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Boom, Bust and the Indian Economy

"India's once booming economy is sliding into a deep slump," warns a recent New York Times editorial. The growth rate has halved since touching 9.4 percent three years ago, and the rupee has fallen steeply against the dollar. Matters will get worse, assert the editors, unless the country's leaders take "politically difficult" actions such as privatizing public-sector firms and doing away with delays in projects. In their view, only reforms as ground-breaking as those of the 1990s, when India opened up to foreign investors, can stanch the flow of cash from the country's fiscal wounds.

Many observers hold, however, that India's predicament derives from those very reforms, which, in the words of economist Aseem Shrivastava, "exposed the country to the winds of the global economy at a time when the country was not ready." In 1991, India accepted a loan from the International Monetary Fund and the World Bank, and right away began to implement its attendant conditions. These included slashing controls on the flow of finance, selling off public enterprises, removing import tariffs, cutting expenditure on the rural poor, and several other directives that lured investors.

The resulting inflow of dollars seduced the country into living far beyond its means, argues Shrivastava. For two decades, a heady economy delighted India's elites. New Delhi and Bangalore acquired glittering new airports, SUVs roared past rice fields on multilane highways, air-conditioned shopping malls dispensed Louis Vuitton handbags, and fortunes were made as land, water, oil, coal, iron and other natural resources were privatized by pathways reminiscent of Boris Yeltsin's Russia.

In 1990, India boasted not a single billionaire; but in its 2013 report, Forbes listed 55 Indian billionaires, many of whom owe their wealth to such resource transfers, just ten of whom control a tenth of the country's GDP. Scams exposed in recent years, such as giveaways of coal mines and electromagnetic spectrum (for mobile phones), add up to losses of more than $100 billion to the Indian exchequer, according to its Comptroller and Auditor General.

The raison d'être of economic growth is, however, poverty reduction, and mainstream economists insist that liberalization has delivered on this count at least. According to a New York Times Op-Ed by economist Arvind Subramanian, "poverty has sharply declined over the last three decades, to above 20 percent from around 50 percent." These figures, which coincide with the Indian government's own statistics, appear to be fallacious, however. Economist Utsa Patnaik charges that they are obtained by continually lowering the poverty line (with respect to an original standard based on calorie consumption) so that ever fewer people fall below it.

When directly measured by hunger, poverty has risen. In the eleven fiscal years between 1993 and 2004, for instance, the percentage of rural Indians who could not access 2,200 calories a day rose from 59 to 70, whereas those who couldn't get even 1,800 calories a day went up from 20 to 25. (The poorest Indians perform manual labor, which requires 3,500 calories on average.) Correspondingly, and alarmingly--given the country's not-so-distant history of famine--the quantity of cereal available to the average Indian fell from 469 to 423 grams per day in the two decades following liberalization.

The burgeoning hunger has manifold causes. Reduced support to poor cultivators has made many small farms unviable: every single day for the last two decades, more than 2000 farmers have abandoned their fields and moved to cities and towns. (Nor are they finding decent jobs there: because of mechanization, job growth in the organized" sector, which provides healthcare and pensions, has been stagnant.) As Shrivastava and environmentalist Ashish Kothari describe in a pioneering book, Churning the Earth, the loss of additional fields to mining, industries, urban expansion and cash crops has also reduced the per capita availability of food--especially of coarse grains, on which many of the poorest depend.

Also since liberalization, and because of it, imports burgeoned and exports failed to keep up, as is inevitable when cheap raw materials such as iron ore are used to pay for, say, gold and BMWs. India's trade balance worsened and volatile short-term investments came to fill the gap--so when US interest rates promised to rise, jittery investors pulled out and the rupee tumbled. "Many of us in the economics precision have been foreseeing this for the last ten-fifteen years," says Shrivastava. It has happened before: similar debacles felled Mexico in 1994, Indonesia in 1998, Argentina in 2001, and several other developing countries that had also opened up their economies to volatile foreign capital.

India depends heavily on petroleum imports, which will become effectively dearer; transport costs and therefore food prices will soar. Despite the debacle, or perhaps because of it, last month India's parliament passed a bill to provide subsidized grain to two-thirds of the population at a cost of $20 billion. The move prompted a reprimand from Moody's Investors Service because it would worsen "the government's weak finances." (Notably, Moody's had praised India's most recent budget, which promised $90 billion to industry in the form of tax breaks and waivers of customs duty--although these concessions were even worse for the government's finances.)

With elections due in mid-2014, however, India's politicians are temporarily more mindful of angry voters than of miffed investors. After that, it will be business as usual. Foreign-exchange reserves are low, so the country's policymakers are likely to woo investors back with further "reforms." That may satisfy the New York Times' editors--while setting up the country for another loop in the downward spiral of boom, bust and deepening poverty.