Will PM explain his volte-face on globalisation?

Prime Minister Dr. Manmohan Singh is indeed a multifaceted personality. True to this definition, the PM has been a wonderful teacher, able administrator, candid advisor, bold reformer and of course a caring leader. Yet, there is another relatively unknown face of the Prime-Minister - his volte-face on globalisation!

To comprehend what has been stated above a reference to the address by Dr. Singh to the nation immediately after assuming the office of the Prime Minister of India in June 2004 is essential.

Outlining the approach to globalisation Dr. Singh opined "We will pursue policies that enable our economy to be better integrated with the world economy without hurting the interests of our people."

Similarly, when asked as to what was the message he would like to give global managers about India, Dr Singh replied in an interview in January 2006. Dr. Singh said "If I have any message, it is that it is our ambition to integrate our country into the evolving global economy. We accept the logic of globalisation. We recognise that globalisation offers us enormous opportunities in the race to leapfrog in development processes."

Personally at that time as it is now, I don't know what Dr Singh meant by "accepting the logic of globalisation." Similarly the logic of leapfrogging development processes defies conventional economics as much as common sense.

As someone put it brilliantly when he said "Development cannot be leapfrogged any more than you can go from being seven years old to being an adult."

Now that the global financial crisis had stuck, the standard reflex action is one volte-face, an instant U turn or a state of complete denial. No wonder, in an interview provided in the first week of October 2008, Dr. Singh labours to explain why and how his government's foremost priority is to insulate the Indian economy "to the maximum possible" extent from the global financial meltdown.

This volte-face by Dr. Singh - from seeking to integrate the Indian economy with the global economy to insulating the Indian economy is indeed a fascinating and compelling story in our economic management.

To understand the compulsion behind this volte-face, an understanding on the issues relating to global capital, its potency and its debilitating impact on national economies caused by its abrupt movements becomes imperative.

Movement of capital is a risky business

If there is one idea in modern history that has captured the imagination of the people across continents it has been the concept of globalisation. To a common man it implied flow of various means of production viz., men, materials, technology and of course capital.

In this model of globalisation, movement of any means of production becomes irrelevant as long as capital moves from one country to the other, facilitated by modern computer technologies, in the process seeking the highest returns.

Movement of men, material and production technology becomes irrelevant as evidenced by the paralysis of the WTO that deals with these factors of production. That would also in a way explain the leapfrogging theory of Dr. Singh.

Readers may note that it is the entry and exit of foreign of capital that causes change in ownership status of domestic firms within a national economy. Further, such movement impacts macroeconomic variables such as money supply, inflation, currency valuation and of course interest rates.

This impact on ownership and macroeconomic variables explains the obsession with free movement of capital.

However, this free flow of capital from one country to the other is often explained by economists as a "logical" and natural consequence of how money would flow to places which maximise rewards and minimise the risks.

This idea of allowing free entry and exit of capital - technically termed by economists as full capital account convertibility - has engaged our policy framers since the early days of our reforms.

In fact, in his dream budget of 1997, the then Finance Minister and the present incumbent Mr. P Chidambaram termed this as his "cherished dream" and proposed to set up a committee to lay a road map for the same.

But the East Asian crisis that followed, the stringent pre-conditions that were prescribed by the Tarapore committee that went into preparing the road map for full capital account convertibility in 1997 and the change of government put paid to such attempts to introduce full capital account convertibility.

Just as one thought that the ghost of CAC was laid to rest by a conspiracy of coincidences, the Prime Minister Dr. Singh threw a bomb shell in March 2006 when he stated "there is merit in moving towards fuller capital account convertibility within a transparent framework.

Our own position, internally and externally, has become far more comfortable. I have requested the Finance Minister and the Reserve Bank to revisit the subject and come out with a roadmap on capital account convertibility based on current realities."

It was once again left to the prudence of RBI and to the sagacious approach of Tarapore again to look into the issues all over again and prescribe a road map for CAC. Interestingly the second report of the Tarapore committee in 2006 revealed that some of its prescriptions and preconditions made out a decade earlier were not met by the government.

Be that as it may, readers may recall that economists are more or less of the view that it is this uninhibited free flow of capital into and outside Asian countries in the early nineties that lead to the East Asian currency crisis in 1997.

Countries like Indonesia and to some extent Thailand are some of those who have not yet recovered from the debilitating impact of same even to this date. Needless to emphasise, the issue of allowing free capital movements is exciting, titillating, captivating or for that matter everything else but a guarantee for economic stability and sustainability.  Yet Dr. Singh ignored those and prescribed the CAC for the nation!

PM and his volte-face

The only limited area where we have allowed greater integration with the global economy has been in our stock markets. As the foreign investors exit India, the rupee slides precipitously, currency markets freeze and the stock markets collapse dramatically - in effect dynamiting the Indian economy completely.

Stock market, it needs to be noted, occupies the outer fringe of our national economy. Yet, given the precarious situation, the Finance Minister is forced to appear before the nation every other day, (in the process earning the sobriquet as Minister for Stock Markets) assuaging the fears of the investors. Simultaneously, RBI goes on tinkering with the macroeconomic policy virtually on a daily basis.

If only the Indian economy were more integrated by allowing more foreign capital, the debilitating impact on the rupee and the overall economy could be well imagined.

Economists largely depend on the willing suspension of disbelief by the rest of us to explain their positions. Dr Singh, the economist, is no exception. Now that they are confronted with the crisis, they believe, some "global" solution would solve the problem in future.

No wonder, speaking in the ASEM (Asia-Europe Meeting) summit in the last week of October 2008 in Beijing on the International Financial Crisis Dr. Singh proposed that "Given the growth in cross-border investment, trade and banking in the last three decades, the world must ponder over the need for a global monitoring authority to promote global supervision and cooperation in the increasingly integrated world in which we live."

In effect, first advocate global movement of capital as a liberal, then diagnose the extant global problem are one arising out of the same and then sagely suggest creating global monitoring authority to supervise movement of global capital as a solution!

What is interesting to note here is that just as Dr. Singh was advocating these ideas in Beijing, across the globe Alan Greenspan, the former Fed reserve Chairman and in a way the father of the present global financial architecture confessed that he "made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders."

In effect, Alan Greenspan concedes what was originally accepted as a virtue arising out of free movement of capital seems to be in reality, a vice. The belief of economists on the power of markets to regulate itself has been shaken like never before. Hence, the suggestion at regulation and a global one at that! After all, old habits die hard.

Nevertheless, the idea of a global regime to regulate global capital is an outlandish thought. It presupposes a global government that issues a global currency through a global order to effectuate the same - an impractical idea even to begin as it would mean end of nation state, local currencies and sovereign government.

Either way, by endorsing free movement of capital (which is highly risky) and as a panacea suggesting a global regulatory mechanism (which is virtually unworkable) and volte-face in between these, Dr Singh owes an explanation to the nation.

PS: Readers may recall that Dr. Singh as a secretary of the South Commission opposed globalisation before he became the finance minister in 1991. Is this volte-face the real face of Dr Singh or the real face of Dr Singh is to practice volte-face?

The author is a Chennai-based Chartered Accountant. Comments can be made at mrv@mrv.net.in