By David Caploe PhD, Chief Political Economist, http://www.EconomyWatch.com .
About a week and a half ago, my colleague Dwayne Ramakrishnan did an outstanding analysis of the new budget presented by the Indian government. And it stimulated a number of conversations in the office about India and its economy, both present and future.
After several of these chats, it seemed a good idea to get at least some of the substance on record, so Dwayne and I sat down to talk about a bit more about what is going on in that huge and ever-more important country.
While I certainly have my own hopes for what India will become – Asia’s first “buy” economy, based on the fact its growth has been based around the IMPORT of “high value added” jobs,
basically outsourced by Western companies taking advantage of the country’s unique combination of English as a “native” language / high education / and, of course, MUCH lower wages than equivalent jobs in the US / Europe / Australia etc,
Dwayne is more familiar than I with the current inner dynamics of India’s economy.
So this time, I asked a lot of questions, and Dwayne did most of the talking – a situation that caused no end of delight in the Economy Watch “inner sanctum.”
We hope the results will be as illuminating for our readers as the conversation was for each of us.
David Caploe [DC]: Okay, dude, so you seemed pretty optimistic in your piece on the most recent Indian budget, and quoted a lot of sources, both Indian and Western who concurred. That said, what do you think is India’s biggest problem from the point of view of economic growth?
Dwayne Ramakrishnan [DR]: Well, let me say I think India actually has three major problems. First and foremost, as I pointed out, there is both a historical culture of, and structural set-up for, immense corruption. While standardization and getting rid of some of the internal boundaries will help, there’s got to be a serious effort – starting at the top, which of course has hardly been immune, but going all the way through – to change not just corrupt practices, but the whole culture of corruption.
DC: Well, that’s not going to be very easy now, is it ???
DR: [Laughing] No, it won’t, and I don’t even mind that interruption, my friend, because it leads to my second point, which is that, as I also said, India is almost ungovernable, not least because, unlike its neighbor China – and I know, David, you’re obsessed with promoting Indo / Chinese friendship, so you can spare everyone that speech again [laughs] – India IS, a political democracy, which, as your country the US shows, often means a prescription for paralysis –
DC: [Laughing] especially when there’s a crisis like the one the US has been going through since the start of the Millennium …
DR: True, but the good news is that – while India is in SOME ways ALWAYS going through a crisis – things really ARE pretty good right now, as I wrote last week.
That said, there IS one very serious third problem, if you will, which is its huge governmental debt, currently running at around some 80% of GDP, which raises both short-and long-term problems.
DC: Ok, but in that case, why aren’t we hearing all sorts of noise about potential horror stories as we are with Greece, which also has a level of debt almost equal to its GDP ??? Is it because the government of India was too smart to get involved with Goldman Sachs [snickers] ???
DR: Hahahaha, no, it has nothing to do with your favorite whipping boys GS, who are actually quite smart and bullish when it comes to India, but the fact that, UN-like Greece, which owes about 80% of its debt to foreigners, whether public or private, about 90% of India’s debt is owed to its own people and corporations. This means India doesn’t have to worry about being “foreclosed,”
Let me put it this way: the government cannot easily borrow more money without significantly driving up interest rates, which makes it more difficult for the private sector to borrow – after all, we’re not talking about America or Japan here with zero interest rates – so there’s a lot riding on this, as you Yanks say.
DC: [Laughing] I thought I told you the US has a DERIVATIVES, not sub-prime, crisis. Jeez. Ok, so how is it going to deal with this debt problem? Usually, there’s no easy way out of a situation like that, unless your domestic currency is the global currency, as is the case with my own dear country.
DR: Well, this goes back to your “inextricable linkage between politics and economics”, but there actually IS a relatively easy, even short-term economic solution – but it has HUGE political drawbacks, especially for Congress, which is now in power, but the same would be true even for a BJP government, which is in principle much more “free market oriented” than Congress.
DC: Always glad to get that political economic mojo going, but don’t keep us in suspense – what is it?
DR: Basically, while Congress was building India up in its early post-Independence days, it created a large number of public corporations. This made sense at the time, especially given its semi-socialist ideology, and allowed both the creation and active participation in national economic life of unions.
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