The history of the past half-century tells us that macroeconomic crises have come with a combination of three events: Back-to-back drought, an oil crisis, and war. The manifold troubles of the mid-1960s were caused by twin droughts and the cost of two wars; and of the early 1970s by all three risk factors coming more or less together—a third war, two droughts and the first oil crisis. Another drought combined with a second oil crisis to send the economy into a tailspin in 1979-80, and oil was yet again the trigger for the liquidity crisis of 1991. So what about today? The economy has just emerged from a double-drought but is still on even keel, and there is little likelihood of an energy crisis unless one of the major oil production centres blows up. Indeed, India’s current combination of moderate fiscal deficit, moderate inflation and a healthy current account balance signals macroeconomic stability.
Then there is war, which looks like a remote risk. Still, India has unresolved disputes with both China and Pakistan. If diplomacy takes a back seat, if those in charge of policy start behaving like war-hungry TV anchors, or if there is another terrorist attack launched by Pakistan, accidents could happen and events snowball. Macho posturing is not what the situation calls for.
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What about the risk of financial crises and contagion? It is reassuring that India survived the Asian crisis more or less unscathed, while the western financial crisis of 2008 caused a blip for barely a year. Today’s financial fault lines are in China and Europe — a banking crisis could materialise in Europe because of negative interest rates (banks there have lost half their market value in about a year), and China’s debt mountain remains hard to define. Cracks that start from those two places could quickly reach India. In one scenario, sharp rupee devaluation could trigger a corporate crisis because of un-hedged exposure to foreign debt, which then morphs into a macroeconomic problem. If that happens, it would be an Indian reprise of the East Asian crisis of 1997.
All of these scenarios (oil, war, financial crisis) involve external threats. What about internal ones? While India’s long-term crisis has to do with water and institutional atrophy, the more pressing issue is the lack of jobs. Ordinarily, rapid economic growth acts as a shock absorber by keeping people busy, but India’s growth has not come with the jobs needed to absorb a growing working-age population. This could quite easily combine with the social tensions created by broader political trends to create an over-arching crisis.
Already we have seen the agitations by Jats and Patels, who ask for the impossible (job reservations), while attacks against Dalits have provoked a new level of mobilisation. New leaders have emerged in these communities who are outside of the political mainstream, and who will not be put down by the nationalist’s new bludgeon of choice: The charge of sedition. Meanwhile, the spread of vigilante action (not just on the issue of cow slaughter) points to the vulnerability of the law and order system, and social fault lines. If, on top of this, the radicalisation seen in the Kashmir valley were to manifest itself elsewhere in the country, the breakdown of community relations could script political and social narratives that acquire a more dangerous character.
India has survived more dangerous times than the present one; the challenges of the 1960s and 1970s (dubbed by one writer of the time as India’s “most dangerous decades”) make today’s challenges look like a walk in the park. Still, it is incumbent on all to be conscious of the dangers, and to act in accordance with that knowledge.