Economic Graffiti: Nation of Shopkeepers

India Today
September 14, 1998

VIEWPOINT: ECONOMIC GRAFFITI
Nation of Shopkeepers

India can export its way out of the current recession

By Kaushik Basu

Returning to India, as I recently did after a lapse of five months, I felt despair. Seldom does one encounter news which is so uniformly bad. There seems to be an enormous increase in crime in Delhi. Inflation is up. Industrial production is down. Pollution continues its steady journey upwards. Large parts of Delhi suffer from shortage of electricity and inadequate water supply. As if to support the adage that God helps those who help themselves, there is little rain to bring respite. Not only that, there is no weather forecast that one can rely on.

India's meteorological office sums up much that is the nation's problem. We have excellent scientists. We have satellites. We have computers almost as sophisticated as in any developed country. Yet the weather forecasts that we come out with smack of laziness and utter irresponsibility. Every day, the weather office puts out virtually the same forecast. It goes something like this: "Partly cloudy sky with possibility of development of thundercloud in some areas."

Those were in fact the exact words of the forecast on August 10. Plainly, this is about as close as one can get to saying that anything can happen. We spend millions of taxpayers' rupees on weather forecasting -- and this is the outcome. Is no one accountable?

The Delhi telephone directory displays a number on the opening pages: "Weather information 4611322." To check what additional information one can get from this source, I pick up the receiver, get a start on being greeted by an abrupt Vande Mataram, give myself a few seconds to recover and dial the number. An irascible male voice answers, "Hello."

I enquire about the day's forecast. "What?" he asks, clearly not believing his ears, that there can be anyone stupid enough to waste a phone call on this. After I repeat my question, there is the sound of shuffling paper and then he reads out slowly, "Partly cloudy sky with possibility of development of thundercloud ..." There is a pause at the other end, as he probably tries to regain a lost focus. Clearly not a man to cut corners in spreading the truth, he eventually adds, "... in some areas." "Thank you, that was most helpful," I put down the receiver.

This is an old Indian malaise. We spend a lot on setting up new facilities and investments -- and then we penny-pinch when it comes to maintaining and using these facilities, not realising that this involves a colossal waste. To be fair, this is a chronic problem. One cannot blame the BJP Government for it, except that this is a new government, with allegedly a new agenda. One had hoped it would try to shake up some of our chronic follies.

Unfortunately, even concerning the more contemporary problems, the BJP Government is doing very little. There is no concerted plan to move ahead with economic reforms. There are only some very poorly conceived responses to the current industrial slump. Consider the Government's effort to boost the flagging automotive sector by ordering 10,000 commercial vehicles. This is exactly the kind of folly from which the reforms were meant to rescue us.

First, sector-specific demand boosts are a bad idea because they cause distortions. More important, governments are very poor judges of quality. A large demand from the government is thus usually met with a poor-quality supply, resulting in wasted resources.

If the Government does want to boost demand, it is better to hand over greater buying power to consumers (through tax cuts or easy credit), as Keynes had suggested. Currently, it is not clear that even this is the right policy -- because inflation is anyway on the rise. The boost to the industrial sector should come from cost-cutting and greater credit availability to firms, not artificial expansion of demand.

In addition, there is scope for helping Indian industry by increasing exports. True, the global climate is not at its best, thanks to the east Asian crisis and the devaluation of most Asian currencies. Yet, if there is any country that is insulated from this crisis, it is India. Of total world exports, India's share is a paltry 0.5 per cent. This is ridiculously low, given India's population share is over 15 per cent.

Thailand, with about a 16th of India's population, exports twice as much as this country does. Malaysia, with an even smaller population, controls 1.25 per cent of the world's exports. This means that even if the volume of total world trade shrinks in the coming months, Indian exports could grow -- if we move towards our expected share of world trade.

Second, the east Asian devaluation is coupled with a major breakdown of the economy. This is most stark in the case of Indonesia. The Indonesian currency has depreciated by close to 600 per cent in the past year. This should have caused a huge increase in international demand for Indonesian goods and therefore exports, making them cheaper than those from other countries.

But that has not happened because of the total breakdown of the Indonesian economy. As a result, the country has been unable to respond to the greater potential demand. In a different measure, this is true for all the east Asian countries in trouble. This is what makes it possible for India to continue to expand its exports and pull out of the recession.

The author is C. Marks professor of economics, Cornell University.

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