Dr. Susmit Kumar, Ph.D.
In last couple of years, India is boasting about its highest economic growth rate in the world, surpassing that of China. Economists world-wide are predicting that India’s growth rate would surpass that of China now onwards, resulting in India’s GDP to be second largest in the world by 2040, behind China and surpassing the US. Indians use this data as a ticket to the super-power status. But there is a fundamental difference between the growth rates of India and China. Behind its exemplary growth rate, India has trade deficit every year in last more than two decades whereas China has trade surplus in the same period. As history has shown us, Indian economy has potential to collapse in an economic crisis whereas Chinese economy can withstand it.
After the sharp devaluation of the Indian rupee and double digit inflation during 2011-13 due to high crude oil price, some economists even started to write the obituary of the Indian economy (read: "None of the experts saw India's debt bubble coming. Sound familiar?", The Guardian, UK, August 26, 2013; ‘Fragile Five’ Is the Latest Club of Emerging Nations in Turmoil, New York Times, January 28, 2014). One point worth noting is that Russia and China were not included in the new club of “Fragile Five”. Both Russia and China have been running trade surpluses since early 2000s. Had high crude oil price persisted for couple of more years, it was certain that India would have had to go to the IMF to take loan which would have destroyed the Indian economy for next one decade or more, due to the IMF’s bitter medicine of getting rid of subsidies to balance the budget, significant increase in the interest rate and selling the crown public sectors to Wall Street bankers at throwaway price.
As explained in my two articles Is "Make In India" Theme Helping Indian Economy? - Part I and Is "Make In India" Theme Helping Indian Economy? – Part II before even thinking to become a super-power, a country needs to generate a trade surplus, which the US did for more than 30-35 years after World War II, China since early 2000s, and both Japan and Germany in last more than three decades. Right now India’s foreign trade is following in the footsteps of that of the US, a bankrupt country surviving on printing its currency which happens to be the global currency (read my article: The US Dollar – A Ponzi Scheme).
In 2009, I attended a conference on Indian economy at a Business School in a midwest university which is in top five business schools in the US. During the first session, I raised the question that yes Indian economy was booming, but its trade deficit had been increasing like the US trade deficit and US could pay it by printing its currency but India would face a crisis down the line. They did not give any direct answer. After my question, they changed the format of question from audience (after the first session) - in the first session, you just needed to raise your finger to ask question. But now they asked to submit questions on a piece of paper to the moderator and it would be up to the moderator to choose from the submitted questions.
India should stop listening to the US educated economists and MBAs because their brains are poisoned by massive propaganda of the Reaganomics by the Republican Party in US. Reaganomics is reduction of taxes and the promotion of unrestricted free-market activity. As explained in my two part series on “Make in India”, had the US Dollar not been the global currency, there would not have been “Reaganomics”. The US economists and MBAs are very good at increasing the share markets, but are not good for the country’s overall economy.
Prime Minister Modi is fortunate that he took over the reins in 2014 when the crude oil price went down and not earlier. In last few years, India has been able to manage its USD 130 bn trade deficit with about USD 70 bn NRI remittance and USD 50 FDI. During 2011-13, a high trade deficit of $180 bn to $200 bn resulted in sharp rupee devaluation and double digit inflation. As discussed in my article Modi Government Should Thank Low Crude Oil Price, Not RBI Governor Rajan, For Stable Rupee, India’s net crude oil bill in 2014 was USD 116 billion at USD 40 a barrel and at USD 100 a barrel rate, this number would have been USD 290 billion which India would not have sustained without having a crash of rupee, may be to 100 Rupee to one USD. There can be several scenario in which trade deficit may go up sharply – a war between Saudi Arabia and Iran will certainly result in USD 100+ a barrel crude oil and it will also significantly reduce NRI remittance from Middle East (nearly half of the total NRI remittance comes from the Middle East); an increase in US interest rate by US Fed will have adverse effect on FDI in India; due to Trump’s “American First” policy or Trump’s ban on Indian programmers in US as discussed in my article “India should be Wary of “Every Day Poker Player” Trump on Kashmir” India may lose a large portion of its current USD 40 bn income from the US, resulting in a large hole in the Current Account Deficit (CAD). As discussed in my article “Narendra Modi, Indira Gandhi and Economy,” Mrs. Indira Gandhi was riding high after winning the 1971 parliamentary elections, the 1971 Indian-Pakistan War and winning nearly 70% seats in the 1972 state assembly elections, but within two years she faced her nadir when she had to go to the IMF to take loan after the 1972-73 drought. The IMF imposed its bitter medicine to tame budgetary deficits and to reduce subsidies. The government was forced to adopt austerity measures by drastically cutting expenditure, reduction in wages and imposing compulsory savings on salaries and incomes. The economy, both global and national, is cyclic in nature and hence it is certain that Mr. Modi would have to face an economic downturn in near future which would be a litmus test for him.
If Mr. Modi would have to go to IMF to get loan, everything will collapse because IMF would force government to get rid of nearly all subsidies and welfare schemes like free housing, free cooking gas, fund for MNREGA, mid-day meal in schools, and old age pensions. Apart from this, IMF will force govt. to sell Navratna PSUs cheap to private sector/Wall Street firms so that IMF can collect dollars which they would give to India in aid. India would have to go through what countries like Spain, Ireland, and Greece went through after 2009 Euro crisis. Entire agenda of PM Modi would be gone.
For this very reason, India needs a fundamental change in its economic policy. Here are some points which can be part of the new economic policy:
(1) In order to achieve trade surplus, the Modi administration needs to come up with a way to incorporate the German and Chinese industrial policies. As India has democratic system, it cannot follow the government-controlled industrial policy of China (although it is the best in the present global economy model), it needs to incorporate major part of the German industrial policy of “Codetermination” plus some features from Chinese industrial policy.
Codetermination in Germany is a concept that involves the right of workers to participate in management of the companies they work for. Known as Mitbestimmung, the modern law on codetermination is found principally in the Mitbestimmungsgesetz of 1976. The law allows workers to elect representatives (usually trade union representatives) for almost half of the supervisory board of directors and hence the future of a firm is decided by stakeholders instead of shareholders. It applies to public and private companies, so long as there are over 2000 employees. For companies with 500-2000 employees, one third of the supervisory board must be elected. The German manufacturing sector still contributes about 25 percent of its GDP as compared to only 11 percent in the case of the United States. For this very reason Germany is still the world’s second-largest exporter and has not faced the same severe crisis that countries such as the United States and other Western nations have been facing due to emergence of the global Chinese workshop.
(2) Replacing imported mass consumption items with India made items: Once I saw a large “Made-in-China” air cooler, with three side cooling pads, a water pump to pour water on cooling pads and a fan in the front, in a politician lawn in Lutyens’ Delhi. This air cooler can be made in India easily. Should India spend its “precious” dollars on simple items like air cooler which can be easily reverse-engineered? As explained in my article The Hidden Cost of Imported Items and The Need to Redefine Modi Administration’s “Make in India” Policy, if you purchase a "Made in China" commodity instead of "Made-in-India" commodity, then India loses not only a factory job but also indirectly associated jobs such as in schools, hospitals, and auto sector. Instead the purchase of the imported commodity creates such lost jobs in China. Due to these hidden benefits, China has been able to sell the items at below manufacturing price undercutting all other countries. The government should target imported products that are killing domestic jobs and provide tax-breaks and subsidies to reduce its price. The Modi government is contemplating on providing minimum basic income to everyone. Let this minimum basic income be paid towards the salaries in the form of subsidies to manufacture these products. India needs to produce all the mass consumption items to insulate itself from factors outside its control. It should not allow large conglomerates to manufacture these items because after few years, they will shut down the manufacturing plants and start importing as profit being their sole motive, they can make more money from imports. These plants can work on no-profit no-loss philosophy with “Codetermination” policy.
(3) India needs its “Landing on Moon” Moment: If India aspires to become a super-power, it has to do something big to claim the super-power status. When watching Soviet Union's double-digit growth rates during early 1950s to the mid-1960s (read: my article Communism Collapsed Due to Collapse in Oil Price in Late 1980’s and German Banks – Not Due to Reagan), the Americans were stunned by hearing on their radios the beep of the tiny Soviet Satellite, Sputnik, which was visible also. Sputnik’s radio pulses were detectable. Four years after the Sputnik shock of 1957, the cosmonaut Yuri Gagarin became the first human in space on April 12, 1961, greatly embarrassing the U.S. Then in May 1961, President John F. Kennedy announced the dramatic and ambitious goal of sending an American safely to the Moon before the end of the decade. In general, Kennedy felt great pressure to have the United States "catch up to and overtake" the Soviet Union in the "space race." It is worth noting that the US was able to land its two astronauts Neil Armstrong and Buzz Aldrin on Moon on July 20, 1969. Mr. Modi needs to do something big similar to Kennedy’s vow to land humans on Moon. As the crude oil is the most expensive item in India’s import, let Mr. Modi vow to eliminate the crude oil bill in import within say 5 or 7 years by utilizing renewable energy resources. There can be several ways to achieve this goal. I would like to give a simple example. In Europe, firms are coming up with ways to eliminate use of oil/petrol in transportation, Electrification of road freight transport being one among them which is actually more than 100 years old technology. In US, “Internet of Things” technology is being used in autos so that one auto can communicate with others to avert collision - this can be effectively used if autos would run using the overhead electric lines on highways. There can be several other technologies which can help India wean away from crude oil import. I have faith on Indian brains to achieve the goal of eliminating crude oil import within a short time. In nearly all US universities, more than 80% to 90% of professors and research (MS and PhD) students in engineering and computer science/technology are either Indians or Chinese. Same is true in all the research labs in the US. More than half of the programmers in San Francisco Bay Area, also called Silicon Valley, California, US, which hosts headquarters of IT firms like Apple, Facebook, Yahoo, HP, Oracle, eBay, Paypal and Cisco, are Indians. Mr. Modi needs to create a task force to assemble brains from the US and other countries as well as from Indian premier institutes like IITs to achieve the goal. India can spend tens of billions of US dollars on it because it has potential to eliminate hundreds of billions of dollars from each year import bill. For this purpose, India should not support start-ups which would create few billionaires like Elon Musk (Tesla), but instead use the “Codetermination” industrial policy of Germany. Comptroller and Auditor General (CAG) office needs to evaluate the work periodically, say every three or six months, as per agile project management principle (read: The Agile Movement) to make sure that money is being spent properly. Like the Europeans, the Indian government needs to provide the world-class transportation facility, like metros, in large and mid-size cities so that people would use them instead of autos. In US, middle-class and upper-class family own more than two cars which they prefer to use to go to office and shopping whereas Europeans prefer to use public transportation for these purposes. In 2010, Americans drove for 85 percent of their daily trips, compared to car trip shares of 50 to 65 percent in Europe. Longer trip distances only partially explain the difference. Roughly 30 percent of daily trips are shorter than a mile on either side of the Atlantic. But of those under one-mile trips, Americans drove almost 70 percent of the time, while Europeans made 70 percent of their short trips by bicycle, foot, or public transportation (read: 9 Reasons the U.S. Ended Up So Much More Car-Dependent Than Europe).