Monday, May 18, 2009
A contrarian view of the Indian Economy
I just got back from a trip to India and I spent a lot of time with my grandfather who shared his ideas and ideals with me. It interested me immensely as it seemed to be a totally contrarian view of the Indian economy that what was taught to me at Business School or prescribed by the Management Gurus and Economists of the day...
Firstly, he attacked the concept being sold by most of our politicians and economists including the then Finance minister, Mr.P.Chidambaram that Indians should be instigated and motivated towards spending in order to see a revival of the economy in these recessionary times. He believes that this is a wrong policy to be advocated for India as India has primarily been an economy driven by savings. Of course, spending has increased over the years, but Indians have mostly been thought to save. Even as I grew up, my mother and grandparents told me time and again that every rupee saved goes a long way in the future and encouraged us to be both penny and pound wise. It was drilled into us to save from a very young age right from the time when we were given our first piggy bank and encouraged to put in every single rupee we could save into this. When the piggy bank filled up, it was a ceremony of sorts at home where it would be broken to take out the savings, counted and then deposited in a bank for us. A new piggy bank would return to take the place of the old one.
Further, he also said that it was a known fact that India was an agriculture based economy and pushing an Industrial Revolution in the country without giving Agriculture the support it needed would only skew the economy to look polished on the outside leaving the rusted portions hidden temporarily. Most of India's Finance ministers and Economists such as Manmohan Singh or Chidambaram or even the late Jawaharlal Nehru have been educated in the west where they have been taught that Industries need to grow for the economy to grow and Consumption should increase to show economic growth. What these people are forgetting is that India is an Agriculture based economy and Indians are taught to save and can't be made to spend money very easily. I agree that this is changing in the urban areas where young people are flush with money and their disposable incomes are high but when you go to the rural areas, people still would think before each additional rupee that they earn is to be saved rather than spent. It is also only in India that people think of saving for their children and their grandchildren. Saving in western nations are primarily to take care of themselves in their old age but is not the same case in India. Families save for generations below them and accumulate wealth in the form of gold and land. Thus, the western school of thought is not pertinent to a country like India where economic growth can be a direct function of spending. Thus, instead of reducing interest rates to tempt Indians to save, the government should spend money to develop agriculture and the rural areas in order to spur the economy.
If the government were to spend towards developing roads and other infrastructure in the villages and towns and even consider moving major educational institutes into these rural areas this would set off a multiplier effect in these rural areas leading to fast development of rural India. This would be in the line of the Gandhian school of thought now christened "Gandhian economics" where he advocated a scattered economy for India.
Much of India's prosperity today is concentrated in Urban Industrial centres and this has led to the rich getting richer and the poor getting poorer. We still hear of Farmer suicides when newspapers and televisions are reporting the fast growing economic might of India.
My grandfather advocates that growth should be stimulated from the rural areas and there is no better time than now when there is a global recession. Let most of the stimulus be in the rural areas and develop the infrastructure there and push educational institutes from the cities into rural areas as this would be the key factor in setting the multiplier into play. Once the infrastructure has been developed and education has been setup in the rural areas, industries would automatically begin to grow there and there would be jobs created in the rural areas.
I feel this is an interesting perspective on the Indian economy and maybe solutions from Harvard and Porter aren't as pertinent to the Indian economy and our Harvard educated ministers should now re-think their strategies for development.
At the end of the day, what works becomes fine strategy and what doesn't makes for a fine case study!