Thirty years ago, India endured its last big financial crisis when it had to send gold held in the central bank’s vaults over to London to borrow hard currency from the Bank of England. Luckily, the flights landed safely, and so did India.
The turnaround in economic thinking triggered by that balance-of-payments humiliation saw the state shed controls on production and imports. The emergence of a globally attuned software services industry as well as vibrant capital markets — which India opened up to the world faster than China — helped spawn entrepreneurship and create a middle-class.
Hundreds of millions were lifted out of poverty; the 1990-91 crisis became the starting point of two decades of rising prosperity.
The growth swoon
All that progress is now at risk because of a very different failure. Growth is crashing. Jobs have gotten scarce. Investments have cratered. Profits have vanished.
Tax collections are low; government deficits high. Debt has surged, but there isn’t enough loss-absorbing cushion either on corporate balance-sheets or with financial intermediaries to allow orderly deleveraging. India isn’t in the midst of an external crisis. It’s grappling with a vicious internal cycle of defaults.
More crucially, what’s missing is the national determination of the 1991 reforms. Economist Manmohan Singh, then a newly appointed finance minister who later became premier, invoked Victor Hugo in his budget speech: “No power on earth can stop an idea whose time has come — the emergence of India as a major economic power in the world happens to be one such idea.”
Unlike Singh, current Prime Minister Narendra Modi is a career politician, who won a resounding popular mandate in 2019 for a second five-year term. There’s no dearth of slogans and goals — such as a $5 trillion economy by 2024 from under $3 trillion now. Yet except for a recent move to make India a low-tax enclave for manufacturing units fleeing the US-China trade war, there isn’t much of a plan in place.
It’s not even clear if a search for enduring solutions will get under way in 2020, or if the economy will just muddle through.
Today’s problems result from past successes. In a withering critique of what he calls a “finance-construction growth model,” Princeton University economist Ashoka Mody has rightly blamed India for ignoring labour-intensive manufacturing. The country has shortchanged its blue-collar workers, especially women, whose participation rate in the workforce has swooned.
A nation of 1.3 billion people is producing only what 150 million affluent customers want.
With rampant automation everywhere, a bulging low-cost labour force isn’t the advantage it once was. Even in software exports, cloud computing and digital technologies have diminished the value of work done by Infosys Ltd. and Tata Consultancy Services Ltd. engineers in maintaining bulky enterprise software for global corporations.
Can India in the 2020s try to reinvent its finance-construction model so that it works for everyone and not just for a few thousand financiers in Mumbai? Here are some ideas.
A new model for infrastructure, supported by more flexibility to companies when it comes to acquiring land or engaging labour, would give India a shot at large-scale manufacturing — for domestic markets as well as exports.
But where are the funds?
There’s a shortage of income and savings. Channelling meagre resources to productive activity via deposit-taking banks may have been the only way after India disbanded its development finance institutions. That didn’t work well, as is clear from the $200 billion-plus pile of dud corporate loans on banks’ books.
Nor did switching credit delivery to non-banks, which rely on wholesale funding, produce desired results. Shadow financiers gave too many loans to developers for homes that never got built. Capital markets became casinos where brokers lure day-traders with additional leverage on already-leveraged derivative products.
Not many of India’s one dozen state-run banks will survive. Technology will render their deposit-taking privilege obsolete over the coming decade. A lender’s expertise will lie in using big data to find customers with stable cashflows, originating credit against those cashflows, and selling to investors.
This is the model that shadow financiers, caught napping making loans for long-term assets using short-term borrowings, are gravitating toward. India should give them a nudge.
The part of India’s finance-construction growth that survives will be worth saving. It may be no less important to the country’s future than the software firms of the 1990s that had honed their skills on domestic projects like computerisation of railway tickets. They hit the global scene once the Y2K millennium-change scare stoked demand.
Coming out of the current crisis is priority. But without trying to pick winners, India should also be getting its financial industry ready for the opportunities the 2020s may have in store.