First published in Mint Sep 4, 2013

The Indian economy has witnessed a fall across the board—be it gross domestic product (GDP), fiscal deficit, current account deficit (CAD), inflation, interest rates or corporate earnings. And so have the capital markets—from equities and commodities to the rupee. There are four key factors that have led to the fall. While I hold global factors to be 40% responsible for our situation, domestic factors contribute for the remaining 60%.

Global events

The quantitative easing by the US after the 2008 crash clearly benefited emerging markets—easy money came into the equity and commodity markets even though the fundamentals of the economy largely remained the same. This eventually wreaked havoc on interest rates, inflation, forex rate and hence on the real economy and the battering of the equity markets was a logical fallout.

The slowdown in Europe has hit the revenues of companies exporting to these countries. The US itself had slowed down till 2011. To that extent, the real Indian economy got hit. However, the easy money coming in to “better” markets like India kept the equity markets propped up. At that time, no one was complaining on why the markets are so high without an accompanying change in the fundamentals?

Besides, the situation in Syria, Iran, Egypt and Libya have a straight impact on the price of crude oil. With oil prices increasing, our import bill and CAD widen further.

Inefficient domestic policy

We have been guilty of not pushing ourselves on economic reforms, cleaning up the system, correcting EX-IM (export-import) balance during the 2009-2011 period (when our economy was growing faster than that of western countries). There’s no better time to repair the roof than when the sun is shining bright. These actions are part of the basic job of any responsible government and our government has fared miserably.

Perhaps, the government thought that populist measures can be repeated (like NREGA helped it win the 2009 elections) and nothing needs to be done on reforms and cleaning up the system. The passing of the Food Security Bill in such haste is a case in point—it could have waited for another six to nine months till Aadhar and other enabling infrastructure could have become more stable. Also, fuel and fertilizer subsidy is more damaging in terms of quantum. In fact, most arm-chair analysts criticizing the food security subsidy must be driving in their diesel cars, contributing to the burgeoning fuel subsidy.

Obstruction from enablers

Since September 2012, when P. Chidambaram became the finance minister again, the government has been trying to salvage the economy, but now the other pillars of our democratic system has started coming in the way—the parliamentary opposition, media, judiciary and the central vigilance commission or CVC. These institutions refused to play ball with the government and after three-four years of requesting/pushing the government to act responsibly, their frustration is not completely unfounded.

Series of scams

That brings me to the last point—series of scams and in general moral degradation—which is one of the most destructive long-term internal factors. While economic course correction can be done through a series of measures, moral course correction can take an entire generation. Kaushik Basu, in a speech this week, actually cited this as a bigger issue than “these short-term economic issues”. At some point of time, we forgot the positive lessons from the great entrepreneurship model of the 1990s. Newer companies which have grown fast in the 2000s are all in rent-heavy industries like power, mining, coal, real estate, telecoms—politicians and bureaucrats are talking about personal incomes in billion dollars. With 22% people not having even one square meal a day, these people need to have specially armoured skins to be able to sleep straight at nights.