Saturday, February 20, 2010

Budget 2010: Return of rectitude

So, the countdown has begun. What remains to be seen is how Pranab Mukherjee, the crisis manager of the ruling dispensation, is going to manage the post-crisis situation. As he`s set to present his second full budget as UPA`s finance minister on February 26, the key question would be whether he will start phasing out the stimulus measures, announced to help the collapsing economy recover on a fast pitch. And now it`s official -- the stimuli have worked and the growth is back. Citing the rapid rebound in industrial production and changing macro economic outlook, a section of the industry, academia and even the government has urged the finance ministry to put fiscal discipline at top of its agenda and start withdrawing stimulus. Widening fiscal deficit, as a result of the government`s increasing public spending, is a symptom of an unhealthy economy, say the fiscal disciplinists.

2010 is not 2009
Presenting his first full budget of the UPA government in July 2009, the options before Mukherjee were limited and challenges galore. The global economy was still struggling with the Great Recession and India`s economic output was steadily falling. The economic expansion shrank to 6.7 percent in 2008-09 from 9 percent the fiscal before, and industrial production as well as exports was plummeting. The RBI had cut down rates and the government had already announced fiscal measures to boost demand and production. Mukherjee presented a cautious budget -- put the proposed financial reforms on the back burner, increased public spending, retained stimulus measures and avoided introducing any drastic changes in the tax structure. But in 2010, the green shoots offer opportunity for the finance minister to take imaginative policy actions. The fear mongers in the academia think the government should grab this opportunity to cut spending and bring down deficit. How sustainable would be such a move?

Let`s now look at some figures. The fiscal deficit for 2009-10 is estimated to be 6.8 percent of the gross domestic product (GDP), up from 6.2 percent in 2008-09 and 3.1 percent the year before. Deficit has started widening in 2008, the year global economy was hit by recession, as the government`s revenue reduced sharply on slowdown and expenditure grew on stimulus. Many analysts compare this situation with early 1990s when India was struggling with the twin problems of slowdown and deficit. When Manmohan Singh presented his first budget as finance minister in 1991, one of his key focuses was to bring in fiscal rectitude. The gap between the government`s revenues and expenditure shot up to 8.4 percent of GDP during Madhu Dandavate, the predecessor of Singh. In his budget speech for 1991-92, Singh proposed to bring down deficit to 5.78 percent. To achieve this, he had two options – increase the government`s revenues through liberalisation policies and cutting down subsidies.

2010 is not 1991 either
India is now a liberalised economy, but the very course of liberalisation is under strain as the western economies, including the US, the Mecca of free market capitalism, are turning towards higher regulation and intervention. There are limitations for Mukherjee to expect rapid increase in revenues as the industry is not yet fully out of the woods. Cutting subsidies is also not a desirable option at this time as such a move would force consumers to cut down on their expenditure, resulting in a slump in demand in the domestic economy. In this recovery time, anything but a demand slump could be tolerated. After all, the policy options of the government are almost used up. It has already pumped in millions of rupees into the financial system through stimulus and has kept the interest rate at record low for over a year. So, another financial shock will leave the government defenceless. That’s why many say, the trouble shooter is in a fix. What can Mukherjee possibly do?

Excess breeds collapse
According to many economists, including Nobel Laureate Paul Krugman, the administrations committed to fighting crisis should not give in to “fear mongering” on fiscal deficit. Krugman says deficit itself is a symptom of slowdown. Any policy action to bring down deficit when the economy was still in sort of a slowdown would be counter productive, he writes in his blog. Though Indian and Chinese economies seem to have overcome the worst, the prevailing crisis in Europe and the possibility of it spreading across the Atlantic still make many scared. The capital markets are still shaky and have plummeted recently on Euro-collapse fears. ‘The Economist’ magazine writes if 2009 was a crisis year for the financial sector, 2010 could be crisis time for the economy as a whole. And Europe indicates just that.

So, it`s not the time to play to the gallery. Mukherjee needs to be imaginative while formulating policies for the difficult times. He has to keep the growth rate steady without letting excess liquidity build more bubbles. Excess breeds collapse and that needs to be kept under constant check. A difficult task, indeed.

Saturday, February 13, 2010

Eastern Dominance

Economic freedom creates habits of liberty. And habits of liberty create expectations of democracy… Trade freely with China and the time is on our side," said George W. Bush in November 1999, a year before he was elected the 43rd president of the United States. Economic relations with between China and the United States zoomed to new highs during the Bush presidency as the Asian giant accelerated its market reforms. Thanks to those reform initiatives, China emerged as the third largest economy in the world and, according to Goldman Sachs, is set to overtake the biggest economy, the United States, in 2027. Will this economic transformation bring in changes in China's Communist Party-ruled system as many Western liberals predicted? Most unlikely, says Martin Jacques, a well-known journalist and once the editor of Marxism Today, in his new book, "When China Rules the World: The Rise of the Middle Kingdom and the End of the Western World".

China's economic liberalisation was hailed by many in the West. The disciples of liberal political scientist Francis Fukuyama strongly believed that the world has been converging on Western liberal democracy ever since the collapse of the Soviet bloc. The neoliberal economic development would accelerate this transformation, they argued for decades. So, China would either end up opening up its polity for a more participative system or collapse due to its internal contradictions like what happened to the Soviet Union. But Jacques challenges both these claims in his book. "Economic change, fundamental as it may be, can only be part of the picture," he writes.

The post-1978 reforms, initiated by President Deng Xiaoping, helped China modernise itself at a greater pace than many western countries did in the 18th and 19th centuries. But China's modernisation, according to Jacques, is not western. It is distinctive and "rooted and shaped by its own history and culture". Therefore, expecting China to follow the western political and cultural values would be erroneous. China is not a conventional nation-state, an ideal unit in the post-Westphalia international order. Rather, it is a "civilisation state" that kept the "essence" of Chineseness unbroken over millennia despite undergoing several political and economic transformations. "It is this civilisation dimension that gives China its special unique character." When it was down, a pragmatic China was ready to get integrated into the international system and reconcile itself to being a nation state. "It was a compromise borne of expediency and necessity," writes Jacques. "But as China arrives at modernity, and emerges as the most powerful country in the world, it will no longer be bound by such constraints and will in time be in a position to set its own terms and conditions."

When that time will come? Jacques believes the West is in the decline. The credit crunch that started in the United States in 2007 followed by the collapse of the Wall Street investment firms including the Lehman Brothers in September 2008, marks the beginning of the end of the deregulated neoliberal capitalism. The distinctive Chinese economy, in which state plays a major role and controls the flow of capital, which is an antithesis to the very concept of neoliberalism, weathered the crisis. China's relative power is rising post-meltdown at a time when the United States and other western economic power houses are struggling to manage their respective economies.

Such a rise would bring in a politico-cultural shift in international politics. For over five centuries, western values were global values. When the United States became the super power after the Second World War, only the power centre shifted from Europe to across the Atlantic. The values, ideas and culture remained the same. But the rise of China does not provide any such opportunity to the West, according to Jacques. "China will act as an alternative model to the West, embodying a very different kind of political tradition - a post colonial developing country, a Communist regime, a highly sophisticated statecraft and an authoritarian, Confucian rather than democratic polity".

Jacques presents his arguments after a detailed analysis of Chinese history and civilisation and connects them to the present-day developments in international politics. China's triumph as a non-capitalist market economy and its rising cultural "smart power" persuade us to believe Jacques' claims. But the author, seems obsessed with the rise-of-civilisation idea, fails discuss the strategic angle in detail. The hard power had played a crucial role in the ascendancy of both Britain and the United States. But how strong is China vis-a-vis the present-day hegemony the United States? How the hard power is going to help China in its quest to transform the world? That link is missing in Jacques' otherwise brilliantly written book.

Author Profile: Martin Jacques is a journalist and academic. He is currently a visiting fellow at the London School of Economics Asia Research Centre and at the National University of Singapore. Jacques previously edited Marxism Today and co-founded the think-tank Demos in 1993. He also writes columns for the New Statesman and Guardian. (Reviewed for Business World)