PM's woods, FM's trees (Human capital is a serious problem with India)

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 PM's woods, FM's trees (Human capital is a serious problem with India)

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• PM and the FM: While the prime minister offers the big, macro picture for economic rejuvenation, the finance minister has to offer the details. The macro woods and micro trees have to complement each other.
• Comparing 2020 to 1991: In 1991, four policy statements were made - (a) end of licence-permit raj, (b) steep cuts in fiscal deficit, (c) steep cuts in tariffs, and (d) devaluation of the Rupee. The economy was pulled out of its troubles and a new growth path was charted. How was that possible? Because a genuine economic vision existed, not just political rhetoric. India needs that today (in 2020).
• 2020 Vision Statement: There were four aspects -

1. Public spending and investment - to promote welfare and raise investment rates
2. Policy reforms - to make domestic economy more globally competitive
3. Long-term structural shift - to make the economy self-reliant and less dependent on world economy
4. Lockdown Model 4 - about to arrive!

• Next step: Investors will take time to observe how the actual execution happens at ground level, by both Central and state governments. The sheer commitment of political leadership has to kick in now.
• What went wrong: Modi started 2014 with a big bang promise of reforms, and quickly lost his way. The 2019 term started with pure political and social agendas, not economic ones. That, despite the fact that economy was in a serious crisis. If today, in 2020, Modi has realised that instead of divisive social agendas he needs to focus on economy, he still may pull it off.
• Self-reliance mantra: All political parties have loved this mantra of self-dependence, and there's nothing new about it. Modi further added that his formula does not include isolationism and inward-orientation. All he wants is less dependence on other nations.
• "Dependency School": The Latin American dependency school advocated greater self-reliance for developing economies. It said that "dependence is a situation where a country's economy is conditioned by the development of another country's economy"! No nation should allow its economy to be dictated by another. Is India dependent on anyone else?
• India's dependencies: India is dependent on others on four fronts, and govt. has not indicated anything on these so far.

1. Oil and gas: India imports oil and gas in large volumes. India will remain import-dependent for a long time, irrespective of the renewable energy trends. Good news is that it's a buyers' market now.
2. Foreign exchange inflows: Financial flows into capital markets (from US) and remittances inflows (from Gulf and US) impact India. This dependence is very deep, and India is seeking more FDI and debt now, not less.
3. Imported defence equipment: We import large quantities from Russia, US, France, and Israel.
4. Electronic goods and pharma: Large quantities come in from China. This is the only area of focus of Modi govt. till date.

• Deng's China: He had proven that for a large economy, it was possible to be both globally competitive as well as self-reliant.

1. Trade by itself doesn't harm if a nation can grow both exports and imports
2. What China did was to use trade as a geopolitical tool and by making its trade partners dependent on it for both exports and imports!
3. Export dependence can make large economies also vulnerable. President Donald Trump's trade war seeks to use the Chinese dependence on exports to US, to weaken China.

• Message for India: India can bring in some companies exiting China for sure, but that will increase India's exports dependence as they will come here to export (to US and elsewhere). The only formula for India is to ensure that it invests heavily in human capital and R&D.
• Summary : The new formula of self-dependence is a good one, but will need a new approach of human capital development and R&D to succeed.

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