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Manmohan Singh’s losing battle with the markets

by Kevin Rafferty

Special To The Japan Times

Ten year old Sonali sits on the baked mud floor of one of the open spaces of the village, grips a pencil tightly as if she fears it may dance away from her, and painstakingly writes spidery letters in a grubby exercise book. When she completes a line, she has a big smile on her face. For Sonali and for almost 100 other children aged between 7 and 12 sitting around her on the mud floor this is something new that her parents and even her elder brother never experienced, a day in school.

This is Paltoo ka Nangla in Uttar Pradesh state, just 55 km from the Taj Mahal, that monument to love and power, and 205 km from Delhi, where Manmohan Singh, M.A. (Panjab University), M.A. (Cambridge), Ph.D. (Oxford), not to speak of honorary degrees galore, wrestles with the task of getting India’s economy back on track.

Singh has protested that India is not facing a crisis. But other learned economic commentators who do not have the prime minister’s vested interests have claimed that the wheels of the Indian juggernaut are falling off, which might seem an appropriate image given that the word “juggernaut” derives from the Sanskrit “jagannath”, a huge chariot under which Hindu devotees threw themselves to be crushed to death.

Factually, the skeptics about the Indian miracle seem closer to the truth. From more than 9 percent only two years ago, India’s growth rate has dropped. The government was projecting 5.5 percent for this year, but the latest quarterly figures show 4.4 percent, leading economists to forecast that growth will be well below 5 percent and may be a mere 3.7 percent for the current year.

Financial markets are distinctly underwhelmed by Singh’s protests that all is alright. With a current account deficit of 4.9 percent of gross domestic product, the third highest in the world, a government budget deficit of 9 percent of GDP and consumer price inflation of 10 percent, India has big problems, exposed by promises that the U.S. Federal Reserve would soon start tapering its $85 billion a month program of quantitative easing. Forex markets sent India’s rupee plummeting. For Mukesh Ambani, India’s richest man, the falling currency took about $5.6 billion off his fortune, leaving him with a net worth of a mere $17.5 billion, according to the Bloomberg Billionaires Index.

Finance Minister Palaniappan Chidambaram took emergency measures to stabilize the rupee and the arrival of Raghuram Rajan as governor of the Reserve Bank have brought the currency back. But there is a growing consensus that 70 may better represent fair value, given India’s yawning deficits.

On every front, the government is in a bind. General elections are due next year, which makes it hard for politicians chasing the popular vote to take tough measures to cut the deficits. Sure enough, India’s lower house of Parliament passed a $20 billion measure to provide cheap food for the country’s 800 million poorest people.

That figure tellingly points to some of India’s real problems. The supposed beneficiaries account for two thirds of India’s population. In spite of India’s recent spectacular growth, the boom of outsourcing, the forays by Indian companies abroad, with Tata buying Jaguar and ArcelorMittal becoming the world’s biggest steel producer, the rise of the millionaires and billionaires in a booming prosperous middle class of 300 million people, too many Indians have been left behind.

Economic theory says that if a country’s currency depreciates — not least because of a heavy current account deficit, such as India’s — it offers opportunities to boost exports and thus reduce the deficit. Singh’s and India’s problem is that the import bill, especially for oil and gas, goes up immediately, and exports may not rise fast enough and certainly cannot respond to the quick march of devaluation ordered by jittery forex markets.

Some Indian economists gloomily claim that the country has lost its export culture, if it ever had one, and its manufacturing cannot compete with better organized countries like China, Vietnam, and even Bangladesh and Cambodia. How can it when the masses of its people are under-educated and socially deprived? Economists Jean Dreze and Amartya Sen point out that India now lags behind Bangladesh on key social indicators.

A welter of problems confound Singh’s promises to wipe the tears of poverty from the eyes of Indians.

To use the vehicle analogy, India’s economy was never a huge juggernaut devouring all before it, but there was a BMW or Lexus for the million at the top, a Suzuki Maruti for the next 40 million, a scooter for another 100 million, a bicycle for another few hundred million, and an overcrowded bus or their own two feet for most of the masses. What is happening is that the wheels are falling off the Marutis and scooters, which were anyway stuck in traffic jams on potholed roads.

The government needs to spend more money and more wisely on too many essential things from basic education to basic infrastructure, but its budget is overstretched and spending is filtered through one of the world’s most corrupt countries. It is anyone’s guess how much of the cheap food will actually reach the really poor.

Paltoo is instructive. The last two years has seen the belated arrival of electricity and the privately run school, costing pupils 100 rupees a month. Nearby cell towers have enabled mobile telephones and a handful of villagers have one, including a shopkeeper, also a new arrival, although his “shop” is little more than a hutch selling knickknacks, snacks and school pens. Houses are no longer the mud and thatch buildings that predominated when I first visited Paltoo more than 30 years ago, but are becoming solid structures shored up with bricks.

But this prosperity is thanks mainly to money sent back by men who have gone to Agra or Mumbai to work. Villagers complain that their wells are running dry, because of water mismanagement.

If Singh has to raise interest rates to protect the rupee, there will be a new threat to India’s growth, jobs will fail and without more careful government spending the trickling progress of prosperity will dry up.

One older boy on the Paltoo school floor had scrawled “Rain, rain go away” in English letters in his book, but neither he nor the two teachers in the school understood any of the words. But with the school, a new door has been opened to the world for these very ordinary Indians. Does Singh have the wherewithal and the imagination to keep it open?

Kevin Rafferty is a professor at the Institute for Academic Initiatives at Osaka University.

  • SunilVerma

    Of course neither Singh nor his madam have the imagination to keep the school open. It is more important for them to throw enough morsels to the poor to keep them alive and vote for the Congress in the coming elections….