That Indian economy is in crisis was something I suppose, people in India have been realizing slowly over the past year or so. International investors have been much later to realize that and are now in panic putting the markets in free fall. Ostensibly, all this is happening because of recent reset of growth expectations and bad economic policies of the Government. It now seems the global traders are trying squeeze the life out of the economy and hasten the downfall. Nothing else can explain 2.5% drop in rupee in a single day and another big fall in stock market after massive loss last Friday.
India is a huge country, both in terms of geographical size and population. It has a large middle class which has grown increasingly prosperous over the last two decades since the economic reforms of the government of P V Narasimha Rao. While one can debate that this prosperity has been lop sided in favor of urban population, no one can deny the overall prosperity. All that wealth and productivity gains have not gone anywhere. Growth rate of about 4% projected is still a lot better than what any of the developed countries will be experiencing in the near future.
So what's the panic ? I think it is the hedge funds, the same ones which caused crisis in EU, one country at a time causing huge headaches, are now preying upon India. They are betting that by shorting Indian securities , currency and stocks, they can make money when India will be forced into debt restructuring.
That is not to say India is blameless and it is all fault of International investors. India does have several systemic fault lines that its rapid growth in the recent years has kept hidden :
Endemic Corruption : For a common Indian, corruption has become a part of life. Indians have never ever invaded another country. That is a virtue they are proud of. But that meant they had to tolerate millennia of aggression from others. That tolerating nature has now manifested into a general acceptance one has to pay a bribe to get a job done. While rich use bribes to break the rules, other are forced to pay bribes to stay compliant with the rules. Like for example, a common man has to pay a tax to the government, the clerk will not do the paperwork till he gets a bribe. The person who is paying the bribe thinks he is doing no wrong but does not realize that the clerk can demand a bribe only because people are willing and this ignorance, is the root of the corruption in India. If the corruption at lower levels happens due to ignorance, at the top echelons, it happens due to greed at its purest form. Politicians with insatiable hunger for money and power collude with capitalists, both national and multi-national to put interest of the common man on the chopping block. 2G scam, Coalgate, Wal-Mart are only a very few examples among many. Increasing corruption in public life has bled money from the real economy into black economy. A proof of this is soaring prices of property and gold, two assets which can easily acquired using black money.
Vote bank Politics : One big reason the government is in policy paralysis is that elections are approaching. The government does not want to alienate communities which can swing the vote. The current government has taken vote bank politics to a pinnacle, with no consideration at all for the economic realities. To keep the vote banks intact, political parties also starve the communities of proper education and encourage communal divisions.
Poor civic sense and civic responsibility : One of the worst aspects of India is the poor civic sense and lack of respect for rules displayed by the general population. It is easy to find even a well educated person willingly breaking rules of the road, driving past a red light or driving on the wrong side of the road, equally willing to pay a bribe if a policeman is encountered. Littering the streets is common place. A typical response when confronted will be 'I am not the only one doing it'. Generations since Indian independence have been passed down with very little moral education. Decades of brain drain has only aggravated the problem. Most well educated and intellectual part of the population has moved out of the country and gradually, the resulting brain drain has made its contribution in bringing down the moral values and civic sense. This is a problem that when fixed, can potentially fix every other problem India has.
While problems are plenty and may justify scepticism about India, none of these can justify the sudden plunge in the markets we are witnessing.
India is a huge country, both in terms of geographical size and population. It has a large middle class which has grown increasingly prosperous over the last two decades since the economic reforms of the government of P V Narasimha Rao. While one can debate that this prosperity has been lop sided in favor of urban population, no one can deny the overall prosperity. All that wealth and productivity gains have not gone anywhere. Growth rate of about 4% projected is still a lot better than what any of the developed countries will be experiencing in the near future.
So what's the panic ? I think it is the hedge funds, the same ones which caused crisis in EU, one country at a time causing huge headaches, are now preying upon India. They are betting that by shorting Indian securities , currency and stocks, they can make money when India will be forced into debt restructuring.
That is not to say India is blameless and it is all fault of International investors. India does have several systemic fault lines that its rapid growth in the recent years has kept hidden :
Endemic Corruption : For a common Indian, corruption has become a part of life. Indians have never ever invaded another country. That is a virtue they are proud of. But that meant they had to tolerate millennia of aggression from others. That tolerating nature has now manifested into a general acceptance one has to pay a bribe to get a job done. While rich use bribes to break the rules, other are forced to pay bribes to stay compliant with the rules. Like for example, a common man has to pay a tax to the government, the clerk will not do the paperwork till he gets a bribe. The person who is paying the bribe thinks he is doing no wrong but does not realize that the clerk can demand a bribe only because people are willing and this ignorance, is the root of the corruption in India. If the corruption at lower levels happens due to ignorance, at the top echelons, it happens due to greed at its purest form. Politicians with insatiable hunger for money and power collude with capitalists, both national and multi-national to put interest of the common man on the chopping block. 2G scam, Coalgate, Wal-Mart are only a very few examples among many. Increasing corruption in public life has bled money from the real economy into black economy. A proof of this is soaring prices of property and gold, two assets which can easily acquired using black money.
Vote bank Politics : One big reason the government is in policy paralysis is that elections are approaching. The government does not want to alienate communities which can swing the vote. The current government has taken vote bank politics to a pinnacle, with no consideration at all for the economic realities. To keep the vote banks intact, political parties also starve the communities of proper education and encourage communal divisions.
Poor civic sense and civic responsibility : One of the worst aspects of India is the poor civic sense and lack of respect for rules displayed by the general population. It is easy to find even a well educated person willingly breaking rules of the road, driving past a red light or driving on the wrong side of the road, equally willing to pay a bribe if a policeman is encountered. Littering the streets is common place. A typical response when confronted will be 'I am not the only one doing it'. Generations since Indian independence have been passed down with very little moral education. Decades of brain drain has only aggravated the problem. Most well educated and intellectual part of the population has moved out of the country and gradually, the resulting brain drain has made its contribution in bringing down the moral values and civic sense. This is a problem that when fixed, can potentially fix every other problem India has.
While problems are plenty and may justify scepticism about India, none of these can justify the sudden plunge in the markets we are witnessing.
