Indian economy destroyed by mindless consumption
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Indian economy destroyed by mindless consumption

PM says the rupee is down because of the global economic crisis. But it started to decline only in 2012 just as the global economy was beginning to look up, writes Bharat Jhunjhunwala.

india Updated: Aug 19, 2013 01:22 IST
Bharat Jhunjhunwala
Bharat Jhunjhunwala
Hindustan Times

In his Independence Day address, Prime Minister Manmohan Singh said the rupee is down because of the global economic crisis. A look at the events of the last decade reveals otherwise. When the global economy was doing well between 2002 and 2008, the rupee was stable at about Rs 45 to a dollar. When the global crisis erupted in 2008 and continued until 2012, the rupee held stable at Rs 45.

It started to decline only in 2012 just as the global economy was beginning to look up. The United States is now on the growth path and Europe too has emerged from the recession. The rupee is falling while the global economy is looking up; not when it is engulfed in crisis. Clearly, the reasons for the decline of the rupee lie elsewhere.

Anyway, the global crisis is a mixed bag for our foreign trade. It may even be beneficial for us just as the loss of a competitor is. It is beneficial because imports become cheaper. The price of oil in 2007 had reached $140. It fell to $40 soon after the crisis erupted. On the other hand, our exports come under stress because foreign countries do not have money to buy our goods.

The bigger problem though is that we are unable to compete with other producers. A businessman reduces the price of his goods during a crisis and plods through to good times. Our businesses are not able to do this because corruption and misgovernance is increasing their cost of production.

The global crisis also affects foreign investment. Here too the impact is mixed. The global crisis makes foreign investors averse to taking risks. This leads to a reduction in foreign investment. Thus the foreign investment receipts fell from $43 billion in 2007 to a mere $8 billion in 2008 at the height of the crisis. Since crisis in the developed countries leads investors to hunt for opportunities outside, foreign investment bounced back in 2009 to the earlier level of $43 billion a year and remained at that level till 2012.

Foreign investors found India a bargain at that time. They now find that Indian businesses are under stress and are therefore averse to investing here. So the problem is not the global crisis but that India has lost her competitive edge due to the bribes extracted by politicians and the bureaucracy.

Why this sudden change of heart on the part of foreign investors in 2012? The problem has been brewing for a long time. We have been using capital receipts to finance current expenditure. A company prospers if it borrows money and invests it in factories. It fails if it uses the borrowing for the pleasures of consumption. Debt begins to accumulate and at some point investors become weary and exit.

That is when the company collapses. The same thing happens to a country. Investors deposit dollars with Indian banks. Banks sell these dollars to Indian importers. The crucial question is whether the buyers use these dollars to make investments in new factories or to import Chinese toys and other items of consumption? The country prospers if the dollars are used for investment but collapses if they are used to import items of consumption. The toys soon go into the dustbin but the country’s debt remains standing. This is precisely what has happened.

The government has led us into a consumption spree. Foreign investors saw a crisis in the making and realised that the Indian economy was losing its competitive edge in the global marketplace; and that money was being squandered in consumption instead of being used for investment. The tipping point came last year and the rupee has been on a losing streak since then. The present crisis is wholly due to bad domestic policies and not because of the global crisis.

Bharat Jhunjhunwala is former Professor of Economics, IIM, Bangalore
The views expressed by the author are personal

First Published: Aug 18, 2013 23:11 IST