aAll the leftists in India – please note that I do not call them left-liberal intellectuals because they are not liberal and far from being intellectual – are having a field day predicting that India is going to replicate a Sri Lanka. These leftists have friends in American universities who urged Union Finance Minister Nirmala Sitharaman to spend more during the COVID-19 pandemic. Thank God he didn’t listen to them. We are all beneficiaries of his restraint and fiscal correctness.
One could argue that the Reserve Bank of India (RBI) could have raised interest rates a little sooner. But clearly, this is a rough argument. No time matters a whole lot like this. Incidentally, a study done 10 years from now can strongly support everything the RBI has done so far. Suffice it to say that the RBI has been quite savvy, smart and admirably transparent on the balance. The last point on transparency is no trivial matter. This has a direct impact on the financial markets.
The Left may not like financialization, believe me the financial markets are quite accurate predictors of what is to come. Countries that lose respect for financial markets will suffer dire consequences in their real economies. So we have Chandrasekhar, S. Venkataraman, C. Rangarajan & Co. should be respected. They took the risk of pledging our gold. But they respected the financial markets. Latin American countries and now Sri Lanka, which have chosen to default on honor, doom their citizens to decades of instability and poverty.
Coming back to today or for that matter in the next few months and quarters — are we looking at an abyss? We have problems. Who doesn’t have problems? And on the one hand, left-wing countries like Venezuela have the worst problems. And lefty Joe Biden’s America, which has punished fracking and clogged pipelines, has created problems for itself and the world as a whole. But the abyss like Sri Lanka is so far-fetched that one has to dismiss it as a lefty fantasy and then wonder if the Left really aspire to it. After all, his hero Comrade Lenin believed in deliberately escalating crises to discredit the bourgeois state.
Sri Lanka reduced indirect taxes. This actually made imports cheaper. Sri Lanka was affected by terrorist attacks on churches. They should have launched a global advertising campaign sending the message that these terrorist acts were strategically calculated to harm tourism. He should have appealed for international tourist solidarity to counter the plans of the terrorists. He learned nothing from the Bali experience. Indonesia today gives easy work visas to those who want to work away from Bali. Sri Lanka had never thought of such imaginative reactions. And then Sri Lanka listened to bizarre Western NGOs pushing poor countries to organic farming while their own countries opt for GM crops.
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India’s Balanced Approach
India’s restraint and balanced approach has been in stark contrast to Sri Lanka’s and ranks as one of the better national economic policies anywhere in the world. Does this mean that we are one hundred percent sure we won’t get into trouble? There is no certainty in economics or political economy for that matter.
I am a little concerned about the potentially misguided outlook for inflation. The idea of us cutting indirect taxes on petroleum products to curb inflation is wrong. In a country with a current account deficit like ours, it would be good to keep gas and gasoline prices high. There is an expectation that, despite the pressure on her, Sitharaman will return to the post.
The idea of not letting the rupee depreciate too much because a weak rupee leads to inflation is another joke. I am sure RBI Governor Shaktikanta Das is well acquainted with Pashe and Laspires indices. He knows that a weak rupee changes the relative prices of the products and cannot move the prices around on its own. Since our statistical conventions involve measuring the prices of a fixed predetermined consumption basket, we can easily fall into this fallacy. A weak rupee is good. Countries that have had good growth rates have maintained low-value currencies. Indeed, a weak rupee is the easiest way to encourage exports and discourage imports. The current account deficit is better addressed by simple price signals than by intrusive administrative actions. In fact, one could make the case that Sri Lanka could have avoided all its mistakes if and only if their central bank had devalued aggressively. But that is another story.
I am a little glad that I live in a country where the Left, who are dominant elsewhere, and who used to be influential here, are being neglected. Continue this approach. Writing in 2052, economic historians will hopefully write about how post-Covid India managed to avoid eddies and whirlpools and move on.
Jaitirtha Rao is a retired businessman based in Mumbai. Thoughts are personal.
(edited by Prashant)