Dr. Susmit Kumar, Ph.D.

By watching the grand show of China’s OBOR (One Belt One Road) Summit, attended by 65 countries, including US and Japan, all Indians are feeling dejected. Under the OBOR project, China is planning to spend $500 billion to reshape the global economy. This is one more step taken by China in its goal to replace the US as the super-power. Indians have to blame their political leaders for letdown. Both China and India started the economic liberalization nearly at the same time in the early 1990s, but China is now the global economic leader whereas India is nowhere. Since then, India have run trade deficits year after year whereas China had trade surpluses, enabling it to amass four trillion dollar FOREX (FOReign EXchange), making it the undisputed country to replace the US as the world’s number one economic superpower. Yes, the growth rate of India in last couple of years is the highest in the world but it is vulnerable to economic collapse, due to an economic crisis as a result of generating trade deficits year on year.

By claiming to have significant economic policy changes and the world’s highest growth rate, Indians need to stop whining about having credit rating which is just one notch above the junk. Just three years ago, the Indian economy barely survived from visiting the emergency ward of the IMF as a result of having record trade deficits due to high crude oil prices. Since then it has been barely able to pay for its trade deficit with NRI remittance and FDI, both of which are volatile. Last year, NRI remittance went down by 9%. Any mini-war, say between Saudi Arabia and Iran, or a large-scale Islamic terrorist attack in the Middle East, would result in sky-high crude oil prices and significantly reduce NRI Remittance, making another 2011-13 Current Account Deficit (CAD) type of crisis for India. More than half of NRI remittances come from the Middle East.

There is nothing special about having the highest growth rate in the world. Yes, it is a new phenomenon for India but in the past several countries had similar growth rates before biting the dust due to mounting trade deficits. During the 1990s and before their economic collapse, Thailand, Malaysia and Indonesia were hailed as the East Asian Miracles, but after the 1997 economic crisis they are nowhere in the global economy. 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 dropped by 50 to 84 percent. Due to the steep devaluation of Asian currencies, prices of essential items in these countries increased significantly. 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 huge 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.

Similarly, Argentina was once the richest country in Latin America in terms of per capita income. Before its economic collapse in 2001, Argentina had been the poster child of globalization. It brought down its trade barriers faster than most other countries in Latin America and liberalized its capital account more radically. It followed a comprehensive privatization program involving the sale of 400 state enterprises — including airlines, oil companies, steel, insurance companies, telecommunications, postal services, and petrochemicals. The U.S. Treasury Department and its surrogate, the International Monetary Fund (IMF), either urged or approved of all of these measures. In fact, even with financial liberalization called into question in the wake of the Asian financial crisis of 1997-98, then-Secretary of the Treasury Larry Summers extolled Argentina’s selling off of its banking sector as a model for the developing world: “Today, fully 50 percent of the banking sector, 70 percent of private banks, in Argentina are foreign-controlled, up from 30 percent in 1994. The result is a deeper, more efficient market, and external investors with a greater stake in staying put” (“The twin debacles of globalization”, Walden Bello, January 2002). Instead of bowing to IMF dictates, Argentina defaulted on $132 billion in 2001, mostly of foreign debts, and the investors had to take haircuts on their investments. At the height of the crisis in 2001, four Argentinian presidents took oaths and resigned in just ten days. Before the onset of the 2001 crisis, Argentina’s fiscal deficit and debt were only 3.2 percent and 54 percent, respectively, of its GDP. The economy went into depression, its gross domestic product having declined by double-digit for next few years. Unemployment stood at 21.5 percent of the work force, and 53 percent of Argentines had been pushed below the poverty line. What was once the richest country in Latin America in terms of per capita income plunged below Peru and parts of Central America ("Argentina.Defy the Creditors and Get Away with It,” Walden Bello, November 4, 2010).

Just one and a half years before the foundation of Niti Aayog, Indian economy was in the midst of a grave crisis. Due to record trade deficits during 2011-13, the exchange rate of the rupee (vis-à-vis the US dollar) tumbled from 44.17 in April 2011 to 62.92 in September 2013. 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). 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 emergency ward of the IMF, wiping out its couple of decades of development 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.

Hence it is completely wrong that “Trade Balance” and “Self-sufficiency in Essential Mass Consumption Items” have not been made the top priorities of Niti Aayog. One reason for this missing of these objectives may be due to Niti Aayog being exceedingly dependent on US economists. The US is the Titanic of the present time and age, due to go down sooner than later (please read my article: Credit Rating Agencies and US Rating). The US is a bankrupt country surviving simply by printing its currency that happens to be the global currency (read my article The US Dollar – A Ponzi Scheme), to pay for its twin deficits – budget and trade deficits. It is up to China to decide when it would pull the carpet underneath the US dollar, causing the entire US economy to collapse (read my article: Chinese yuan replacing US dollar as global currency: A not so distant prospect).

In the US, university students are taught virtues of the so-called US capitalism, painting rosy pictures only of the US economy, and not at all discussing the actual dire economic scenario in the US. Apart from this, 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 reduction of taxes and promotion of unrestricted free-market activity. The Americans do not care for their trade deficit, which they have generated for more than 40 years now, because the US can just print its currency, which happens to be the global currency, to pay for its trade deficit (and also for its budget deficit). That’s why top US economists also do not give importance to it. If they would give importance to trade deficit and discuss about its debilitating effects on the nation’s economy, it would alarm the Americans. The Modi government should think twice before accepting any recommendation from a US economist or MBA because these are the people who created and sold the US to its Frankenstein, China, in the name of lower taxes and unrestricted free-market. The US economists/MBAs are very good in increasing the share prices, but are not good for a nation’s economy. In an op-ed article, published in New York Times, William Grieder, a bestselling author, wrote (“America's Truth Deficit,” New York Times, July 18, 2005):

 

“For years, elite opinion dismissed the buildup of foreign indebtedness as a trivial issue. Now that it is too large to deny, they concede the trend is "unsustainable." That's an economist's euphemism which means: things cannot go on like this, not without ugly consequences for American living standards. But why alarm the public?”

Now it is time for India to wake up from last nearly three decades of slumber during which successive Indian governments just kept watching China accumulating a $4 trillion war chest and did nothing. During the World War II, the US created the Manhattan Project team to come up with the desperately needed Atom Bomb to win the war. Again, after the Sputnik shock and the cosmonaut Yuri Gagarin becoming the first human in space on April 12, 1961, President John F. Kennedy had to announce the dramatic and ambitious goal of sending an American safely to the Moon before the end of the decade, in which the US succeeded. Similarly, today there is an urgent need for the Modi administration to create a task force to get rid of the country’s perennial trade deficit. Indians have brains and that’s why Indians and Chinese form the majority of research students in most of the US premier research universities. Hence I am certain that India can achieve the goal of getting rid of perennial trade deficits if the political leadership decides for it.

If India cannot get rid of its perennial trade deficit and save hard currency every year to create a war chest of couple of trillions of hard currencies, like China has done in accumulating $4 trillion in last two decades, India should not even dream about becoming a superpower. But right now please stop whining about credit agencies not giving the accurate rating to India. India is a consumer country which is barely able to pay for its trade (with other countries) by NRI remittance and FDI.

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