The economics of plenty

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June 10th, 2010 Rajiv Shastri

Among other things, the Financial and Eurozone crises have imparted a significant degree of clarity to economic beliefs, despite the profusion of over-simplified economic rules which surround them. Standard debt-GDP ratios and requirements of fiscal discipline have given way to rules specific to each country’s economic situation. They have proved, with some finality that different rules apply to Europe, the US and countries like India.

Countries adopting the euro face a particularly challenging environment. Being used to the luxury of owning their respective currencies, they failed to fathom their changed circumstances after adopting the euro. Most of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) nations will default at some point. It’s no longer if… just when.

At the other extreme is the US. Despite borrowing and spending way beyond its capacity to repay, the US will not default. Neither on its explicit debt and nor on its implicit debt, not for a decade or two. Its currency is desired by the rest of the world and is, for all practical purposes, its primary export. Till such time that foreigners, including foreign governments, buy the US dollar and invest it back in the US, there is no reason for the US to default. But only till such time…. If this inflow of foreign funds stops and the US needs to earn a currency foreign to it, default would be a heartbeat away. Right now, the bigger fool theory is firmly in place. Everyone believes they will get out before getting splattered by the fan.

Which brings us to India. As one would expect, India is floundering somewhere between the two. We own our currency, but aren’t really sure how much the world wants it. Capital account flows would suggest that demand exists, but we haven’t yet reached a stage where the world wants our currency for itself and not for the assets it can buy. No one wants to own a weakening asset and we don’t want an appreciating rupee.
India has choices to make. It is at a point in its existence when it can go any way it wishes to. It could continue with policies formed during times of shortage and tweak them to reflect our current surpluses. This positions India as a producer for goods and services demanded by other nations. It would necessitate a weak currency which would assist competitiveness, but deprive the local population of the purchasing power they desperately need.

Or we can discard these policies and adopt the “economics of plenty”. This would position us as a nation of 1.2 billion consumers, not 1.2 billion hungry mouths and necessitate a strong currency which increases our purchasing power. Yes, it would increase our current account deficit but, coupled with the right policies, increase demand for the rupee as an asset in itself.

In our current policy framework, India competes in other markets for a share of their business against players who have set the rules. True progress will lie in changing the rules, in becoming the market others want to compete for. In an environment where major markets are shrinking, or growing at a snail’s pace, India’s emergence as a market will be welcomed by the world. In changing its policies to favour domestic consumption over exports, India will have to change the way it thinks. And the first change will need to be our currency policy.

India’s future lies in this choice. India will grow regardless, probably faster than most countries in the world. But, in the former we will need other markets to grant us our progress. In the latter, we will drive it ourselves.

The blogger is an independent macro-economic consultant and has been a part of the debt market for over 15 years. He also blogs at www.rajivshastri.com. Views are personal

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4 Responses to “The economics of plenty”

  1. DULAL BASU Says:

    There is no reason to assume that the blogger is paraphrasing NYT. Actually, similar, if not identical, thoughts are occuring in the minds of rationale and right-thinking people everywhere around the globe. But most of them are not regular writers nor do they have access to a column/ blog in any reputed daily/ magazine.

    For example, almost two years ago, in response to an article by a reputed columnist, I coined a term “ethnomics” (to mean, ethical economics) where I had suggested that much of the woes of the current system can be resolved if people approached business in a more ethical way, and Govts did not clamour for growth alone, which, any way, is increasing the inequality and not leading to greater overall happiness. Lo and behold! Similar thoughts came afterwards from the likes of the French President and even the Pope.

    The pitty is- the daily where the columnist’s article was published did not care to publish my observations (I still have my comments preserved in my sent-mailbox).

  2. Rajiv Shastri Says:

    @Rajan: The US has it’s own choices to make… It needs to import savings from across the globe as it doesn’t have much of it’s own. The strong currency is just an outcome they have to live with…

    @Rahul: I do read the NYTimes. As I read the Washington Post, the Financial Times and a whole lot of blogs. Almost everything I want to write about is covered by atleast one of these as well. Also, my own perspective agrees with one columnist or the other… My attempt is to figure out how global happenings affect India or whether there are any lessons for us. I could write about this alone, but that would have me assume everyone reads what I do and know where I’m coming from. Ideally, I would just link readers to the posts I want to refer to, but there are issues with external links here. So here we are…:-/

  3. Guha Rajan Says:

    US may not default now, but that does not mean they are safe. Recession in US is one such indicator and more over having strong currency has its own cup of woes. Which is US crying foul on Chinese government on its currency?

  4. Rahul Says:

    It seems you read NYtimes and then write the same thing in a simpler language for Business Standard.

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