Column

Popular response to the global economic meltdown — both at the governmental and people’s level, in India and around the world — has resembled nothing so much as the excited squawk of a brood of headless chicken staggering aimlessly around a coop. The suddenness with which the crisis deteriorated, and the staggering geographical scale of its capacity to inflict equal-opportunity misery from New York to Nagarhole, so to speak, has induced a crippling policy paralysis. By benumbing minds, that paralytic condition appears to have incapacitated the formulation of cogent policy responses and their effective articulation.

Yet, for all the wealth destruction and gloom and doom it has brought about, a life-defining crisis such as we are experiencing also provides the priceless opportunity for our policymakers to learn from the mistakes of other economies, governments and corporate entities; these are mistakes that we might — given half a chance — ourselves have committed, but didn’t (or, at any rate, not on as grand a scale) only because our own economy is at a different stage of evolution. This opportunity to learn, therefore, is like being given premium, front-row seats at the grand global laboratory for the experimentation of economic and business theory and practice, and it would be a shame to pass it up.

The financial crisis originated in the US, and some of the more enduring lessons that can be had from the lead-up to it and the policy responses — or the lack thereof — are there. As has been sufficiently well chronicled, the meltdown in the US was the culmination of many years of policy wrongs on several fronts: the pursuit of an ‘easy money’ monetary policy, the process of excessive deregulation of the financial sector, the imbalance of risk and rewards, and a general drift towards an ‘anything goes’ corporate culture. But perhaps the overarching failing was that a market-oriented economic theory which, for all its merits, is not without deficiencies, was elevated to the level of the 11th Commandment — to the point where the space for meaningful expression of alternative philosophies became vastly abridged.

Just one point is illustrative of this: the excesses of CEO compensation, which was never allowed to be intellectually challenged during the years of feel-good bubble-building, but which has now been dragged into the public domain. You don’t have to be a Prakash Karat to make the point that a system that obscenely rewards a revolving-door CEO arrangement while real wages in the entire economy are going down isn’t sustainable. In fact, nearer home, Infosys founder NR Narayana Murthy called in 2003 for a CEO compensation structure that was based on the principles of “fairness, transparency and accountability”; and in 2007, Prime Minister Manmohan Singh too raised the subject as part of a Social Charter for industry. Even though the ideas came from two men whom Corporate India admires, they didn’t gain much traction with industry and with media commentators. Today, presumably, they will find greater resonance.

Another critical lesson from the US relates to the folly of postponing reforms. America’s healthcare and pension systems were in desperate need of overhauling, but the failure to address them in good times has meant that the problems have multiplied and come home to roost in rough economic times. India too needs urgent reforms of its public finances, yet successive governments have failed to make the most of periods when asset prices were rising.

A disinvestment in state-owned enterprises in those boom years, for instance, would have raised much more revenues than they would today, and would have restored a sense of order to the government’s balance sheet. That, in turn, would have enhanced the fiscal leverage that the government would have had when economic growth slowed down — unlike now, when it finds itself unable to unveil even a semblance of a stimulus package. A post-election government will almost certainly be required to sell some stake in SOEs to bridge the widening fiscal deficit, but the timing of such a sale won’t at all be propitious given the sharp fall in asset prices. The lesson for policymakers: reform in good times, you get more bang for your buck.

In return for all this, India too has a lesson to offer the world — on the artful management of monetary policy with the aim of averting asset bubbles of the sort that brought the world order crashing down. There is great admiration in global economic circles for the manner in which India’s central bankers were on the ball in recent years by aligning interest rates to the market, not allowing excessive froth to build up — and even, on occasion, beating back political cues and industry pressure to ease up on monetary tightening. You don’t often get to see intellectual rigour and honesty win over political expediency, and for that reason it is doubly sweet.