Dr. Susmit Kumar, Ph.D.

Development, without the aim of “Trade Balance” and “Self-sufficiency of Essential Mass Consumer Items” (to insulate its economy from factors, beyond its control) has no meaning. Time and again the history of global economy has shown that a FOREX (FOReign EXchange) crisis can bring down a country’s entire economy, within few months, for years to come. Unless the Indian economy achieves “Trade Balance” and “Self-sufficiency of Essential Mass Consumer Items,” it will be always vulnerable to collapse due to factors beyond its control. Niti Aayog needs to modify all their three recently approved key documents for the country - 5-year vision, 7-year strategy and 3-year action plan - and have these two as their top priorities/objectives.

In recent years, India has been boasting about its economic growth rate, projecting it to be the highest in the world, surpassing that of China. All over the world economists are predicting that India’s growth rate would now surpass that of China, resulting in India’s GDP to be the second largest in the world by 2040, behind China and surpassing the US. Indians use this data as a ticket to super-power status. But there is a fundamental difference between the growth rates of India and China. Behind India’s phenomenal growth rate, the country has trade deficit year on year for more than two decades whereas China has trade surplus in the same period. As explained in my two articles Is "Make In India" Theme Helping Indian Economy? - Part I and Is "Make In India" Theme Helping Indian Economy? – Part II, the Niti Aayog and also the “Make-in-India” policy of the Modi government have no significant positive bearing on India’s trade deficit. As history has shown us, the Indian economy has the potential to collapse if subjected to an economic crisis whereas the Chinese economy can withstand it. In the recent three years, our trade deficit with China has been increasing year after year like the US trade deficit with China.

After the sharp devaluation of the Indian rupee and double digit inflation during 2011-13 due to the high crude oil price, some economists even started to write the obituary of the Indian economy (read: "None of the experts saw India's debt bubble coming. Sound familiar?", The Guardian, UK, August 26, 2013; ‘Fragile Five’ Is the Latest Club of Emerging Nations in Turmoil, New York Times, January 28, 2014). Due to the record trade deficit during 2011-13, the exchange rate of India’s rupee (vis-à-vis the US dollar) tumbled from 44.17 in April 2011 to 62.92 in September 2013. One point worth noting is that Russia and China were not included in the new club of “Fragile Five”. Both Russia and China have been running trade surpluses since the early 2000s. Had high crude oil price persisted for a couple of more years, it was certain that India would have had to go to the IMF to take loan, which would have destroyed the Indian economy for next decade or longer, due to the IMF’s bitter medicine of getting rid of subsidies to balance the budget, significant increase in the interest rate, and selling the crown public sectors to Wall Street bankers at throwaway prices.

Nearly all the major financial crises in the developing countries started due to a FOREX crisis in the respective country:

  1. 1991 Soviet Union Collapse (even the CIA had not predicted the Soviet Union’s collapse) (read: my article Communism Collapsed Due to Collapse in Oil Price in Late 1980’s and German Banks – Not Due to Reagan). Because of lack of hard currency Russia's shelves were empty of bread before its collapse in 1991. In 1984-85, the USSR imported 55.5 million tonnes of both wheat and coarse grain, a record for a single country to take in one year. Beginning with the 1972-73 crop season, the Soviet Union imported more wheat than any nation had ever done. It is an irony that today Russia is the number one exporter of wheat in the world.
  2. 1994 Mexico Peso Crisis,
  3. 1997 East Asian Economic Crisis,
  4. 1998 Russian Financial Crisis,
  5. 2001 Argentina Economic Crisis,
  6. 2009 Euro Crisis

FOREX crisis is generally caused by a prolonged or sudden increase of trade deficits. Unlike the Eurozone countries that were not affected by the 2009 crisis, all the PIIGS countries – Portugal, Italy, Ireland, Greece and Spain – had been running trade deficits for a decade or so. In the early mid-2000s, the economy of Greece (worst affected by the 2009 crisis) was one of the fastest growing in the Eurozone. At that time, economists were predicting that both Britain and France, who had similar trade deficit issues, also might join PIIGS. Here it should be noted that India has been running trade deficits for the last two decades and more.

Even with fiscal deficit (when a government's expenditures exceed its revenue) and debt under control, a FOREX crisis can lead to complete economic collapse. Prior to the 1997 East Asian Economic Crisis, the affected countries had modest budget surpluses, and inflation was low. At the time of its 2001 FOREX crisis, Argentina’s fiscal deficit and debt were only 3.2 percent and 54 percent, respectively, of its GDP. At the onset of the 2009 Euro Crisis, PIIGS countries, who suffered the most, had been running nearly the same fiscal deficit as non-affected Euro zone countries during the preceding decade, except the fact that all the PIIGS countries had trade deficit during that decade whereas the other countries did not.

All the countries that received a bailout from the IMF suffered an economic nightmare for the next several years. After the 1997 crisis, Indonesia’s GDP fell by 13.1 percent, South Korea’s by 6.7 percent, and that of Thailand by 10.8 percent. The stock markets of these countries also dropped, by 50 to 84 percent. Due to the steep devaluation of Asian currencies, prices of essential items in these countries increased by significant amounts. For example, in Indonesia the price of rice increased by about 36 percent, electricity by 200 percent, milk by 50 percent, and cooking oil by 40 percent. It was poor people who suffered the most. They also faced layoffs due to the closure of massive infrastructure projects. The country’s stock markets crash wiped out a significant amount of money and the devaluation of its currency resulted in drastic decreases in the entire wealth of the country, such as real estate, minerals and labor, and vis-à-vis other currencies, which finally resulted in inflation.

Indonesia’s President Suharto compared the currency traders to “gamblers.” He said, “We have 30 years’ experience of building a strong foundation. Then, in six months it collapses, not because of an internal crisis, but because there is manipulation of our currency.”

This shows that a FOREX crisis can destroy decades of development within few months. For the average person, the real meaning of the IMF was indeed “I’M Finished” (and not the International Monetary Fund).

PIIGS countries, too, went through a similar economic nightmare following the administration of the bitter IMF pills. Countries like Greece and Spain still have economic problems, such as very high unemployment rates.

India’s foreign trade is following in the footsteps of that of the US – a bankrupt country surviving on printing its currency which happens to be the global currency. Even before thinking to become a super-power, a country needs to generate a trade surplus, which the US did for more than 30-35 years following World War II, which China has done since the early 2000s, and both Japan and Germany in recent decades. (The last two countries are economic super-powers but are too small to be military super-powers.) During World War II, US enticed all other countries by claiming that it would keep its dollar pegged to gold at the rate of $35 for one ounce of gold. The US asked other countries to use the US dollar as reserve currency and also for conducting transactions between countries. This resulted in the 1944 Bretton Woods Accord, signed by 44 countries. As per the agreement, you could have asked the US govt to give you one ounce of gold for $35. As shown in Charts, the US had trade surplus from the end of World War II till early 1970s, but since it has had trade deficit year after year. In 1971, Nixon de-linked the dollar from gold and since then the US has just continued to print dollars to fund its trade and budget deficits.

India aims at becoming a super-power. Hence one of the main objectives of Niti Aayog should be to have 1) trade surplus and 2) self-sufficiency of all the essential mass consumption item, in order to insulate its economy from external factors, at the earliest.

The important question is should we follow the economic policy of either:

(i)                 A bankrupt country like the US, which is sold to its Frankenstein China by the Wall Street and US economists?

(ii)               Trade surplus countries like Japan, Germany and China, especially the last two?

In order to achieve trade surplus, the Modi administration needs to come up with a way to incorporate the German and Chinese industrial policies. As India has democratic system, it cannot follow the government-controlled industrial policy of China (although it is the best in the present global economy model), it needs to incorporate major part of the German industrial policy of “Codetermination” plus some features from Chinese industrial policy.

Codetermination in Germany is a concept that involves the right of workers to participate in management of the companies they work for. Known as Mitbestimmung, the modern law on codetermination is found principally in the Mitbestimmungsgesetz of 1976. The law allows workers to elect representatives (usually trade union representatives) for almost half of the supervisory board of directors and hence the future of a firm is decided by stakeholders instead of shareholders. It applies to public and private companies, so long as there are over 2000 employees. For companies with 500-2000 employees, one third of the supervisory board must be elected. The German manufacturing sector still contributes about 25 percent of its GDP as compared to only 11 percent in the case of the United States. For this very reason Germany is still the world’s second-largest exporter and has not faced the same severe crisis that countries such as the United States and other Western nations have been facing due to emergence of the global Chinese workshop.

Unless India makes a change in its policy to become self-sufficient in essential consumer items, which it is importing right now, and achieves trade balance as well, it will continue to be in great danger of going into the emergency ward of the IMF which would be nothing but a serious setback to the Indian economy for several decades. Without becoming self-sufficient in essential consumer items, India has no hope of becoming a super-power.

One reason for this missing objective may be due to Niti Aayog being exceedingly dependent on US economists. I have lived in the US for 28 years. Poisoned by the massive propaganda of the Reaganomics spearheaded by the Republican Party the brains of so many American economists could be said to be seriously poisoned. Reaganomics means the reduction of taxes and promotion of unrestricted free-market activity. As explained in my article The US Dollar – A Ponzi Scheme, had the US Dollar not been the global currency there would not have been “Reaganomics”. An average Americans do not have the concept of self-sufficiency. In their view, the world looks somewhat like the following:

 

 (source: https://interculturalmeanderings.wordpress.com/2011/07/18/why-americans-view-the-world-as-geography-cartoons-depict/)