Donít knock opportunity
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It hurts when management-wisdom books are correct. (And yet, sometimes they must be, if only because there are so many of them.) On this occasion, the evidence of opportunity is all around us, can be sensed even in the way that commentators that should sound gloomy are somehow upbeat; when government officials and economists who could be moaning seem energised instead, animated by a fresh sense of purpose.
And where do they expect that purpose to lead? Some want financial sector reform, some a second look at the Companies Act, others more government participation in infrastructure. All good ideas. But before we make the decision as to which is the most important target for reform, the biggest bottleneck, one giant step is needed: a closer look at precisely why there's reason not to be gloomy. That might help us set priorities. (All right, at the risk of giving away the ending, it does.)
One clear reason for quiet optimism has been India's sudden elevation to the international high table. Both intangibly, in terms of what appears to have been the respectful attention paid to India's particularly well-prepared views at the recently concluded G-20 summit in Washington, and tangibly, such as in the invitation to join a souped-up Financial Stability Forum. To an establishment accustomed to dozing in the back rows of the General Assembly, even the first glimmerings of a world in which international conditions might be something India helps set rather than has to accept with ill-grace are welcome. Still, questions are already being asked: if we increase our representation at the IMF, or are expected to take on a role at the FSF, where's the trained manpower coming from?
There's also trade. The memory of the Depression's tit-for-tat trade wars means that everyone ó even the generally obstructionist French ó has committed to pushing the Doha round of trade talks forward, which were considered effectively dead before the meltdown. India has nothing to be ashamed about in its performance in the round so far; but the hardest part of hammering out a deal, the US's cotton subsidies and Indian and Chinese industrial and emergency agrarian protections, are still to be negotiated. The payoffs will be big: but such talks always need careful thinking, planning, and preparation. Will there be enough time, and enough capacity?
Here's another source of optimism, evident at, for example, the World Economic Forum's India meeting this week: India expects to be a lot more stable than other countries. Relatively stable not only in its macroeconomic indicators ó which, given the real size of the fiscal deficit, nobody should really be sure about ó but also relatively stable in terms of government reaction, of savings and investment, and even, perhaps, employment. The last is particularly interesting: India is well-placed to adapt quickly, given that its labour markets are flexible; and a younger workforce means that retraining is quicker, and less painful socially. The private sector is rushing to reassure the country that massive retrenchments aren't planned: but, even if some current jobs are lost, the internal cost structure faced by trans-national companies should cause them to want to move additional jobs here. This won't be back-office work. We've already seen some of that happening: the 80 American companies that spend the most on research and development send over half that money overseas. Another aspect of US's labour flexibility: a lot of the brightest people that we've grown up with in India but haven't seen around for a bit will suddenly start thinking that now would be a good time to return here for a few years.
Indeed, in general, it is understood that India has a chance to ride this out with minimal disruption. The long-term benefits of that cannot be underestimated: first, when evaluating investment destinations, people would then think of India as being safely immune to major downturns (however inaccurate in theory); and second, a pro-reform domestic consensus would be perpetuated. Both those are important. If we can keep the policy reaction insulated from reflexive, petty politicking ó such as Narendra Modi's strange little rant on Monday against "dirty money" in FDIs ó we've got a good shot at making hay while the sun doesn't shine.
And, in just laying this out, we've developed a sense of where the biggest, most urgent bottleneck is. It isn't in credit to the private sector, unsustainably expensive though that is, or in infrastructure, slow though the response seems to be in that sector. It's in intellectual capacity. The overstrained establishment is expected to move with speed and agility, while keeping vital balls in the air: efforts to maintain energy security, its new responsibilities at the FSF (and soon, hopefully, the IMF and World Bank), new trade talks. It's being watched to see if it can handle playing with the big boys, so India will have to over-achieve in meeting the requirements that the G-20 spelled out for domestic economies: transparency in accounting, for example. All this while keeping financial sector reforms burning, developing a bond market and so on. Big, heterodox ideas are needed, and many of them: do we really believe that the bureaucracy will be able to provide most of them? Nor is there any confidence that the overstretched finance and commerce ministries will be able to produce enough capacity even for things that don't require out-of-the-box thinking.
Which is why the most urgent change required in thinking is for the government to look again at its ministries. They need to be open to ideas from outside, to more short-term contracts, to special advisers and short-term contracts to independent analysts. Relying on a static, insulated corps of Delhi-centric policy economists or administrators with a bit of experience in special deputations, will not get us through this. The PM made an impact in DC because he was well-prepared ó partly thanks to his new special adviser, the Chicago economist Raghuram Rajan. More of that, at every level, is essential. And here the crisis actually helps us: as I pointed out earlier, it means that quite a few people will be returning to India looking for something to do.
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