Plotting an economic 'crisis'

By Kamal Nayan Kabra

IT WOULD not be far short of foolish to turn a blind eye to the effects of conjoint bunching of various acts of agencies known to be working in tandem for the achievement of their grand projects. In the last couple of weeks, many apparently unrelated happenings concerning the organised segments of the Indian economy, particularly those relating to the external sector, have been hitting the headlines, but in isolation from each other. Downgrading of India's credit rating by Standard and Poor, followed by Moody's has coincided with the visits of the U.S. Trade Representative and the CEO of a big U.S. Bank. The latter two have in many ways added their voice to the rumblings emanating from the rating agencies. To appreciate the not-so- apparent meaning of these conjoint manoeuvres, let us drew attention to some indicators about India's external economic relations. Foreign exchange reserves have continued their accretion spree beyond the $43.6-billion watershed. It should not be long before they hit $ 44-billion level, notwithstanding the delay in bringing in over Rs. 14,000 crores by exporters. The managers of the Indian economy are extolling it as a never-before achievement.

Having left the external value (as also the internal value) of the rupee to the market forces and not targeting any particular level in the course of the RBI's market interventions, its breaching the Rs. 47 to a dollar level is leading to real income losses by way of cheapened sale of Indian goods and costlier purchase of foreign goods. This loss and its wider secondary and tertiary rounds of effects do not seem to form any part of the policy-makers thinking, wedded as they are to tertiary sector, exports and debt-led growth of GDP. The neglect of the real sectors and internal diffusion of purchasing power cannot but assert itself. Hence, we are face-to-face with the decline in export growth. This is combined with a sharp deceleration in industrial production, with negative growth in capital and basic goods sub-sector, negative growth in imports, particularly in the capital goods imports. It is clear the economy is facing a downturn. This is also reflected in the poor and deteriorating health of India's government finances. Fiscal deficit continues to rule above 10 per cent of GDP, off-budget spending pressures are mounting and internal debt of the Government is around 70 per cent of the GDP. Tax buoyancy seems to have gone on an unsanctioned long leave.

The above scenario fails to capture the situation of the people's economy, which is seeing perpetual worsening of poverty, unemployment, inflation, inequities and massive deterioration of living conditions. Yes, worsening of inflation as well, because the Wholesale Price Index and the Consumer Price Index have reached unprecedented levels; current 3 per cent growth rate makes the unbearably high levels only higher, notwithstanding the contrived hype about macro-economic balance. Even the chorus of deteriorating economic scene orchestrated by the rating agencies has been articulated earlier by the business classes of India, bemoaning worsening recession, slowdown of pro-business reforms, persistent infrastructural bottlenecks and misuse of bureaucratic-political discretionary powers reflected in an unending succession of mega scams. The VIP visitors from the U.S. have lent their voice to this carefully timed playing up for going on heedlessly for liberalisation and the second round of WTO negotiations - a euphemism for rubber stamping the US-OECD script. These re-ratings and the publicly built-up pressure by the visitors from the U.S. are intended to come to the help of a regime which is politically incapacitated, morally bankrupted, and has unwittingly failed the economy.

Why suddenly the revision of India's rating from stable to negative? The real reason for the lowering of India's reckoning vis-a-vis the players in the global financial markets seems to be a multi-pronged strategy to kill many birds with a single stone. The Indian Government does not seem to be left with the capacity to go ahead with the implementation of the new round of `reforms' the translational finance capital and companies are espousing, especially exit policy, privatisation, dereservation of industries earmarked for the small sector, etc. The latter are keen to ensure their implementation. This becomes clear when we appreciate the methods of the rating agencies.

The rating agencies provide an assessment of the overall, sectoral economic situation in the context of what has been popularised as issues relating to goverance which go to determine both investment prospects and investment climate. Indian economic information is both a relatively rich fare and an open book; one can log on to many sites, and obtain an update on the Indian economy. There is nothing available with or about the so-called global rating agencies which is unique to them except for the fact that the potential global FDI, portfolio and money-credit market suppliers choose to rely on the assessment carried out by non-Indian agencies like the Moody's or S & P.

Their primary USP is a result of a well-entrenched system of mutual back-scratching: by publicising assessment which has a close bearing on the presumed credit worthiness of sovereign nations and as also the pricing behaviour/ decisions and strategic futuristic gameplan of the global financial players. But in the process of lowering or downgrading a particular country's currency/credit rating or that of its bigger companies, they become hidden persuaders for a policy shift favourable to or furthering the cause of multinational/global finance capital. Their supposedly technical analysis is essentially the thin edge of the wedge to camouflage their role as powerful lobbyists plus black-mailers. To lend further credence to the veiled threats if policy shifts of dramatic proportions are not carried out, there seems to have occurred a contrived or fortuitous coincidence of the arrival of the U.S. Trade Representative and the CEO of a big U.S. bank singing the same tunes. To clinch the design, the Indian business associations fell in line, whether openly or clandestinely. The assessment reports explicitly state these `demands', which can allegedly save the situation for India. The Indian business classes, while formally protesting about the revised ratings, are joining the same cacophony. They have said that the North Block should grab this opportunity to re-launch the reforms, going to the extent of reducing the Government just to a facilitator without a regulatory role. The whole exercise seems to be a well-laid-out plot to accomplish just this grand design.

They know that the kingpin sustaining the current muddling through is the swollen foreign exchange kitty. But this is an area where India is highly vulnerable. Shake the confidence of the lender and investors and the managers of the Indian economy can be brought down on their knees. And once these flows dry up, a first rate `crisis' of the 1991 vintage could be enacted. The last round of `real liberalisation', as described by an Indo-U.S. Economist, was triggered by the crisis syndrome and went much beyond that demanded by the so-called crisis. Hence the agencies downgrading the rating maintain that ``fundamental adjustment will only come in an atmosphere of crisis''. And so they are on the job of creating a crisis; revision of ratings is just the first salvo; peripatetic advisers and officers of the North and their Indian allies will dutifully lend their voices in the days to come. The market will respond and the meltdown of the forex reserves will start. Let a word spread about an imminent `correction' in the dollar value of the rupee and exodus of funds will start along with further swelling of the non-repatriated export earnings. Is there not a strong sense of deja vu, a replay of the 1991? Crisis management would help generate the political consensus and revive the ``there is no alternative'' (TINA) complex. In financial markets sentiments do the trick as prophecies tend to become self-fulfilling. The plot is clear and writ large in between the lines. What is not clear is whether the potential victims are in fact tacit accomplices! But have not at least some segments of Indian civil society become wiser from the experience of 1990-91?

(The writer is Professor of Economics, Indian Institute of Public Administration, New Delhi.)

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