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Globalisation & the Chinese bamboo

Surjit S Bhalla

It was the end of the summer of 1997, the East Asian crisis had just begun, and at the World Bank-IMF meetings in Hong Kong I presented a paper entitled 'Economic Freedom and Growth Miracles: India is Next'.

I then argued that because of the ongoing increases in economic freedom, the Indian growth rate should accelerate towards 7.7 per cent per annum.

"In other words, the uncaged tiger is now prowling a restricted habitat but should soon freely hunt in the whole jungle".

Politicians, bureaucrats, and academia -- they all laughed at the forecast, and some of them are still laughing. With the publication of the Tenth Plan, 8 per cent growth is now part of official policy.

While my forecast was obviously hasty, and though it is now part of the establishment, the question remains -- is this a 'pigs may fly' forecast?

The answer is a resounding no, and is made even more emphatic by the reality that there is virtually nothing that the politicians, or bureaucrats, or industrialists, can do to prevent the 8 per cent target from being achieved by India in the near future.

There are two elements to the changed reality, at least since 1997. First, globalisation today is in full flow, and two years after the 1997 forecast, software growth started adding about 0.3 to 0.5 per cent annually to GDP growth.

But does globalisation mean more than call centres? Of course -- and more means the decline of domestic policy makers to mess up the economy, and its citizens. Let us say the policy makers (and their advisers) were stupid enough to guarantee a high rate of interest on domestic savings.

This is what happened in the East Asian economies when foreign investors were guaranteed an interest rate some 300 to 500 basis points above what they could achieve in their own economies.

The guarantee was there in the form of a 'fixed' exchange rate regime operated by the various East Asian governments. Given such a guarantee, wouldn't everybody invest in a Thai Baht?

Obviously yes, and everybody did invest! The rest as they say is history, though some bureaucrats and non-market economists would have you believe that it was all due to unruly markets -- rather than unruly and terribly bad government policy!

If you think that Greenspan makes monetary policy for the US, think again. It is made on the pits of the Chicago Board of Exchange, by millions of investors like you and me.

The decline in interest rates there was led by investors in Fed-Fund futures -- investors who looked at the real interest rate and found it too high given sluggish growth.

Closer to home, the unprecedented appreciation of the rupee by two per cent in the last year, rather than its depreciation by the 'expected' 5 per cent, is also the effect of globalisation.

In the old days, policy makers would have found reason to continue with high interest rates and an undervalued but steady currency.

Now, with impersonal and rapid and foreign capital flows dictating domestic policy, domestic long-term interest rates have been made to fall to a level below 6 per cent!

One test of the relative influence of domestic Neanderthals versus globalised investors will occur at the time of our next Budget.

Last year, the finance minister made a promise to link the return on 'small (read corporate) savings' deposits to government securities.

(This generous link provides for an excess of 50 basis points on Bihari savings with comparable government of India securities, but that domestic absurdity is left for another occasion!).

Presently these savings yield a 9 plus per cent return i.e. a guaranteed excess of 300 basis points to every investor, not unlike what happened in Thailand before the deluge.

Clearly, some fat cat corporate investors will stand to lose if Jaswant Singh sticks to promises made by Yashwant Sinha.

Hence, the move to not implement a sensible, globalisation dictated policy. And the reason -- why, because "in the name of the poor anti-globaliser small investors" say so!

My forecast is that globalisation will win. And that real borrowing rates in India will start to come down from double-digit levels.

It is not emphasised enough, but industrial growth pre-1991 reforms was exactly the same, at around 5-6 per cent per annum, as the growth rate post 1991 reforms.

Does that mean that industry oriented reforms had no effect on industrial growth?

No -- the effects were large, but they got nullified by the large (300 to 500 basis points) increase in real interest rates that occurred post 1995-1996.

Now is payback time -- real corporate borrowing rates will decline to a level about 3 to 5 percentage points above inflation.

And world inflation cannot rise (and this has not occurred for about 5 years) as long as 1 billion Indians and 1.3 billion Chinese are participating in the global economy. And that is not about to change, no matter how many Vishwa Hindu Parishads and socialists and communists gang up to prevent their intellectual and financial losses.

This is where the pinch of the Chinese bamboo is critical. Earlier, domestic corporates used to think up strategies to prevent their entry into domestic markets.

Now, it seems (and happily so) that reality has set in -- they are here to stay so the only strategy can be -- how can you learn from them, and hopefully beat them.

There is a second globalisation induced kick that the Indian economy should be praying for. The Kelkar report on taxes should, if implemented, reduce our tax rates and bring them closer in line with our competitors in China, and the rest of East Asia.

Again, the strange alliance between left-wing moral technocrats and feudal corporates (who want nominal tax rates to stay high and post-bribe tax rates to stay low) might delay the inevitable, but cannot alter the future.

What about 8 per cent growth? Currently, despite a drought, the Indian economy is growing at 6 per cent. Each 100 basis point decline in real interest rates adds about 0.35 per cent to GDP growth rate.

So even an easy 300 basis point decline in corporate borrowing (mirroring what has already happened to government borrowing) will mean a 7 per cent growth rate.

Add to that some more divestment, a 2 per cent agricultural growth and services growth pulled up just a wee bit with industrial growth in double-digits.

One gets to 8 per cent without the help of your friendly politician i.e. these guys are increasingly becoming irrelevant!

Don't even ask what happens to the Indian stock market when elections and politicians and intervention bureaucrats matter less and the market matters more.

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