Imagine would India be a global ITeS superpower without the Y2K problem or technology (dotcom) bubble during the late 1990s having created a huge demand for trained and semi-trained IT professionals? Would we invest huge capital in building so many houses, roads, malls, power plants, steel plants and cement plants during 2003-2013 but for a global credit bubble that made the global capital accessible to all? Would capital be so easily and cheaply available to Indian entrepreneurs without a QE bubble in the West post the global financial crisis?
The answer arguably is "No".
From my negligible knowledge of the laws of physics, I understand that we need much less force to push an object down from a cliff. Some extra force would be needed to stop the object that is slithering down on a slope. But we would need significantly greater force to reverse the direction of a falling object and make it climb upwards again.
In the economic context, I refer to this extra force, needed to reverse the direction of a decelerating economy, as a 'bubble'. These bubbles are needed to neutralise the gravitational forces of unemployment, pessimism, poor demand, excessive indebtedness, deflation and poor fiscal health that work to pull the economy down into recession.
In the present Indian economic context, there could be arguments that the economy is not decelerating; it is just growing at a slower pace as compared to the average growth rate of the past two decades. Hence, usual acceleration methods like monetary easing and small fiscal incentives are sufficient to accelerate the pace of the economy.
We need a high growth rate
I would however strongly disagree with this argument. In my view, the present condition of the Indian economy is like a One Day International cricket match in which India needs to score at 9 runs per over for the next 20 overs to win the match. Scoring at 6 runs per over may be a good run rate from a historical perspective, but it is totally insufficient for winning this match. Each over in which less than 9 runs is scored takes the required run rate from the remaining overs higher, diminishing the chances of victory.
Given the present demographic characteristics of India, we need a high growth of 9-10 percent for the next 20 years to generate enough employment opportunities for the youth joining the workforce every year. A year of slow growth means millions of youth will lose appropriate employment opportunity since next year they will be pushed back by the next lot of youth joining the workforce. These youth who do not get the employment opportunity at the right time shall remain unemployed or underemployed perhaps for their entire life.
Moreover, the current economic data indicates that more than half the Indian population may be facing severe stagflationary conditions. The wages for a large part of the population are either stagnant or falling, while the cost of living continues to climb higher. For example, the rickshaw ride from the nearest metro station to my place has been costing Rs 20 for the past 5years, whereas the cost of living for rickshaw pullers has climbed higher. A large auto ancillary management confessed to me last month that they had to choose between material layoff or wage cut; and they have opted for 15-20 percent wage cut.
Non-conventional measures necessary
In my view, therefore, we need to accept the current economic slowdown as material deceleration, warranting non-conventional measures that would create extra force (bubble) to accelerate the growth rate to the required 9-10 percent.
Historically, Indian governments have used the force of bubbles rather reluctantly; though we have always participated in global bubbles, e.g., commodities bubble in the early 1990s; dot com bubble in late 1990s or credit bubble in mid-2000s.
The Atal Bihari Vajpayee-led NDA government did make a reluctant attempt to create a domestic bubble to fight the global economic sanctions post-1998 nuclear tests by large scale investments in infrastructure sector, especially roads and energy. In the process, many government monopolies like coal, oil and gas, E&P, telecom, roads, power, airports and ports were divested to the private sector. The bubble did get support from easy global liquidity post dotcom bubble burst and led to supernormal economic growth during the 2003-08 periods. However, the reluctance of subsequent governments in keeping the bubble afloat caused disastrous consequences in terms of a humongous pile of bad credit assets for the financial sector. It is pertinent to note that in this very period (2009-2019), the western counterparts like US Federal Reserve (Fed) and European Central Bank (ECB) et. al. have successfully used the bubble of abundant liquidity and zero rates to bring back their own financial sectors and troubled peripheral European economies from the brink of disaster.
In my view, if the incumbent government wants to reverse the direction of the current economic cycle sustainably, it must urgently consider creating a massive bubble. I could think the following ideas for creating this bubble:
What the govt should do
(1) Initiate some ostensibly egregious construction project like Taj Mahal or Fatehpur Sikri. A statue of Sardar Patel or Bullet Train is not enough. Consider something like the following:
Model the cities of Ayodhya, Kashi and Vrindvan on examples of Mecca, Vatican City and Jerusalem etc could help. Make a large international airport there. Connect Ayodhya and Kashi with Lucknow and Vrindvan with Delhi through bullet trains. Construct international spiritual and yoga universities. Develop the riverfronts. Make 20-25 luxury hotels in each city and prepare a Yatra calendar (like Haj) for pilgrims and tourists from across the world.
Convert an island like Diu into a city like Macau or Las Vegas. Make it a duty-free zone where most of the Indian laws do not apply.
(2) Include direct taxes to the concurrent list. Charge 10 percent as central income and corporate tax (with no exemption or deduction) and allow the states to make their own direct tax laws and fix rates accordingly.
(3) Abolish all restrictions on FDI in productive activities subject to each million dollar of FDI creating at least 2 new direct new jobs.
(4) Bring an amnesty scheme for gold. Issue 7-year zero-interest bonds against undeclared gold deposits. Leverage the gold so deposited 5x by issuing gold ETFs against such gold. Use the proceeds to finance the development projects.
(5) Create holding companies for energy sector (IOC, BPCL, HPCL, ONGC, GAIL, Coal India, NTPC etc.), financial sector (banks, insurance and financial institutions), engineering and construction sector (BHEL, BEL, EIL, NBCC, NHAI etc.) and services sector (telecom, aviation, railways, power and water distribution and space transportation) and divest 51-74 percent in these holding companies.
(6) Allow large corporates to partner with farmers' cooperatives for collective farming of cash crops.
Vijay Kumar Gaba explores the treasure you know as India, and shares his experiences and observations about social, economic and cultural events and conditions. He contributes his pennies to the society as Director, Equal India Foundation. The views are personal. Read his columns