India's ostrich club and the global recession

L’affaire Infrastructure Leasing and Financial Services (IL&FS) meltdown is not a freak incident. It is an inherent market risk for companies to fail, for good reasons and bad. Inquiries might unearth corporate mis-governance in the case of IL&FS, but that is an entirely different story. The moral of the market economy is that small disasters trigger bigger ones, potentially. It is a lesson that Indian economists do not sufficiently emphasise, and to which political leaders turn a blind eye to. This takes us to the main issue: Did India’s eggheads ponder over what has come to be known as the Great Recession, which continues to linger after a decade?

Most Indian politicians, policymakers and economists have displayed a strange indifference to the major quake that shook the global economy, first in the United States and then in the European Union, from 2007-08 through 2017-18. In December 2008-January-2009, then finance minister Pranab Mukherjee announced a Rs 40,000-crore stimulus package for the industry to smoothen their frayed nerves, which had its own deleterious effects on the government’s growth and financial deficit numbers. In 2013, P. Chidambaram, in his second run as finance minister, had to face the rupee volatility after the US Federal Reserve announced its decision to taper its unusual monetary policy (UMP) of infusing funds into the tottering financial and industrial institutions. There was a flight of capital from emerging market economies like India, and it dampened the Indian economy’s prospects.

The leaders of the BJP, who were then in Opposition, including former finance minister Yashwant Sinha, then Leader of the Opposition in Rajya Sabha Arun Jaitley and then Rajya Sabha member Nirmala Sitharaman mercilessly flayed the UPA-2 government over the country’s dithering economy, and refused to accept the argument that the global economic squall had battered the Indian markets, especially exports. The argument put forward by the leaders of the BJP and others was that India did not depend on exports for its economic growth, and that the huge domestic market and the consumption it entailed was good enough to keep the economy in shape and the global developments were marginal. After the BJP came to power in May 2014, Ms Sitharaman, as commerce minister, put up a stoic front in the face of sluggish exports and finance minister Arun Jaitley confessed that seven per cent growth in GDP was laudable in the face of a subdued global economy.

In the immediate aftermath of the outbreak of the financial crisis, the Communist parties claimed credit for the relative stability of the Indian economy because they said they did not allow the government to liberalise the financial sector, and therefore no harm was done. It turned out, however, that the undisclosed global exposure of State Bank of India (SBI) and ICICI Bank ran into a few hundred million dollars. The Left was supporting UPA-1 from the outside and they exerted an invisible veto on what the government could do on the economic policy front. That is the reason for the Left’s tone of triumphant satisfaction.

The Left parties and their intellectual fellow-travellers did not, however, proclaim the end of capitalism after the 2007-08 implosion. The criticism was muted as there was no alternative socialist model anywhere in the world which they could cite as a counter-example. The Left’s discomfiture in raising the ideological battle cry against the failing global markets was understandable. But it was the silence of the market economists, the liberals and right-wingers, that was of greater concern. For over a quarter century after the collapse of the Soviet Union and along with it the state-controlled economy, the boast of the market economists had been that the markets were sure-fire engines of growth and prosperity.

Moral critics of unbridled greed like Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman were gloating in their self-righteousness, but they were not addressing the structural flaw in the market system that had led to the breakdown. Nassim Nicolas Taleb’s “black swan” event explanation is interesting, and it should have led to greater analysis of the unpredictability of the markets and should have created the equivalent of quantum mechanics in economics, but it did not. Perhaps the real world cannot bear too much of probability and unpredictability. The only moment of critical self-awareness among the free market economists came when they rediscovered American economist Hyman Minsky’s 1980s’ analysis of the phenomenon of securitisation and how it could lead to complications of multiple mortgages and thus lead to a collapse. For a moment, Hyman Minsky became the prophet before his time!

In India, the only man who seems to have looked at the reality of the frayed free market system was former Prime Minister Manmohan Singh, who did not ever flaunt his credentials as a trained and professional economist, but who was deferred to at the G-20 meetings that became regular post-2007-08, who made the clear-eyed observation in his speech at the UN General Assembly on September 24, 2011: “Till a few years ago, the world had taken for granted the benefits of globalisation and global interdependence. Today we are being called upon to cope with the negative dimensions of those very phenomena.” But he did not go any further than that.

The free market enthusiasts in the country appear to be too embarrassed to discuss the issue of the inevitable market crashes that are bound to occur because they had rather naively believed the market to be the proverbial horn of plenty, and that no inefficiencies could be associated with it. There is a slow veering round to the view, which would have been laughed out of court a few years ago, that the State has a necessary role to play in sustaining the markets.