New Economy and all that

It is a perilous balancing act between the trappings of the 'new economy' and the realities of the 'old' that India is being led towards. What is in prospect?

SINCE the Union Budget for the current financial year was presented, many of the partners of the ruling coalition, the National Democratic Alliance (NDA) have been agitating for a softening of the new rigours imposed on the public distribution system for food. Finance Minister Yashwant Sinha has chosen to ignore these demands and in fact Prime Minister Atal Behari Vajpayee has publicly upbraided his allies in governance for their supposed innocence of the compulsions of administration.

As if to ensure that its reincarnation as the new and determined state is not lost to public attention, the Bharatiya Janata Party-led government followed up its budgetary imposts with a generalised increase in the prices of petroleum products. And to mi tigate a failure in communication between the Ministries dealing with Finance and Food, a further rise in foodgrain prices - beyond the levels announced in the Budget - was decreed in the last week of March. The political message is clear - the governmen t will not buckle in its pursuit of an economic regime in which efficiency rather than populism is the governing deity.

This new sense of resolute purpose was hinted at often enough in the prelude to the previous Union Budget. Finance Minister Yashwant Sinha has made it a point to emphasise at every available opportunity that the soft options had gone on for far too long. Nine years into the economic reforms that were supposed to shake off the legacy of decades of sloth, the country could no longer afford to evade the hard choices. Yet, after all the brave talk, the Budget itself showed a conspicuous vacuum of ideas and a tendency to stick to traditional nostrums.

A very different kind of aversion to declining prices was soon evident on the part of the government. When trading began on the Bombay Stock Exchange on Tuesday, April 4, the main price indicator on the market - the Sensex - plunged into a dizzying free fall, and it stabilised only towards the end of the day. Leading the race to the bottom were the information technology (IT) shares that had been attracting almost obsessive investor interest in the preceding months.

The government reacted in a manner approaching panic. It hastened to disown the underlying cause of the downward spiral in share prices - notices sent by the Income Tax Department sent to a group of financial institutions. The Finance Minister made it cl ear that the officials who had initiated the move had exceeded their authority, for which they would be rebuked. Having made their point, the investors whose slightest caprice now seems to determine the mood of entire markets, restored Dalal Street to th eir list of favoured destinations. By the following Friday, all the losses that had been registered on Black Tuesday had been more than made good.

That week of fluctuating fortunes on Dalal Street made evident a new facet of the resolute state as embodied by the Atal Behari Vajpayee government. It will remain untouched by the appeals of domestic constituencies even at the risk of engendering bad bl ood within its political coalition - indeed, even when the underlying issues have a bearing on the lives and livelihoods of masses of people. But it is infinitely pliable where the delicate sensibilities of international financial operators are involved, even ceding to them its sovereign right to enforce tax laws. The Indian markets have for years been driven by the whims of foreign institutional investors (FIIs). The government has now made known its susceptibility to a particularly unsubtle form of co ercion by speculators who move large sums of money across the globe in friction-free transactions that in turn determine the fortunes of whole nations.

It would also seem appropriate, when the after-glow of the U.S. President's tour of India is yet to wane, that the economic fortunes of the two countries should be linked more intimately than ever before. In this sense, the movement of the Sensex on that Tuesday was only part of a global phenomenon. Beginning on Monday, April 3, when a U.S. Federal Court ruled against the global software giant Microsoft for its predatory commercial practices, the Nasdaq composite index - a key indicator of investor inte rest in the American high technology industry - began distinctly to wobble. Although Indian infotech companies have a very marginal presence in the Nasdaq, these movements were amplified as they were transmitted across the globe, merging with the transie nt insecurities of institutional investors to produce a precipitate drop in share prices in Mumbai.

The credulous have always been told that globalisation in action has these implications, among many others. But that term, so much a focus of debate and discord until not long ago, seems now to be supplanted by another. The new justification for the untr ammelled reign of finance is derived from the claim that the world now stands on the threshold of an epochal transition. Gone are the old laws and norms of economics which have been a part of the policy-maker's mental apparatus. Opening up now are the in finite potentialities inherent in the "new economy".

AS a rule, Indian theorists have tended to approach the "new economy" concept with a measure of suspicion - and this applies for even the most enthusiastic proponents of globalisation. The "new economy" simply had no credibility in a milieu where the "ol d" one had failed quite conspicuously to achieve a minimum degree of fulfilment of the needs of the large mass of people of the country.

Matters seem now to have changed. The Indian diaspora in the U.S. had always been actively advocating a new orientation of policy which would outflank the "brick and mortar" industries and rush into the vanguard of the dot.com revolution. The U.S. presid ential visit seems to have given this thinking a new impetus.

The "new economy" only drew one explicit mention from Clinton during his visit to India and that was during the speech in the Central Hall of Parliament. Seemingly awakening to the growing disparities that every critic of globalisation has been warning o f for some years now, the President said: "Part of the world today lives at the cutting edge of change, while a big part still exists at the bare edge of survival. Part of the world lives in the information age. Part of the world does not even reach the clean water age. And often the two live side by side. It is unacceptable, it is intolerable; thankfully, it is unnecessary and it is far more than a regional crisis. Whether around the corner or around the world, abject poverty in this new economy is an affront to our common humanity and a threat to our common prosperity."

WITHIN days of the Clinton visit, India announced the newly updated version of its foreign trade policy - better known as the Exim Policy. In the main, the policy announcement was awaited with much anticipation since it was supposed to embody the outcome of the tortuous negotiations between India and the U.S. on the dismantling of a regime of quantitative restrictions (QRs) on imports. That transition from quantitative controls has been achieved in the main by enforcing higher import tariffs on all the products involved. There is still a distinct possibility that several of the industries that have grown behind the protection of tariff walls could find themselves in deep waters. Many of the notified small-scale industry units, in particular, are in imm inent danger of extinction. Agriculture, dairy farming and other primary activities have got the protection of high tariffs and hence do not have any immediate need to worry.

Perhaps the more critical part of the Exim Policy, which establishes its affinity to the "new economy" concept, lies in its decision to accelerate the establishment of Special Export Zones (SEZs). Exports have grown under the stimulus of a decade of libe ralisation, but the impetus achieved with the deregulation of trade and foreign exchange policy has obviously been insufficient to sustain the many claims that were made for the virtues of globalisation. The new emphasis is on cordoning off sections of t he country as exclusive export-oriented zones, free from all the irksome constraints that generally prevail elsewhere, such as unionised workers, poor infrastructure and inefficient law enforcement. The idea, in other words, would be to establish two dif ferent systems of legality - one applicable in the "new economy" and the other in the "old" one.

Yet, with all the hyperbole, actual investment performance in the "new economy", particularly its Indian avatar, has been dismal. Despite the bull run in the stock markets which should have the collateral effect of cheapening capital and boosting investm ent, the government has had to use the decidedly "old" policy instrument of interest rate cuts to seek to achieve this end. Scepticism abounds about the efficacy of the interest rate cuts announced by the Reserve Bank of India on April 1. It is yet uncle ar what the main result would be - for all its stated purpose of boosting investment, the outcome could well be a further rise in speculative activity in the stockmarkets.

In the early part of April, Clinton hosted a conference on the "new economy" at the White House in Washington. Following day-long deliberations involving some of the best and the brightest among economists and corporate executives, the principal outcome apparently was the question whether the "new economy" really exists.

AS a concept, "new economy" derives its inspiration from the unbroken decade of economic prosperity that the U.S. has enjoyed. Rules prevalent in the "old" seemed to indicate that after a few years of growth the economy would tend to overheat. Employers would start competing for scarce labour resources, wages would be bid up and as a consequence prices in general would tend to thrust up. Inflation, in other words, would serve as an alarm signal that would be activated when the economy went into a phase of extended growth.

The reality of the U.S. economy now is that it seems to have burst through all known barriers. Its growth rate today is higher than at any time in decades. And despite unemployment rates seeking ever lower ranges, inflation is no higher than during the m ost placid phases in the U.S. economy's evolution.

Yet, the Tuesday crash in the Nasdaq composite index shows up many of the vulnerabilities of this phase of economic growth. The American trade and current account deficits are today running at hideously bloated levels. After all its earnings from the res t of the world - from exports of goods, technology transfer and overseas investments - the U.S. as an economy needs on current reckoning, to borrow over $1 billion every day merely to sustain its current level of consumption. On an annual basis, the U.S. current account deficit is today running at no less than $ 400 billion. And to convey a sense of the manner in which this figure has been growing without any seeming bound - just last June, the annualised estimate of the U.S. current account deficit amo unted to just $ 250 billion.

THIS rather unprecedented growth of the U.S. economy under the stimulus of funds borrowed from elsewhere has led to a new revision of the laws of economics. It was once understood that the level of a country's current account deficit determined how much it had to borrow in order to stay afloat. Today's orthodoxy reverses the chain of causation - a nation's trade deficit is determined by the flow of funds into the country. It is not the economy which drives the financial sector, but finance which drives the economy. And since the U.S. is the sole engine driving the global economy, the world seemingly has a direct stake in keeping afloat its bloated levels of personal consumption and its rapidly escalating household and corporate debt, merely so that the re is no generalised recession afflicting all countries.

Alan Greenspan, Chairman of the U.S. Federal Reserve Board, has been warning of this "irrational exuberance" for close to three years. Over the last year, he has been incrementally ratcheting up the interest rate to cool down the speculative fever afflic ting the markets. There has been no palpable impact. In fact, the hazard now is that when the signals start turning adverse, heightened interest rates may only aggravate the cascading debt-induced distress through the economy.

It is a massive onus of responsibility that the U.S. has to carry today in order to sustain the illusion of a "new economy". And yet it is evident that the current account deficit is becoming a serious political issue within the domestic political arena in the U.S. The mental conditioning of thinking on the "new economy" being what it is, the responsibility for the U.S. current account deficit is likely to be ascribed to other countries which supposedly follow mercantilist policies which are antithetica l to the credo of free trade. Contemporary realities make it virtually incumbent on the U.S. today to begin a coercive new round of trade diplomacy which will transfer onto other countries the onus of adjusting to its massive current account imbalances. It is far from evident, though, that the world will be as acquiescent in this process as it was the last time around. Complacence is clearly misplaced since the "new economy" is a zone of several potential hazards. And for India to venture into this zone in the belief that the laws and necessities of the "old" will automatically stand repealed there, may be self-delusion of the most dangerous kind.