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Indian Economy

Notes 12.4.2 Using Natural Resources

It is important to note that India still has time to work towards insulating itself from the
vagaries of global finance causing much weakness in the currency and the current account. To
begin with, the government can easily generate $20 billion or one per cent of GDP by allowing
higher coal and iron ore production from its large reserves. Our annual coal imports have gone
up from roughly $7 billion five years ago to about $18 billion now. The increased dollar outflow
was largely avoidable because India has among the largest coal reserves in Asia. India could
have saved $10 billion simply by producing more domestic coal. The government must, under
a specially regulated dispensation, maybe under the Supreme Court’s watch, revive the export
of iron ore from Karnataka and Goa where much of the mining has stopped following judicial
intervention. Prime Minister Manmohan Singh spoke about making a special plea to the Supreme
Court to restart mining and exports from here. This could add another $7 to $8 billion to the
foreign exchange reserves. These are simple ideas which do not require “big bang reforms,” as
some overzealous economists might suggest.
If some of these resources are produced optimally and gold imports are brought down by about
$20 billion, to the levels that existed before 2011, the CAD should be back to the comfort zone of
less than three per cent of GDP. The moment CAD comes below three per cent of GDP, the
overall sentiment would definitely change for the better.
12.4.3 Food Security Mechanism

Further, a more rounded food security mechanism can help insulate the poor from rising food
inflation. This can free up the Reserve Bank of India to then look at the manufacturing inflation
as a dominant basis for making monetary policy and help ease interest rates for industry. All
this needs a dramatic improvement in governance and a return to normality in the strained
relations between the bureaucracy, the political class and the judiciary. Some argue that this can
only happen after the general election, whenever it is held.

It is important for you to note that the capitalist class also has a big lesson to learn. It merely used
cheap, western finance all these years to ramp up stock prices based on cornering scarce resources
like land and minerals. All such companies are today quoting at 80 per cent below their peak
values seen in 2010 when the economy was still doing well.
These companies today are in a huge debt trap and their interest payments far exceed their
earnings annually. Worse, Indian companies have a massive exposure of close to $200 billion of
loans from abroad and the sharp fall in the rupee is making their repayment even more difficult.

Many big business houses thought they could use cheap, global money to create financial, not
real wealth. For a while this worked and some of the stock market-created wealth went into the
funding of elections. This game is over now. So, the big learning is that there is no substitute for
creating real wealth accompanied by higher productivity. Excessively cheap global money is an
illusion which gets shattered in a business down cycle.
Self Assessment

Fill in the blanks:
13. …………………… still has time to work towards insulating itself from the vagaries of
global finance causing much weakness in the currency and the current account.

14. Emerging economies like India, which managed to avoid until …………………… the
negative impact of the global financial crisis, began to dramatically slowdown after 2011.

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