Policy response to economic slowdown

September 15th, 2011

Logic dictates, one cannot deny what has already happened. Unfortunately Indian policy makers are doing just that. The economic slowdown has arrived in India and there is no point in denying. Early acceptability of this fact will only help us arrive at early solutions.

Over the past nine months, as the government was busy responding to allegations of corruption, very little has been done to prepare the country for the impending economic crisis. In fact it now appears that the government was not even aware that the country is going to face a crisis on the economic front.

Inflation is nearing double-digit levels despite repeated assurances from policy makers that it will be tamed, the Indian currency is at a two-year low, the IIP numbers are not encouraging at all, and to sum all these up, international agencies like ADB etc. have now revised the country’s growth projections downward for the current year.

What is most amazing is the policy response (or rather no response) to all of this. Let us take the July IIP numbers which were released recently. The numbers were disappointing and the moment they were released, the comments started pouring in. But if one looks back at the way the macro economic numbers have been coming over the past few months, the IIP number should not surprise. Car sales were slowing on a monthly basis, FMCG numbers have not been too encouraging and obviously the inventory of residential properties was on the rise, so it was known that the slowdown is coming. I don’t know why people were surprised. What amazes me the most is that even top government functionaries (Pranab Mukherjee, Kaushik Basu etc.) expressed surprise at the numbers. Policy makers at such levels should be acting and not reacting. Reactions are for people down the line.

The fact that Indian policy makers had very little clue of what was happening and were obviously a confused lot was clear when Kaushik Basu (Chief Economic Advisor) commented that the policy of the RBI with respect to tight money (high interest rates) needs a relook. The central bank has been hiking interest rates since March, 2010, in its bid to tame inflation, so what was Mr. Kaushik Basu doing all this while? Was he not a party to the policy decision of hiking interest rates?

The time has come when policy makers should take actions based on what is happening and not on what has happened. The best economists are the ones who predict the future and take actions accordingly, the second best are the ones who understand the current happenings and accordingly take policy decisions and of course you have the third lot of economists who wait for some statistical numbers and then react. The current economic woes being faced by India can surely not be cured by the third lot.

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100 days of Mamata Banerjee

September 6th, 2011

Mamata Banerjee (a.k.a. didi) has just completed 100 days as Chief Minister. The manner in which she has swept into the portals of power in West Bengal, rising like a phoenix, (leading the 13-year-old Trinamool Congress party) after 34 years of uninterrupted Marxist rule reminds me of Rajiv Gandhi’s euphoric and historic victory in 1984.

There are striking similarities between the two historic wins. Winning 411 seats in the Lok Sabha, Congress created history in the 1984 elections under the leadership of Rajiv Gandhi. The euphoric victory was not only influenced by the sympathy wave (the tragic assassination of Mrs. Indira Gandhi), but Rajiv Gandhi also benefited from his appeal to the youth and a general perception of being Mr. Clean, or free of a background in corrupt politics. Rajiv thus revived hopes and enthusiasm for a clean governance amongst the Indian public. There was a huge burden of expectation on his shoulder. Similar is the situation of didi – the expectation index is very high and comprises all sections of the society.

Didi has openly remarked that she is in a hurry and needs to take quick action on pending issues and if the actions go wrong is willing to make amends. She prefers this to the wait and think approach which she feels may lead to no action at all.

Brilliant thinking on the part of a politician of the calibre of didi who is actually a leader of the masses, but this thinking has one big flaw. The masses do not forgive mistakes when they exercise their franchise. And if the expectation index is very high for a party in power, the chances of making mistakes is that much higher. This should always be remembered by didi. Even Rajiv Gandhi had openly acknowledged (addressing the Joint Session of the US Congress and India) that India was impatient. But while he was in power, a string of decisions taken hurriedly and under wrong advice led to a total fall in the popularity charts and by the time it was 1989, (the next elections) we saw the congress reduce its tally to 197. It was decisively voted out of power. Along with this defeat, the period of political domination by the Congress came to an end. The Congress has not been able to regain that domination till date.

The people of West Bengal have voted for didi with a lot of hope that her rule will mark the beginning of a new dawn in the history of the state. Already within the first 100days the beginnings of a new dawn are visible but we understand that it is very difficult to have a bright new start when the night has been so long and dark. In the quest to usher in a bright new morning, didi has to make sure she does not do a-la Rajiv and ends up without power in 2016 when the people of the state evaluate her first term as chief minister.

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