Indian cricket fans are manic-depressive in their treatment of their favourite teams. They elevate players to god-like status when their team performs well, ignoring obvious weaknesses; but when it loses, as any team must, the fall is equally steep and every weakness is dissected. In fact, the team is never as good as fans make it out to be when it wins, nor as bad as it is made out to be when it loses. Its weaknesses existed in victory, too, but were overlooked.

Such bipolar behaviour seems to apply to assessments of India’s economy as well, with foreign analysts joining Indians in similar swings between over-exuberance and self-flagellation. A few years ago, India could do no wrong. Commentators talked of “Chindia”, elevating India’s performance to that of its northern neighbour. Today, India can do no right.

THE PROBLEMS

India does have its problems. Annual GDP growth slowed significantly in the last quarter to 4.4 per cent, inflation is high, and the current-account and budget deficits last year were too large. But the same deficiencies existed when India was growing fast. To understand what needs to be done in the short run, we must understand what dampened the Indian success story.

In part, India’s slowdown paradoxically reflects the substantial fiscal and monetary stimulus that its policymakers, like those in all major emerging markets, injected into its economy in the aftermath of the 2008 financial crisis. The resulting growth spurt led to inflation, especially because the world did not slide into a second Great Depression, as was originally feared. So monetary policy has had to be tight, with high interest rates contributing to slowing investment and consumption.

Moreover, India’s institutions for acquiring land, allocating natural resources, and granting clearances were overwhelmed during the period of strong growth. Strong growth increased the scarcity and value of resources such as land or mineral wealth. To the extent that these were cheap in the past, there was little reward to misallocating them. Growth, however, increased the rents to corruption.

Similarly, industrial development led to growing encroachment on farmland and forests and the displacement of farmers and tribals. India is a developing country with a civil society possessed of first world sensibilities. Protests organised by politicians and activists led to new environmental laws and land acquisition laws that aim to make development sustainable. Over time, India will learn to streamline the new laws to make them more functional, but in the short run a side effect has been more bureaucratic impediments to investment. So growth, as well as the reaction to that unbridled growth, created a greater possibility of corruption.

India’s investigative agencies, judiciary, and press started examining allegations of large-scale corruption. As the clean-up proceeded was that bureaucratic decision-making became more risk averse, and many large projects came to a grinding halt.

TURNING TIDE

Only now, as the government creates new institutions to accelerate decision-making and implement transparent processes, are these projects being cleared to proceed.

The combination of excessive (with the benefit of hindsight) post-crisis stimulus and stalling large projects had other consequences such as high internal and external deficits. Similarly, as large mining projects stalled, India had to resort to higher imports of coal and scrap iron, while its exports of iron ore dwindled.

An increase in gold imports placed further pressure on the current-account balance. Newly rich consumers in rural areas increasingly put their savings in gold, a familiar store of value, while wealthy urban consumers, worried about inflation, also turned to buying gold. Ironically, had they bought Apple shares, rather than a commodity (no matter how fungible, liquid, and investible it is), their purchases would have been treated as a foreign investment rather than as adding to the external deficit.

For the most part, India’s current growth slowdown and its fiscal and current-account deficits are not structural problems. They are all fixable by means of modest reforms. Back to the cricketing analogy, India is an open argumentative society. But we are prone to mood swings, perhaps more so than other societies. Stripping out both the euphoria and the despair from what is said about India – and from what we Indians say about ourselves – will probably bring us closer to the truth.

Excerpts from a recent lecture delivered by the RBI Governor at Harvard Business School

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