The current financial crisis, precipitated in 2008 leading to the fall of Lehman Brothers on September 15th and beyond, which culminated in a full blown global recession not seen since the Great Depression has been a veritable eye opener for me. This is not least due to the fact that it directly impacted me in terms of my work experience while working as a consultant. More than that, it has shaken my complete and ardent belief in free market economics. I would not say that I have had a complete ‘U turn’ and become a believer in all the principles of ‘Socialism’. However it has definitely encouraged me to think beyond the concepts of a completely free market economy, one that has important aspects of government regulations and systems in place.
My formative years saw the turbulent period of the post financial reform years which started in 1991 after the balance of payments crisis which led to the opening up of the Indian economy. We had heard so much of the ‘Hindu rate of Growth’ till then, which remained at around 2-3% throughout the 1970-90 period. I belong to a middle class background and our consciousness then was shaped by the life that we saw possible for the first time as western goods and services started entering our country. Socialistic principles overnight started getting derided by us. Over the years, I have always believed that the choices that became available to us in terms of opportunities in education, jobs etc was because of these reforms that took place under the guidance of the World Bank.
I slowly started believing that the government was being mostly irresponsible by stalling the completion of the reforms process. I could see India moving forward only when the Government uncoupled the regulations stifling the Indian businesses, particularly manufacturing and financial institutions. There were examples of Industries like Telecom and Information technology doing extremely well just because they were outside the ambit of too many regulations and left to their own devices. Free economy was the buzzword and I had the belief that the domestic industries would do well if they were given a chance to compete with the organizations abroad. Indian businesses would not suffer because our products were of high quality and competitively priced, was what we had been told by our business leaders and I believed them.
This optimism was not pierced even when the IT bubble burst in 2000. It was seen as a small hiccup since the impact was hardly felt by a few people. Also the Asian economy crisis in 1997 was not looked at as an example since we were barely affected if at all. There were various discussions that mentioned that our subsidies predominantly to the farming community was not feasible in the long run and it was better spent on other important areas like building infrastructure etc in urban areas. It also needs to be understood that at this point of time, my understanding of the inequalities in India was restricted. I had seen the agrarian communities of North Indian states like Punjab and Haryana which seemed extremely well developed and suitably ‘rich enough’. Hence I had a belief that the government should have focused on removing the problems of the urban communities and make these cities really ‘world class’.
There were false hopes throughout the early part of the first decade of 21st century that somehow the reforms process would be pushed forward. After all the economy had been growing at close to 9% over a 5 year period and our foreign exchange holdings were touching new highs daily. There were even plans of creating a special vehicle for financing some of the immediate infrastructural woes. However, a concrete direction somehow did not materialize. It would not be wrong to suggest that my understanding of the situation was at complete odds with the governments view and hence my interest waned in the economics of various policies that were being debated. This continued till 2008.
On 15th September 2008, when the proverbial ‘all hell broke loose’ and Lehman brothers collapsed, the entire financial market in United States and Europe seemed to collapse very rapidly. However, strangely enough, the Indian Financial institutions except a solitary one remained mostly stable. There were fears of Bank runs and share price collapses but nothing of the same happened. This was particularly true of the state run financial institutions. As far as my perception is considered, they remained almost indifferent. This piqued my curiosity and made me realize that it was because of the fact that they were highly controlled organizations were they able to manage the crisis. To give a background, most state controlled financial institutions in India are former private banks which were nationalized in late 1970’s and early 1980’s. They are strictly regulated as to their investments and their liabilities since they manage a very large volume of retail accounts of low income households and hence their risk taking abilities are curtailed. Hence terms like credit swaps and derivatives are generally a strict no for them.
Suddenly, the logic behind government control and relatively high regulations starts becoming clearer. This signaled a major change in my thinking about various economic and social policies. The clincher in this argument was when the financial crisis led to the global economic recession. It is obviously correct to state that there are hardly any countries which were unaffected by the crisis. However, it is also very true that India survived and along with that kept the economic growth rate to an acceptable rate of 6-7%. I consider this to be a relatively high growth rate considering the scenario that confronted us all. What has also helped is the turnaround in terms of employment growth which was sagging considerably 8-10 months ago. The investor confidence is back and there is currently a possibility of FDI and FII inflows increasing. I realize today that I had simply been wrong about the policies of the state and had been blindly following arguments about the reforms process which were not grounded in reality. In fact I would not be able to talk about such contrasts if it had not been for the global recession to jolt us in our thinking.
Essentially what this meant is that the socialistic tinged policies of successive governments had come good. The regulations that had been place in the economy had made sure that there was no hyperactive growth which could not be sustained. The banking institutions were properly funded and hence they were able to meet their obligations while at the same time providing credit for small and medium enterprises which had suffered. Even sectors which had been relatively badly hit were able to manage the situation by securing large contracts from public sector undertakings which were flush with finances. This was definitely the case with the IT sector. State policy also had a significant role in making sure growth rates did not plunge. An example in this case is the focus that had been provided to the rural households a few years earlier by better irrigation and drought management facilities. Subsidies in the form of cheap fertilizers and free power had been provided so that the food security and employment did not suffer. A scheme called the NREGA (National rural employment guarantee act) was put in place where a minimum employment of 100 days in a year was guaranteed to people below the poverty line. This was to supplement the income of landless farmers and people in rural areas and was to provide payment even if no work was available, though at variable rates. It was a massive form of subsidy by the government considering our per capita GDP and there had been murmurs against it when this scheme had been launched. However, today it is feted as a landmark regulation even by the private sector. The reason being, it has boosted rural incomes and spending power. Hence while there is a recession outside the country, the organizations have been able to target these rural areas to keep their growth rates on target. As per various estimates the difference in GDP growth due to such rural targeted schemes is between 1.5-2% per annum.
It must be kept in mind however, that the successes have been made possible due to the opening of the economy which started in 1991. The schemes were made possible because very simply, we now had the money to finance them. Our economy had been on a very healthy growth rate for over a decade and a half and the money that it had generated was ready to be of use. However, the state had made sure that regulations were going to be a part of the system and free economy was tinged with protectionism. To just contrast the aspects that have been mentioned here with those of USA, it has come to light that even when the American economy was growing in the early 21st century, it was mostly impacting approximately only the top 2% of the population. Again this was the segment which was worst hit during the recession and hence the overall scenario got magnified. It had a cascading effect on the large number of indirect jobs that were dependent on these jobs. Looking at India, we had been able to target both the rich as well as the poor so the interrelationship was probably stronger and hence one could rely on the other to bail them out. Even China has been able to keep up its strong growth despite interdependence with the US. This is because of its regulated and protectionist economy. As I mentioned earlier, I have not taken a complete change in direction and have started advocating policies being completely aligned to socialism. I am still a believer in the reforms process and governments not interfering too much with the economy. Is the Government completely right? – No, Is it on the right track? – Yes. I now believe that a balance has to be struck somewhere between regulation and free reign. Concepts like the bottom of the pyramid have a place in economics. The target for all entities, be it the government or the industries, should be all levels of this pyramid. Obviously, there might be some inconsistency in the targeting but no one should be forgotten completely. Theories which were popular earlier like the trickledown effect which talked about the money flowing from the top to the bottom of the pyramid will have to be discarded or heavily modified. Else, the economic inequalities will keep becoming larger with rich becoming richer and poor becoming poorer.
Going slightly tangentially, since my changed understanding of the situation, I have been working with my father on a business plan to target employment of semi urban & semiskilled people. This is a ‘for profit’ venture which my father will undertake post retirement in a couple of years. Although this is in a very rudimentary stage, we came to the idea about training of such people who have skills but do not find avenues for employment. Also there is a huge requirement for such people like mechanics, plumbers, machinists, drivers, construction workers, healthcare workers etc who can be given proper and updated training and then gainfully employed as per the requirements. This idea was an extension of targeting the rural people by the government and other organizations. Also importantly, I have been able to think on those lines only when I understood their importance in our continued success in growing the economy. This would have not been possible had it not been for the collapse of Lehman Brothers on that fateful September day.
My formative years saw the turbulent period of the post financial reform years which started in 1991 after the balance of payments crisis which led to the opening up of the Indian economy. We had heard so much of the ‘Hindu rate of Growth’ till then, which remained at around 2-3% throughout the 1970-90 period. I belong to a middle class background and our consciousness then was shaped by the life that we saw possible for the first time as western goods and services started entering our country. Socialistic principles overnight started getting derided by us. Over the years, I have always believed that the choices that became available to us in terms of opportunities in education, jobs etc was because of these reforms that took place under the guidance of the World Bank.
I slowly started believing that the government was being mostly irresponsible by stalling the completion of the reforms process. I could see India moving forward only when the Government uncoupled the regulations stifling the Indian businesses, particularly manufacturing and financial institutions. There were examples of Industries like Telecom and Information technology doing extremely well just because they were outside the ambit of too many regulations and left to their own devices. Free economy was the buzzword and I had the belief that the domestic industries would do well if they were given a chance to compete with the organizations abroad. Indian businesses would not suffer because our products were of high quality and competitively priced, was what we had been told by our business leaders and I believed them.
This optimism was not pierced even when the IT bubble burst in 2000. It was seen as a small hiccup since the impact was hardly felt by a few people. Also the Asian economy crisis in 1997 was not looked at as an example since we were barely affected if at all. There were various discussions that mentioned that our subsidies predominantly to the farming community was not feasible in the long run and it was better spent on other important areas like building infrastructure etc in urban areas. It also needs to be understood that at this point of time, my understanding of the inequalities in India was restricted. I had seen the agrarian communities of North Indian states like Punjab and Haryana which seemed extremely well developed and suitably ‘rich enough’. Hence I had a belief that the government should have focused on removing the problems of the urban communities and make these cities really ‘world class’.
There were false hopes throughout the early part of the first decade of 21st century that somehow the reforms process would be pushed forward. After all the economy had been growing at close to 9% over a 5 year period and our foreign exchange holdings were touching new highs daily. There were even plans of creating a special vehicle for financing some of the immediate infrastructural woes. However, a concrete direction somehow did not materialize. It would not be wrong to suggest that my understanding of the situation was at complete odds with the governments view and hence my interest waned in the economics of various policies that were being debated. This continued till 2008.
On 15th September 2008, when the proverbial ‘all hell broke loose’ and Lehman brothers collapsed, the entire financial market in United States and Europe seemed to collapse very rapidly. However, strangely enough, the Indian Financial institutions except a solitary one remained mostly stable. There were fears of Bank runs and share price collapses but nothing of the same happened. This was particularly true of the state run financial institutions. As far as my perception is considered, they remained almost indifferent. This piqued my curiosity and made me realize that it was because of the fact that they were highly controlled organizations were they able to manage the crisis. To give a background, most state controlled financial institutions in India are former private banks which were nationalized in late 1970’s and early 1980’s. They are strictly regulated as to their investments and their liabilities since they manage a very large volume of retail accounts of low income households and hence their risk taking abilities are curtailed. Hence terms like credit swaps and derivatives are generally a strict no for them.
Suddenly, the logic behind government control and relatively high regulations starts becoming clearer. This signaled a major change in my thinking about various economic and social policies. The clincher in this argument was when the financial crisis led to the global economic recession. It is obviously correct to state that there are hardly any countries which were unaffected by the crisis. However, it is also very true that India survived and along with that kept the economic growth rate to an acceptable rate of 6-7%. I consider this to be a relatively high growth rate considering the scenario that confronted us all. What has also helped is the turnaround in terms of employment growth which was sagging considerably 8-10 months ago. The investor confidence is back and there is currently a possibility of FDI and FII inflows increasing. I realize today that I had simply been wrong about the policies of the state and had been blindly following arguments about the reforms process which were not grounded in reality. In fact I would not be able to talk about such contrasts if it had not been for the global recession to jolt us in our thinking.
Essentially what this meant is that the socialistic tinged policies of successive governments had come good. The regulations that had been place in the economy had made sure that there was no hyperactive growth which could not be sustained. The banking institutions were properly funded and hence they were able to meet their obligations while at the same time providing credit for small and medium enterprises which had suffered. Even sectors which had been relatively badly hit were able to manage the situation by securing large contracts from public sector undertakings which were flush with finances. This was definitely the case with the IT sector. State policy also had a significant role in making sure growth rates did not plunge. An example in this case is the focus that had been provided to the rural households a few years earlier by better irrigation and drought management facilities. Subsidies in the form of cheap fertilizers and free power had been provided so that the food security and employment did not suffer. A scheme called the NREGA (National rural employment guarantee act) was put in place where a minimum employment of 100 days in a year was guaranteed to people below the poverty line. This was to supplement the income of landless farmers and people in rural areas and was to provide payment even if no work was available, though at variable rates. It was a massive form of subsidy by the government considering our per capita GDP and there had been murmurs against it when this scheme had been launched. However, today it is feted as a landmark regulation even by the private sector. The reason being, it has boosted rural incomes and spending power. Hence while there is a recession outside the country, the organizations have been able to target these rural areas to keep their growth rates on target. As per various estimates the difference in GDP growth due to such rural targeted schemes is between 1.5-2% per annum.
It must be kept in mind however, that the successes have been made possible due to the opening of the economy which started in 1991. The schemes were made possible because very simply, we now had the money to finance them. Our economy had been on a very healthy growth rate for over a decade and a half and the money that it had generated was ready to be of use. However, the state had made sure that regulations were going to be a part of the system and free economy was tinged with protectionism. To just contrast the aspects that have been mentioned here with those of USA, it has come to light that even when the American economy was growing in the early 21st century, it was mostly impacting approximately only the top 2% of the population. Again this was the segment which was worst hit during the recession and hence the overall scenario got magnified. It had a cascading effect on the large number of indirect jobs that were dependent on these jobs. Looking at India, we had been able to target both the rich as well as the poor so the interrelationship was probably stronger and hence one could rely on the other to bail them out. Even China has been able to keep up its strong growth despite interdependence with the US. This is because of its regulated and protectionist economy. As I mentioned earlier, I have not taken a complete change in direction and have started advocating policies being completely aligned to socialism. I am still a believer in the reforms process and governments not interfering too much with the economy. Is the Government completely right? – No, Is it on the right track? – Yes. I now believe that a balance has to be struck somewhere between regulation and free reign. Concepts like the bottom of the pyramid have a place in economics. The target for all entities, be it the government or the industries, should be all levels of this pyramid. Obviously, there might be some inconsistency in the targeting but no one should be forgotten completely. Theories which were popular earlier like the trickledown effect which talked about the money flowing from the top to the bottom of the pyramid will have to be discarded or heavily modified. Else, the economic inequalities will keep becoming larger with rich becoming richer and poor becoming poorer.
Going slightly tangentially, since my changed understanding of the situation, I have been working with my father on a business plan to target employment of semi urban & semiskilled people. This is a ‘for profit’ venture which my father will undertake post retirement in a couple of years. Although this is in a very rudimentary stage, we came to the idea about training of such people who have skills but do not find avenues for employment. Also there is a huge requirement for such people like mechanics, plumbers, machinists, drivers, construction workers, healthcare workers etc who can be given proper and updated training and then gainfully employed as per the requirements. This idea was an extension of targeting the rural people by the government and other organizations. Also importantly, I have been able to think on those lines only when I understood their importance in our continued success in growing the economy. This would have not been possible had it not been for the collapse of Lehman Brothers on that fateful September day.
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