps not the answer either.
The world was very different in 1991 when western economies were still strong and looking
outward, trying to deepen the process of economic globalisation. Today, major OECD economies
are looking much more inward than before, trying to fix their own domestic economy and
polity. Emerging economies like India, which managed to avoid until 2011 the negative impact
of the global financial crisis, began to dramatically slowdown after 2011. Most of the BRICS
economies have lost over four per cent off their peak GDP growth rates experienced until 2010.

You must consider that after 2010, excess global liquidity flowing from the West, the consequent
high international oil and commodity prices fed seamlessly into India’s domestic
mismanagement of the supply of key resources such as land, coal, iron ore and critical food
items to create a potent cocktail of high inflation and low growth, and a bulging CAD. The key
difference between 1991 and 2013 is the availability of global financial flows. In 1991, western
finance capital had not significantly penetrated India. Now, a substantial part of western capital
is tied to India and other emerging economies where OECD companies have developed a
long-term stake. The broader logic of the global capital movement is that it will seamlessly
move to every nook and corner of the world where unexploited factors of production exist and
there is scope to homogenise the modes of production and consumption in a global template.
This relentless process may indeed gather steam after the United States shows further signs of
recovery. Indeed, some experienced watchers of the global economic scene have said that a
recovery in the U.S. will eventually be beneficial for the emerging economies. This basic logic
will sink into the financial markets in due course. At present, the prospect of the U.S. Federal
Reserve withdrawing some of the liquidity it had poured into the global marketplace is causing
emerging market currencies to sharply depreciate.
In a sense, the depreciation of 15 to 20 per cent this year of the currencies in Brazil, South Africa,
Turkey, Indonesia and India can be seen partially as a knee-jerk reaction to the smart recovery
of the housing market in the U.S. and the consequent prospect of the Federal Reserve gradually
unwinding its on-going $40 billion a month support to mortgage bonds over the next year or so.
But eventually, a fuller recovery in the U.S. will mean better economic health globally.
Besides, some tapering of liquidity by the U.S. Federal Reserve is inevitable as such an
unconventional monetary policy cannot last forever. The U.S. Federal Reserve balance sheet
was roughly $890 billion in 2007. It has ballooned to a little over $3 trillion today simply by
printing more dollars. Such massive liquidity injection by printing dollars in such a short
period is probably unprecedented in American history. This is also unsustainable because sooner
rather than later, such excess liquidity could send both inflation and interest rates shooting up in
the U.S. — which again may not be good for the rest of the financially connected world.
So what should India learn from the current situation? One, it needs to understand that cheap,
finance capital flowing in from the West is a double-edged weapon. If not used judiciously to
enhance productivity in the domestic economy, such finance will tend to become an external
debt trap. This lesson is as important for the government as it is for the Indian capitalist class
which has shown a tendency to use cheap finance and scarce resources such as spectrum, coal,
land and iron ore to play stock market games in collusion with the political class. Of course, this
is a systemic issue and needs to be addressed at the level of electoral funding reform. Indeed, this
is more important than “fresh economic reforms” that blinkered economists advocate.

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