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Invisible hand of market at work to rescue Indian economy

Source : REUTERS
Last Updated: Mon, Oct 21, 2013 10:10 hrs
Indian currency notes are stapled to form a garland in Srinagar

India's economic situation is at least grave, if not exactly in dire straits. Growth is at a decadal low, consumer inflation is persistently high, jobs have never been as scarce, the currency is weak and the investment cycle is showing no signs of revival. Many of these problems are a result of bad policy and global economic conditions, but several are also the outcome of a natural economic cycle.

The Indian economy has developed several imbalances over the years as a result of bad policy and the usual cyclical fluctuations. The corporate sector went on an investment binge between 2005 and 2012 and is now saddled with significant amounts of excess capacity in several core sectors. The government itself went overboard with spending, first in 2009-2010 with the stimulus in response to the global financial crisis and then with its various populist programmes.



The result of these excesses is most obviously visible in the high current account deficit, retail inflation and property prices. After remaining in the 1 - 3 percent range for most of the last decade, the current account deficit rose to a high of over 6 percent of GDP in December. Consumer inflation too has remained above 9 percent ever since the stimulus began. And despite a weak jobs market and a slowing economy, property prices across the country kept rising till early 2012 and are still rising in some parts.

What we are seeing since is in some way a process of self-correction to the excesses of the past. Free market economic systems are to a large extent inherently self-correcting, making them superior to centrally driven economic systems. Slower growth, depreciating currency, falling consumption and low investments are all responses of a free economy to the excesses of the past. The invisible hand of the market is at work.

The depreciation of currency will help neutralize the loss of productivity from years of high inflation. Slower growth is reducing the high consumption that had expanded the current account deficit of the country to unsustainable levels. Similarly, the slowdown in the investment cycle is the corporate sector reacting to the excess capacity in the system, which will help improve utilizations and hence return on investment over time.

However, we can't depend on the self-correcting mechanisms alone since that could take far too long and inflict excessive pain. The government can and should play a role in making the process faster by undertaking economic reforms and also reducing the impact on citizens by way of selective welfare intervention.

At the same time, when evaluating the current economic and investment environment, we need to recognize that irrespective of what the government does or does not do, the invisible hand will aid self-healing and bring economic growth to its long-term trajectory. India's economic growth has averaged 6.5 percent for the last 33 years. The structural factors driving this growth have, if anything, become more favourable today than in the past. I have no doubt that the invisible hand of Mr. Market will take us back in some time.

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