The Web


Home > Business > Columnists > Guest Column > T C A Srinivasa-Raghavan

How many economists do we need?

July 19, 2003

Finance Minister Jaswant Singh has drawn criticism for saying that India's foreign exchange reserves will cross $100 billion by the end of the year.

Some of these dollars, it has been unctuously pointed out, will come at a cost in the form of the difference between Indian and US interest rates, so what's there to crow about?

On a narrow view, this is no doubt right. Indeed, that is why the cap on NRE deposits has been fixed and that is a good management decision.

The problem, however, is that if you add up all the narrow views at hand -- and I give several below -- what you get is not the broad view, but just another narrow view. More than anything else, it is this that has brought economics a bad name and economists disrepute.

Thus, take the way the economists are beating their breasts about the ever-increasing level of foreign exchange reserves. You'd think that some grave policy error is being made.

They seem to miss the point totally that there is no such thing as an optimum level of reserves because if there were, it would just be a re-statement of the old Marxist principle of 'to each according to his need', with the need being determined by some imaginary yardstick -- that too in an external agency.

The notion of optimality, clearly, should not be extended to assets because that way lies the end of choice and utility, the two cornerstones of economics.

Also -- though economists are unlikely to appreciate this point -- much of India's newfound confidence comes from its altered status from a pauper to a player. There is nothing like a bit of money to puff the chest out. It provides much-needed room for manoeuvre.

Nor is it just on foreign exchange reserves that economists have been taking the narrowest possible view. On the food grains surplus, too, there has been considerable anguish.

Thus, if the interest rate differential is blamed for the surplus of foreign exchange, the minimum support price system is blamed for the 60-odd million tonne stock of grains.

The cost of holding so much stock is crippling the exchequer, they say, so they are exhorting the government to neither a procurer nor a hoarder be.

I can appreciate concern about the management issues in respect of the Food Corporation of India but, really, little else. What value would you put on the fact that in spite of the very poor monsoon last year, inflation stayed low precisely because of these high stocks?

It could be argued that the same result can be achieved with a smaller stock but that is a management, not a policy, issue.

Other subsidies, too, are attacked, quite unmindful of two things. First, the original case against subsidies was made not by economists but by the Republican Party in the US because its fatcat members and supporters had to pay for them.

Charity was OK for them but it had to be through the Church and not the State. Just read the 1930s literature on it (that is, after Roosevelt began his welfare programmes under the New Deal) and you will see what I am talking about.

Second, subsidies are not a fit subject for economics anyway because they are tools of social and political stabilisation that governments simply have to use if they want to keep the boat steady.

The alternative is repression of the sort you find in China. Only if you don't attach any value to social and political stabilisation would you be against subsidies. Targeting is a different issue, concerned with the management of subsidies.

Likewise, the system of reservation for small-scale industry (SSI) has been criticised for so long that it has become as much an article of faith among economists as the Ram temple is to the VHP. 

If China does better than in India in manufacturing, employment and exports, it is said that it is only because we have SSI reservations and China doesn't.

No one mentions that you don't have trade unions, either, in China nor, indeed, even the right to dream of them. (Personally, I believe that given our recalcitrant trade unionism, SSIs are a nice way out of the problem. They don't have unions). This does not mean that SSI reservation should be there forever. But it does mean that it serves a purpose.

India's labour laws are also a favourite target of economists. Firms should be allowed to hire and fire at will, they say because a flexible labour market is what increases the efficiency of capital.

This is unexceptionable in a capital-scarce country like ours but would someone tell me in which country in the world except China does labour not enjoy such protection?

I don't think economists really appreciate the issue that lies at the heart of the protection that countries offer to labour. Contrary to popular belief, it has very little to do with votes.

Instead, it is the much larger concern that a passive participant, namely labour, should not be made to pay for the mistakes of the active participant, the management.

I know this argument can be stretched too far, as it often is. But again the issue is one of management, not of principle.

There is then the mother of all issues, the fiscal deficit. I have argued extensively that, first, the thing doesn't matter very much; two, that there is no magic figure like 3 or 3.5 per cent of GDP at which it needs to be pegged; and three, most crucially, that it became the most important thing only in the 1980s because the IMF, as a guardian of Western financial capital, needed to protect the money bags who had invested in foreign currencies from devaluation.

China runs a huge fiscal deficit, but since it offers a fixed exchange rate, no one cares. India has a flexible rate so the fiscal deficit is a big issue. Believe me, if tomorrow China were to make its exchange rate flexible, the IMF (at the level it matters) will get very upset and worried with it. Likewise, if India were to offer a fixed exchange rate, the IMF would forget about our fiscal deficit.

I have therefore concluded that by poking their noses into things that are way beyond their competence to comprehend, and given their uni-dimensional view, economists tend to spread despondency.

It cannot be a coincidence that countries low on self-esteem also have a surfeit in the subset consisting of economists pronouncing on public policy.

Whence the question: what is the optimum number of economists a country should have?

Powered by

Article Tools

Email this Article

Printer-Friendly Format

Letter to the Editor

Related Stories

IMF selects India member of FTP

RIB payout to cut forex reserves

More Guest Columns

Copyright © 2003 India Limited. All Rights Reserved.