When is the wolf coming?

LINE AND LENGTH

Hindu practice lays a lot of store by preventive action. Hindus are constantly seeking to bribe god so that some bad thing does not happen to them at some unspecified date in the future.

That is perhaps why it is almost a national trait in India not only to follow foreign intellectual leads, such as Marxism or IMF-ism, but also to seek remedies to current problems only after anticipating everything that can go wrong with the solutions, so that in fact nothing gets done.

If you look at the policy debates of the last 50 years, not to mention the response to the government's current reform onslaught, it is clear that we neglect what is to be done now in favour of providing for contingencies that may never arise and which, if they indeed arose, can be remedied easily then.

I am afraid India's economists, mostly being Hindu, have carried this feature into their trade. Consider, in this context, the following three debates that they have been conducting with such vigour.

Fiscal deficits: For the last two days, at a seminar organised by the National Institute of Public Finance and Policy (NIPFP) and the IMF, the Page 3 counterparts of the world of economic policy have been discussing the topic. When I saw the list, my heart sank and I decided not to attend.

Not only do all these people know each other in the way people who have been at school or college know each other, with one exception (who agrees only with himself) all of them also all agree with each other. Not just that. Their views have been known for several years. Finally, not a single dissenting voice was included in the list of speakers. It could, for all practical purposes, be a club of communist party members or the 16th century Catholic Church.

But, as a leading non-Leftist dissenter, let me ask these worthies a few questions to which, as a journalist, I would like some answers. First, are they warning a bit too much against an eventuality that may never arise and which, even if it did, isn't such a big deal?

Second, hasn't the IMF tired of generalising from the Latin American experience of the early 1980s, which saw billions of dollars of US banks' money go down the tube on account of very high short-term debt invested in long-term projects?

Third, if India has borrowed very little from foreign banks, and nothing for long-term investments, why should the IMF worry about the level of its deficit even if it leads to devaluation or depreciation?

Fourth, devaluation is good for Indian exports so why should India worry even if has to devalue a bit? Fifth, If fiscal deficits lead to devaluation, why should the IMF worry unless it is protecting American banking interests?

Moreover, we have been hearing these warnings for the last seven years but the heavens are yet to fall. Nor, if you ask me, will they. In other words, it is time the fiscal Cassandras moved away from the IMF orthodoxy, which is completely context-insensitive, to a more sensible appreciation of the issues based on local conditions.

Foreign exchange reserves: All of last year, there was a chorus from economists that India was accumulating too many dollars for its own good, quite unmindful of the fact that the rest of the world was doing exactly the same thing, each country for different reasons and in a different way.

In the case of India, few foresaw that eventually, when the rupee started to appreciate beyond what was good for exports, it would create pressure on the finance ministry to cut import duties. Few also foresaw that the pressure to cut interest rates would come from the need to reduce arbitrage opportunities and not from persistent importuning from the CII and FICCI.

Instead, there were dire warnings about the costs of holding these reserves, both in terms of growth foregone because of the sterilisation and in terms of the cost to the fisc. No one calculated the benefits. It was not as if the economists didn't say that tariffs should be cut. They did, but only in passing.

Mostly, therefore, the debate focused on the wrong issue with the result that only defensive action was prescribed, that too for contingencies that would never arise. It was Hindu preventive measures at its best.

Nor was there sufficient discussion of mercantilism. The point about mercantilism is not merely that it always requires a trade surplus; it is also that it requires a country to possess large quantities of that medium of exchange in which confidence is permanent.

The problem with dollar accumulation is not that so many countries hold too much of it "" about half a trillion "" but a structural shift that would shake confidence in the dollar.

It took the First World War to dethrone the pound after a 75-year run and a combination of the Cold War and the Vietnam War for the US to go off the gold standard, which gave a temporary jolt to the dollar. I don't see something calamitous like that happening, so what is all the fuss about?

Regulation: Here again we see the same syndrome. No sooner had the government begun to liberalise and move towards a market economy in the early 1990s, than did economists start off about the need to regulate the new markets. I never understood how you could regulate something that did not exist or was just coming into existence.

The result has been completely predictable. The new outfits have been captured not by the market players (not entirely, anyway) but by the civil service. Not just that, regulators now exist even where there is nothing to be regulated. This is an Indian version of regulatory capture, the likes of which does not exist anywhere in the world and for which there is no bibliography. It is unique.

The main problem with this form of regulatory capture is that it has not eliminated political interference. The only thing that has changed is that instead of Secretaries to the Government of India, it is now the regulators who do the bidding of politicians. The markets are not so much regulated as directed and in that sense, it is business as usual.