by Vinod Rai
That sense of glory didn’t last long as the negative side of globalization caught up soon thereafter with the outbreak of the global financial crisis following the collapse of Lehman Brothers in September 2008. The crisis hit virtually every country in the world and India was no exception. There was dismay and disbelief over the setback in India. The financial sector in the rich world was in deep turmoil because of reckless risk-taking in pursuit of quick profits but Indian banks had no exposure to the toxic assets. There was also a global recession but that should have hit big exporters like China, Japan and Germany; not India whose exports are only a small proportion of GDP. So went the popular narrative.
So why did India get hit by the crisis? The reason was that by 2008, India was more integrated into the global economy than we consciously recognized. India’s two-way trade (merchandise exports plus imports), as a proportion to the gross domestic product (GDP) more than doubled over the previous decade: from about 20 per cent in 1998–99, the year of the Asian crisis, to over 40 per cent in 2008–09, the year of the global crisis. The deep trade integration was accompanied by an even deeper financial integration. Measured by the ratio of external transactions (total of all inflows and outflows in the current and capital accounts) to GDP, financial integration had more than doubled from 43 per cent in 1998–99 to 111 per cent in 2008–09. What this integration meant was that if global financial and economic conditions were in turmoil, India could not expect to remain an oasis of calm.5
International experience as noted above, including that of India’s, shows that the adverse effects of globalization arose mostly out of financial liberalization rather than trade liberalization. On balance, trade liberalization has benefited developing economies whereas financial liberalization has been a mixed bag. In any case, past experience makes the challenge of globalization obvious—maximize the benefits and minimize the costs.
Benefits of Globalization
The benefits of globalization are obvious enough. The competitive forces generated by globalization improve productivity while also allowing the economy to operate to its comparative advantage. The resultant higher exports and faster output growth make the economy more attractive to foreign investors thereby giving the domestic economy access to a more diversified and competitive resource base. At the same time, domestic investors can diversify their risk by investing abroad. While higher investment engendered by globalization will expand the production base and employment opportunities, access to better technology and management practices will potentially put the economy on a virtuous cycle.
Does this theory work in practice? In other words, has India benefited from globalization as predicted by theory? Some broad indicators will be instructive.
Real GDP growth accelerated from 5.6 per cent per annum during the eighties to 6.9 per cent per annum in the post-reform period (1992–2016). Acceleration in per capita income was even more striking, rising as it did from 3.2 per cent per annum in the eighties to 5.1 per cent during 1992–2016. Underlying these broad parameters was a host of macroeconomic indicators—savings and investment rates, tax base and tax buoyancy, fiscal and current account deficits, credit growth and financial intermediation—all of which showed significant improvement consequent on reforms.6
How much of this improvement in the overall macroeconomic situation is due to India’s integration with the global economy? Put another way, could similar results have been obtained if reforms were restricted to the domestic sector? It is difficult to give a precise answer in the absence of a counterfactual. But the reality is that domestic and external sector reforms are two sides of the same coin; it is difficult to reform on one side without reforming on the other side as well.
Costs of Globalization
Just as with benefits, the costs of globalization too are obvious enough but difficult to estimate in quantitative terms. With globalization, India’s macroeconomic fortunes get linked to the vagaries of global forces. Entire industries can die because of import competition causing extensive job losses and destruction of regional economies. A case in point is the large steel imports that flooded Indian markets in the last two years forcing several factories to shut down, resulting in a huge negative multiplier effect. Similarly, exports can suddenly lose established markets because of abrupt and unforeseen supply–demand imbalances or innovation of new products and processes. Exports are also subject to periodic threats of protectionism as is the case presently.
While the volatility associated with trade integration can take a formidable toll, volatility arising from financial integration can be even more unforgiving. Capital flows, in particular, are notoriously fickle, subject to sharp surges, sudden stops and abrupt reversals, all of which can impair macroeconomic and financial stability, erode competiveness and hurt growth and welfare.
Volatile capital flows have been a common and recurrent feature of India’s macroeconomic experience over the last ten years. In the years immediately preceding the crisis (2003–08) when the India growth story was on a roll and the world was experiencing the so-called Great Moderation, foreign capital inflows into India surged beyond its absorptive capacity. The result was a sharp appreciation of the rupee out of line with fundamentals and the threat of an asset price bubble and financial instability. The Reserve Bank of India (RBI) had to intervene in the market to prevent undue appreciation of the rupee.
That story changed abruptly with the outbreak of the global financial crisis in 2008 when, unnerved by the turmoil in the advanced economy financial markets, capital fled emerging markets to the safe haven of the US, giving India the reverse problems. The rupee depreciated steeply, inflation pressures intensified and fiscal pressures were exacerbated. This time round, the RBI had to intervene in the market to sell dollars in order to prevent volatility in the exchange rate.
The same story was repeated during the so-called Taper Tantrum triggered by a statement in May 2013 by Ben Bernanke, then chairman of the US Federal Reserve, that they were considering gradually tapering their asset purchase programme, popularly known as ‘quantitative easing’. That the Federal Reserve would unwind its unconventional monetary policy once financial markets started stabilizing was known from the beginning. Nevertheless, global financial markets were shaken by the Bernanke statement setting off the Taper Tantrum.
Amidst the ensuing fear and panic, emerging markets, including India, experienced capital flight. The rupee tumbled, depreciating by as much as 17 per cent in just a little over three months, forcing the RBI once again to mount a fierce exchange rate defence.7
Managing exchange rate volatility caused by capital flow volatility is always a complex and costly challenge. Emerging market economies have tried a variety of options—capital controls, foreign exchange intervention and, on occasion, even monetary policy. But experience showed that no option is benign.
On capital controls, for example, there are always questions about what type of controls, when and indeed whether they will be effective. Similarly, when it comes to foreign exchange intervention, a central bank is concerned about maintaining its credibility since a failed defence of the exchange rate can be worse than no defence at all. If the exchange rate does not correct in spite of intervention, the central bank runs the risk of hitting a tipping point when it forfeits market confidence and the exchange rate goes into a free fall. This explains why central banks are always anxious to ensure that they have sufficient ammunition by way of foreign exchange reserves to counter any threat to exchange rate stability.
Global Cooperation to Manage Globalization
Volatile capital flows are a characteristic of globalization—in particular, a consequence of spillover from the advanced economy central bank policies into emerging market economies. Quite understandably, this is a contentious issue that has regularly figured in international meetings such as those of the IMF and the G20.
The consistent refrain of emerging markets at these meetings would be that the unconventional monetary policies of advanced e
conomies are taking a heavy toll on their economies and that advanced economies must factor in this spillover impact in formulating their domestic policies. They argue that these cross-border capital flows are a consequence of globalization—maintaining open borders for trade and finance. Both sides, advanced and emerging economies, benefit from globalization and so they also must share the costs of globalization; it is unfair to leave the entire burden of adjustment to emerging markets.
Advanced economies, led by the United States, have largely been dismissive of these grievances. Their main response would be that their policies are driven entirely by the need to stimulate their domestic economies, and the argument that it is a cover for deliberately debasing their currencies for export advantage is vacuous. They would not deny the existence of the spillover impact but would argue that such spillover is an inevitable by-product of their policy effort to revive their domestic economies. Moreover, the argument goes, revival of advanced economies is an international public good inasmuch as emerging markets too benefit from such revival through increased demand for their exports. Their response would typically end with advice to emerging markets that they should set their own houses in order to cope with the forces of globalization rather than find a scapegoat in the domestic policies of advanced economies.
This has largely been a dialogue of the deaf. Global problems require global coordination; but in a world divided by nation states, there is no constituency of the global optimal. Consequently, emerging markets have had to fall back on their efforts to manage the negative impact of globalization, especially the macroeconomic instability caused by volatile capital flows. India has been in the forefront of putting across the case of all emerging market economies.8
Managing the Costs and Benefits of Globalization—India’s Agenda
The above synopsis defines the task clearly: what should India do to maximize the benefit-cost ratio of globalization. Here is a five-point template in that regard.
Keep the fiscal and current account deficits in check: Both in 1991 when we had a severe balance of payments crisis and in 2013 when we had a near crisis, the root cause was the ‘twin deficit’ problem—unrestrained fiscal profligacy spilling over into the external sector9 pushing the current account deficit beyond sustainable limits. On the fiscal side, it is becoming increasingly clear that it is not enough if the Central government puts its fiscal house in order but the states too must do so, because what matters for macroeconomic purposes is the combined deficit of the general government.
Maintain macroeconomic stability: The objective is to manage the basic macro parameters—interest rate, inflation rate and exchange rate—in such a way as to drive rapid and sustained growth consistent with low and steady inflation. This requires, in particular, managing the ‘impossible trinity’ which asserts that a country cannot simultaneously maintain all three policy goals of free capital flows, a fixed exchange rate and an independent monetary policy.10 As an emerging economy steadily integrating with the world, India should manage the impossibly trinity flexibly and predictably to preserve macroeconomic stability.
Keep financial stability always on the radar screen: A big lesson of the global financial crisis was that financial instability anywhere was a threat to financial stability everywhere. The crisis held out many other lessons as well. Steady growth and macroeconomic stability does not guarantee financial stability; indeed an extended period of stability can itself sow the seeds of instability. Moreover, the financial system can contain pressure for longer than we think possible and as a result, when the inevitable implosion takes place, it can be quite disastrous, even catastrophic. The challenge for regulators is to ensure that the systemic risk is within acceptable limits without choking growth and innovation.
Improve productivity: The importance of improving productivity in order to be competitive in the world is obvious and India’s agenda in this regard is huge—improve education and health outcomes, reduce gender gaps, improve skills and infrastructure and most of all create an environment and establish a regulatory framework that fosters innovation.
Improve ease of doing business: One of the prime motivations for globalization is to attract foreign investment. The frustration and harassment that investors face in implementing projects in India is now the stuff of folklore. While India has now improved its rank to 100 out of 189 countries in the World Bank’s ranking by way of ‘ease of doing business’, it still has a long way to go in making the country an attractive place for doing business. Empirical evidence shows that countries gain as much as one percentage point of growth when they move up fifty places in the ease of doing business ranking. Here again the agenda is huge and obvious; the challenge lies in implementation.
Globalization—a Double-Edged Sword
Globalization is a double-edged sword. It offers immense opportunities but also poses harsh challenges, making it tempting for emerging markets to believe that they would be better off withdrawing from globalization. That would be throwing away the baby with the bathwater—exactly the wrong response. Managing globalization boils down to keeping borders largely open for flows of goods and services, and keeping borders only cautiously open for financial flows. The challenge for India, as indeed for all emerging economies, is to manage this balance in such a way as to maximize the benefit-cost ratio.
III
India’s Elections and Electoral Reforms at Seventy
S.Y. Quraishi
A thriving and vibrant electoral democracy has been India’s distinct and durable identity, long before it asserted itself as an economic, nuclear or information technology (IT) major. This institution, which was founded by our freedom fighters and makers of the Constitution, has been nurtured by the Parliament, judiciary, political parties, media and above all by the people of India, with some distinct contribution from the Election Commission of India (ECI).
Despite doubts and fears from many quarters, the founders of modern India adopted universal adult suffrage from day one, thus reposing faith in the wisdom of the common Indian to elect his/her representative to the seats of power. The choice of electoral democracy was variously termed: ‘a giant leap forward’, ‘a bold enterprise’, ‘an unparalleled adventure’. The common people in India were politically empowered to vote at a time when 84 per cent of Indians were illiterate and poor, living in an unequal society fractured by a caste-based hierarchical system.1 The poor masses of India had voted in many elections before Switzerland allowed its women to vote in 1971 and Australia did so for its aborigines in 1967. The United Kingdom, the ‘mother’ of modern democracies, granted equal voting rights to women only in 1932, about 100 years after its first elections. On the other hand, the United States of America had its first presidential elections in 1789, but its women had to wait till 1920, till the nineteenth amendment of the Constitution, before being able to vote. France and Italy did so only in 1944 and 1945 respectively. Indeed, in this regard it is worth iterating Nobel laureate Amartya Sen—‘A country does not become fit for democracy, it becomes fit through democracy.’2
Over the past sixty-seven years, the Election Commission has delivered sixteen elections to the Lok Sabha and over 400 elections to state legislative assemblies and has facilitated peaceful, orderly and democratic transfer of power. In India, the rise of leaders belonging to the marginalized sections of the society, farmers, women and minorities to head national and state governments, and to other important Constitutional positions has been a direct outcome of the practice of electoral democracy. Heterogeneity of political parties and multiple instances of government formation through coalition of different political parties reflect a bouquet of diverse aspirations. The upward trend of participation of women, backward castes, tribal communities and the economically marginal in India’s politics and governance can be traced to elections. It is a matter of pride and satisfaction that secular India has had Muslim and Dalit presidents and vice-presidents, a Sikh prime minister and a Christian defence minister.
India
is large, perhaps ‘extra-large’, in many respects, but the significance of its size would not dawn upon many without some elaboration. There were around 835 million electors on the electoral roll of India, as on 1 January 2014, which is more than the voting population of every continent. The elections to the Indian Parliament held in 2014 were described as the biggest management event in the world involving 835 million voters, 932,000 polling stations, 1.18 million electronic voting machines (EVMs) and 11 million polling personnel. While these are the statistics for the general elections to the Lok Sabha, corresponding statistics for many state elections would exceed those for national elections in several countries.
India’s mind-boggling electoral statistics should not obliterate the painstaking administrative efforts for reaching voters. Some of these are remarkable, like having a stand-alone polling station for a lone voter from the Gir Forest area in the state of Gujarat, and twelve electoral staff trekking forty-five kilometres in knee-deep snow to reach a polling station for only thirty-seven voters in the Ladakh region in the Himalayas. All modes of transportation, including elephants, camels, boats, bicycles, helicopters, trains and aeroplanes have been used to move men and material during Indian elections.
India is a country of great diversities, be it geographical—deserts, mountains, plains, forests, islands, coastal areas—or in being multireligious, multicultural, multilingual and multi-ethnic. It has been a great challenge for the Indian state to meet the demands of this diversity. Equally difficult have been the challenges of fighting terrorism, external and internal security threats, adjusting to the impact of economic globalization and the rapidly rising expectations of an information-savvy, growing middle class. It is a daunting task to ensure the neutrality and credibility of elections for all stakeholders amidst conflicting claims, particularly when each political actor in a multiparty parliamentary system devotes full energy and prime time to demonstrating the inability of other parties to govern. And the methods used in this respect are not always above board. It, therefore, becomes the key responsibility of the election management body to deliver free, fair, transparent and peaceful elections, ensuring inclusiveness and participation. Indian elections are invariably marked by rivalry and revelry, serious and melodramatic campaigns, adherence and violation of codes but, finally, by happy acceptance of the verdict.