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The Great Indian Crash


In The Importance of Being Earnest, an impressionable young student is advised to skip the chapter in her economics textbook on the Indian rupee as it is “too sensational.” The adventures of the rupee this summer live up to that billing; India is now facing a full blown currency crash.

When I came to India for a three week lecture tour (Kerala, Delhi, Amritsar and Lucknow), I didn’t expect to have a ringside seat for a dramatic economic crisis. But that is just what has happened; the Indian rupee has hit one record low after another, falling below the unheard of 65 to the dollar level in today’s trade—and the stock market is falling as well.

Some of the trouble comes from the shifts in American policy; the probability that US interest rates will continue to rise is sucking money out of emerging markets around the world. That creates problems for Indian companies who have borrowed in dollars; the falling rupee also means that imports (like oil) cost more, pressuring profit margins for many Indian companies, hitting the government budget deficit, and squeezing household budgets.

But what really seems to have the markets in a tizzy is the failure of India’s political system to focus on effective responses to the gathering storm. With a general election coming up, all of India’s many political parties are taking the low road. The Congress Party is pushing a “food security” bill through parliament that promises food subsidies to as much as half the country’s population. Sonia Gandhi made a rare speech in parliament to support the bill, then dramatically fell ill and was rushed to the hospital. The doctors say she is doing fine; the effects of the bill are likely to be longer lasting. It is the worst kind of inefficient, unwieldy approach to the genuine problems of India’s hungry people: it will be hugely expensive, monstrously inefficient, and provide a perfect environment for the massive political corruption that is a hallmark of Indian political life (and the despair of many civic minded Indians).

Meanwhile, the opposition is also doing its bit: it is trying to light a fire under the Ayodhya temple issue. This is one of the hotspots in Indian communal politics. In 1528 or so, a Muslim conqueror built what was known as the Babri Mosque on the site (apparently, but all facts are in dispute) of an ancient Hindu temple commemorating the birth of the god Ram. In 1992 Hindu hardliners destroyed the mosque, and demand that a temple be built on the site. The dispute has wound in and out of the courts and the newspapers since; it remains an effective way for the Hindu-backed BJP and its allies to mobilize their voters—while inflaming Hindu-Muslim tensions. The opposition has been promoting a march of religious activists to the site, just in time to stir up controversy as the election nears.

Investors in India and abroad can’t help but be dismayed by these political shenanigans at a time of genuine crisis. Unfortunately, the coming economic turbulence is likely to promote the worst instincts in politicians; investors seem to think we will be seeing more irresponsible demagoguery and not less as the crisis unfolds. Broadly speaking, the Congress Party in India corresponds to the Democratic Party in the United States—left of center, redistributionist, rhetorically down on business but heavily invested in crony capitalism. The BJP is a lot like the Republican Party: an uneasy mix of pro-business, free market folks with a populist religious base some of whose members sometimes cross the line between sober religious faith and wacko crackpottery. And because India is bigger, more diverse, more complicated and less culturally inhibited than the United States, both these parties and the many smaller regional parties can be even wilder and more exotic than the politicos of our own dear native land in their political stunts and policy ideas.

India is an even more complicated place than the European Union, with more languages, more cultures and more religious diversity (and more people) than the EU. It’s hard for a collectivity of this size and diversity to act quickly—but when economic crisis strikes, fast policy responses often mean the difference between a quick recovery and a long slump. For the last twenty years, India has been coasting to some degree on the momentum of the economic reforms it undertook in the 1990s; the next couple of years should see whether India will manage to surmount its current crisis and begin a new era of rapid growth.

Given the effect of India on the balance of power in Asia, the economic news from India is geopolitical news as well. India’s rapid growth has been a major stabilizing force on the Asian political scene; generals as well as bankers will be watching to see what India does now.

[Rupee notes image courtesy of Shutterstock]

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  • Atanu Maulik

    Over the past decade, when cheap foreign money flooded into India or when the investment led boom in China led to a boom in commodity prices boosting nations from Brazil to South Africa to Indonesia, the leadership of those nations had the golden opportunity to lay the foundations for a long running economic boom. They could have invested the new found wealth wisely in infrastructure, education, healthcare and could have undertaken fundamental reforms to boost long term productivity. As it has become clear now the opportunity was squandered, the wealth was plundered (characteristic of third world leadership isn’t it ?). So now as the tide turns, the realization is suddenly dawning that nations cannot bluff their way to greatness. The easy money has left. A long hard slog now lies ahead.

  • lukelea

    WRM writes: India is an even more complicated place than the European Union, with more languages, more cultures and more religious diversity (and more people) than the EU.

    Reminds me of a bumper sticker I saw:


    • Jaldhar H. Vyas

      Another HBDChick disciple I see 🙂 While a lot of Indias problems are due to clannish behaviour based on caste, religion, language, and region it should be noted that India does have a sense of national identity that was not merely bolted on by colonial powers. India has despite a few bumps managed to remain a liberal democracy with Indira Gandhi the only leader who attempted dictatorship and she was swiftly trounced. Indias largest political parties do attempt to make a universal appeal to voters outside their particularist powerbases. So things are not quite as bad as in the Middle East. (“The Rule of the Clan” is well worth reading though.)

      No Indias biggest problem is a _lack_ of diversity in the political class. With the exception of a few pro-market types in the BJP and fewer in the Congress, the spectrum runs from center-left to stark raving looney left. No wonder all they can come up with is the same failed solutions again and again.

  • lukelea

    Maybe a little off topic, but here is a book WRM and his readers might find useful in understanding places like India and Southwest Asia and, indeed, most of the world: The Rule of the Clan

  • J R Yankovic

    Many thanks for (IMO) a superb, not to mention very neatly balanced, essay on a hard but crucial topic. Easily one of the best short pieces I’ve read on India in quite a while. Off the record, too, I think you’re spot-on re the keys parallels between our respective political parties. But if you want something equally good in what I think is a similar vein, may I suggest this post from my particular favorite “authority” on South Asian matters, Prof M D Nalapat:

    On the OTHER hand (sorry, I just can’t help it), I can imagine somebody ELSE, admittedly more red-bloodedly American than me, arguing:

    How dare you. How DARE you go through the trouble of highlighting just those predicaments facing modern India that MIGHT seem to warrant a US response different from our customary default modes. A set of modes properly consisting of either:

    1) Keeping as ignorant as possible of the godforsaken place, until “business as usual” requires otherwise;

    2) imposing some one-size-fits-all, preferably unhistorical (“history = bunk”), hamfisted (neo)liberal democratic agenda on it;

    3) blowing it out of the @#$&in’ water (wrong metaphor, I know);

    4) dithering, muddling and handwringing until the situation gets to a point where we can no longer make either a positive or a decisive difference. (What the hey, these things always sort themselves out eventually; sooner or later every foreigner [who counts] discovers his or her “inner American”; at the end of the day Almighty Trade Conquers All, etc, etc).

    Or preferably – just to show how irrelevant all these messed-up places are – all of the above.

    I mean, what’s your point? Next thing you’ll start proposing some of our bright, earnest, talented young people actually go over there to live for a while. Maybe start learning a language or two. Plus something of the culture(s). And the history. And the geography. I’d go on but the whole thing just makes me sick . . .

    Bottom line: It’s high time Via Meadia
    stopped offending against all the best canons of American Whig History. It’s time you faced the fact that it doesn’t REALLY matter what we do or learn about, because the force and attraction of American culture (“Make that CIVILIZATION, buster!”) are long-term irresistible. And, hey, if large parts of our future Americanized world end up consisting of political elements both bloodthirstily religious AND fanatically business-minded (e.g., the BJP on occasion), hey, go for it. Whatever helps you succeed, in this world or the next, right?

    In short, it’s high time you Meadians got with the REAL(ly) American program.

  • Jacksonian_Libertarian

    There is only one law of economics, “The Law of Supply and Demand”. If the Rupee is falling and the Dollar is rising, then there is an oversupply of Rupees, or an undersupply of Dollars, or both. Maintaining the supplies of currency is the responsibility of the Reserve Bank. So, it is the Reserve Bank’s fault for the present problems, and those in charge, should be fired for their incompetence. India has $290 Billion in foreign currency reserves, 10th largest in the world, so buying up Rupees to strengthen the Rupee would be easy. A program of buying $1 Billion worth of Rupees every day until the Rupee had recovered, would be the easy and prudent solution.

    Unfortunately this isn’t what the Government wants. They want the Rupee to decline, this raises the price of imports and lowers the price of exports. India is clearly making a play for the lion’s share of the Asian export market, and blaming the problems on any scapegoat that presents itself.

    Indian exporters are going to see a windfall of profits, and Indian businesses and entrepreneurs will gravitate to finding export niches of their own, taking market share from other Asian counties, especially China.

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