Like in 1991, animal spirits need to be revived

'On every rational count, today’s India is in dramatically better shape than 28 years ago. And yet, animal spirits today reflect doom and gloom as almost never before.

'They will revive only when our perceptions of the future revive,' says Naushad Forbes.

Illustration: Dominic Xavier/Rediff.com

John Maynard Keynes, writing in 1936, said that “most, probably, of our decisions to do something positive... can only be taken as the result of animal spirits -- a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

But do we really have a problem with animal spirits? Why? And what can be done about it?

We have a problem.

Consider two August 15s, 28 years apart: 1991 and 2019. In 1991, the Indian economy was a shadow of what it is today.

We were, then, the 19th poorest country in the world, and the 16th largest.

Our foreign reserves were down to two weeks of imports.

India’s foreign trade had fallen to 0.5 per cent of global trade, down from 2 per cent at Independence.

Indian companies were pygmies by international standards -- the entire market cap of the BSE 100 was $ 45 billion.

The contrast with August 2019 couldn’t be greater.

We are today the world’s seventh-largest economy, and consistently for the last 28 years have been among the world’s 10 fastest-growing economies.

Our foreign reserves are $ 425 billion, nine months’ imports.

A government has just been re-elected with a larger absolute majority of seats than many governments before.

On every rational count, today’s India is in dramatically better shape than 28 years ago.

And yet, animal spirits today reflect doom and gloom as almost never before.

Almost never before. In 1991, Rajiv Gandhi had just been assassinated and the minority Congress government formed in June was widely expected not to last a full term.

The same month, The Economist published a survey of the Indian economy, titled “Caged Tiger”, which began with a damning statement: “Nowhere in the world, not even in the Soviet Union, is the gap between what might have been achieved and what has been achieved as great as it is in India.”

If ever there was a time for depression, this was it.

And yet, within 100 days, everything had changed in animal spirits.

There was a sense in industry that private enterprise would chart India’s future, that our time had finally come.

Within a year, a prolonged investment boom was underway, a new confidence pervaded every board room, and Indian industry -- and with it India -- was set on a great new future.

The rest, as they say, is history -- indeed a history that turned the dire numbers of 1991 into the health of 2019.

The government of 1991 must take much of the credit for the sea-change in sentiment.

Three things turned the tide: A new rhetoric in policy talked reform and India’s global aspiration; this new discourse was backed by profound policy change and structural reform; and a crack team of reformers put international best practice to service.

A brilliant Budget speech on July 24 by Manmohan Singh, then finance minister, heralded a new India:

“The thrust of the reform process would be to increase the efficiency and international competitiveness of industrial production…. It is essential to increase the degree of competition between firms in the domestic market….

"The time has come to expose Indian industry to competition from abroad in a phased manner…. We should welcome, rather than fear, foreign investment…we must restore to the creation of wealth its proper place in the development system.

"For, without it, we cannot remove the stigma of abject poverty, ignorance and disease…. We have also to remove the stumbling blocks from the path of those who are creating wealth….

"At the same time, we have to develop a new attitude towards wealth … the philosophy of trusteeship.”

Dr Singh’s Budget speech must rank amongst the greatest speeches in world history, but it didn’t stop there.

The rhetoric was combined with major structural policy changes.

Industrial licensing, MRTP (Monopolies and Restrictive Trade Practices), and Directorate General of Technical Development (DGTD) were all scrapped, freeing large industry to perform.

The rupee was devalued by over 30 per cent, making imports more expensive and triggering an export boom.

Import duty was slashed, with a promise of more to come until we reached global levels.

And in subsequent years, personal income tax rates were brought down -- from a marginal rate of 50 per cent in 1991 to 30 per cent by 1997.

Dr Singh had ended his speech by quoting Victor Hugo: “No power on earth can stop an idea whose time has come.”

He went on “the emergence of India as a major economic power in the world happens to be one such idea.

"Let the whole world hear it loud and clear. India is now wide awake.”

History -- and the animal spirits of India’s entrepreneurs -- has proved him right.

Now consider Animal Spirits in 2019: “...the pall of despair I detect in Mumbai is real.

"Since the Budget, I have had conversations with a whole range of people, from small shopkeepers to big businessmen, and have not met a single person who said confidently that the future looks bright and hopeful.

"Most said that what worried them was the Budget that the finance minister brought to Parliament (on July 5) in that bright red bag, old-fashioned, Indian-style, indicated to them a return to old-fashioned, Indian-style socialist policies.”

This quote is not from some left-over Congress politician; this is Tavleen Singh, a strong supporter of Prime Minister Narendra Modi.

So, in brief, we have a problem. Why?

It is all a matter of how the reality of today combines with perceptions of the future.

In 1991, a sodden reality was matched, within 100 days of the government being formed, by perceptions of a bright future.

Today, a bright present is blighted by our perception of the future -- Ms Singh’s worry of “a return to old-fashioned, Indian-style socialist policies”.

Our animal spirits will revive only when our perceptions of the future revive.

Naushad Forbes is co-chairman of Forbes Marshall, past president of CII, and chairman of the Centre for Technology, Innovation and Economic Research.