Published: March 4, 2014 - 15:18

What really went wrong with the India story? The rapacious attitude of Indian businessmen, government corruption, inflation, or global slowdown? Corruption has always been rampant in the country.

In fact, when the economy was zooming ahead at the breathless rate of 10 per cent or more, there was far greater corruption than what has been witnessed during the slowdown. Mining companies were digging deeper and scooping out minerals and blindly exporting to China. There was exaggerated over invoicing and under invoicing of iron ore and other minerals that allowed them to generate black money that was used for buying assets and engaging in some business activity. The Bellary Reddy, cooling their heels in jail and many other miners from Goa, who reportedly bought assets globally, came to unimaginable riches. And these were just mining companies. Then there were the realty companies that enjoyed improved valuation of their land due to policy change that allowed Foreign Direct Investment in real estate. So good times were rolling when the regulation was lax and there was no attempt by the Government to rein in these heaving money making enterprises.

Did corruption really slow down the growth? Visibly, no! Did the slowdown hit the economy? India had recovered smartly after the 2008 slowdown and then an impression was created that India had decoupled from the world economy. The Government also followed the G-20 prescription to give substantial stimulus to the economy to preserve manufacturing and consumption, which gave an inordinate boost to the economy. If one looks at the post slowdown year of 2008, then we would find that the Indian growth rate was hovering around a high of 9-10 percent per annum. During this period India was the toast of the world and its growth story the subject of much envy and intellectual enquiry.  

Many economists and social scientists began to witness and report the extraordinary changes sweeping the countryside due to the growth rate and the policies of the Government…like the national rural guarantee scheme and loan waiver. Increased road connectivity and spread of the telecom network began to transform the lives of the people that had lived in hopeless conditions. Changes seemed so heady that the Government began to claim bravely that the country could lift the majority of the poor above the poverty line. It was around this time that the economy began to betray inflationary tendencies, which is quite understandable for anyone with any basic understanding of economics — there was indeed too much money chasing fewer goods. Food inflation was particularly high and the Government began to display understandable jitters about how it should control it.

It was here that the Government headed by an economist and supported by people who had spent years in multi-lateral financial institutions began to lose its nerve. They began to curb the money supply in the market by raising interest rates at which money was lent. Squeeze was increasingly tightened to make the money less available. There was little attempt to address the supply side issue of  providing more of vegetable, food grain, pulses, etc., even if it meant resorting to imports. As an economist Ajay Chhibber claims that budgetary provisions could have been made meeting these supply side demands rather than paying a bigger price of slowing down the economy.  With corruption scandals upsetting the poise of the Government, it was in dithers as to what strategy to follow.

Inflation can hurt the party in power so governments are quite sensitive to it. At this juncture the policy of increasing the interest rate to fight inflation became the sole objective of Reserve Bank of India. The fact that the spread of wealth was more extensive was lost on these monetarists who, as a senior government official claimed, did not take orders from their own Government but from the International Monetary Fund (IMF) and the US Treasury. Almost a dozen times the interest rate was hiked; this ejected the money out of the system. Quite suddenly, the real estate sector that had been driving the growth began to get smothered.  Small and medium industry began to starve of easy credit. Big corporate houses too began to cut back on production and began to pare down their production targets. Small and medium enterprise began to report sick. There has been a phenomenal rise in the non-performing assets of banks, which is expected to go up to Rs.1.5 lakh crores. Big companies like the Ambanis, Tatas, Adanis and many others are under a mountain of debt. Bank Chairmans are running scared. The CMD of United Bank of India has quit. More blood may flow in the banking sector and the economy may be savaged before the elections get over.

What’s the way out? To start with, the RBI has to disengage from the diktats of IMF and begin the process of reviving the economy rather than mindlessly taming inflation and hurting the economy.


Editor of Delhi's Hardnews magazine and author of Bad Money Bad Politics- the untold story of Hawala scandal.

Read more stories by Sanjay Kapoor

This story is from print issue of HardNews