It was sometime in the mid-1970s that the late Malcolm Adiseshiah started presenting his mid-year review of the Indian economy. The idea was to see if correctives were needed, and if so which ones.
The government used to take him very seriously in those days, partly because of his reputation for objectivity and partly because of the wide exposure his review received.
Depending on who was organising the event, it would be hugely or poorly attended. The first one I attended was in November 1981.
It had been organised by Assocham, then still a force to reckon with. Ficci was in a bit of disarray. The internal squabbles that would haunt it through the 1980s were just starting. And CII had not even been dreamt of, let alone conceived.
The huge hall at the Taj Hotel (there was no Taj Palace then) was overflowing. A few years later, when the IIC organised it, not even Committee Room 1 could be filled.
Now, to its credit, it must be said that it manages to fill Committee Room 2, which is about a third larger.
This is very creditable because the success of the Adiseshiah model has spawned a large number of copycats and clones.
In October, there were as many as four such reviews. Even the government puts out a mid-year review. Perhaps, in its overall drive to raise productivity, it has begun targeting the chief economic advisor also.
The RBI, Crisil, Icra, CMIE, NCAER, have all joined the game now. Only NCAER, to the best of my knowledge, uses a proper forecasting model for growth projections.
The others just wing it. But it doesn't seem to make much difference. The projections are all roughly the same.
Far more importantly, given how rotten the data is, everyone knows that these projections are unlikely to stand the test of time. Indeed, in some ways, the only differentiator is the quality of the lunch provided -- and IIC doesn't even do that.
This year's mid-year review for it, like last year's, was prepared by NCAER (I was closely associated with it). Suman Bery presented it.
Along the way, someone raised an anguished question: how come India with its huge fiscal deficit had neither a balance of payments problem nor inflation? The textbooks on macroeconomics tell us that it should have one or the other?
Well, folks, the answer is simple. The textbooks are wrong. Macroeconomic theory assumes, rather like religions, that it is inter-temporally valid and is therefore completely context-insensitive.
It also relies on a logic that is basically tautological. Not content, it then employs induction instead of deduction as a tool of reasoning.
Almost by definition, then, it cannot have inter-temporal validity because that is precisely what religions do as well. The gates of ijtehad must never be closed, for that way lies disaster. But macroeconomics does precisely that.
I had argued some of this in a series of four articles on macroeconomics last December, from which I quote: "Macroeconomic theory, because of its tautological aspect, says that a high budget deficit will lead to one of two things: high inflation or a balance of payments (BoP) crisis."
"India has a very high deficit but neither inflation nor a BoP crisis is in the offing. So why on earth is the finance minister being asked to cut government spending? The efficiency of government spending, of course, is a different matter. That does need to be improved."
"But cut spending when no one else is spending? That too during a slump in industrial production...? The absence of a strong logical foundation has resulted in macroeconomics becoming a set of rituals conducted by a set of mumbo-jumbo chanting purohits."
The link between interest rates and investment is also exaggerated. Interest rates matter more for corporate profits than for investment. And profits do not necessarily mean new investment, which depends on many other things.
That is why investment boomed in 1993-96 in spite of very high interest rates.
That is why it is sagging now in spite of low interest rates. (It seems there is a flood of IPOs coming but which brave soul will link them directly and only to the drop in interest rates?)
For what it's worth, here is my explanation why, despite the huge fiscal deficit, there is neither a BoP problem nor inflation.
Inflation is low because of the oldest reason on earth: enough is being produced in the country, mostly in the unorganised sector using low technology and little capital.
This has put demand and supply to be roughly in balance. This is why the inflation is always agriculture induced these days.
And there is no pressure on foreign exchange because although there is a lot of low value addition going on, it has very little import content.
In other words, India is leveraging its domestic market just as China leveraged the export market -- at the low end. The difference is that whereas China's exports get recorded, informal sector production in India doesn't.
Economists, with their ostrich-like obsession with the observable, miss the informal sector because it is not observable, except perhaps from the stolen electricity.
But the truth is that nearly half the manufacturing activity in India goes unrecorded and untaxed except by corrupt government officials.
It caters to the highly segmented Indian market -- there is always something for everyone, even the BPL types.
The industrial wage-goods gap that used to worry Sukhamoy Chakravarti so much when he was writing the Fourth Plan has disappeared. But since quality is poor, these goods are not tradable.
The difference between India and China is that it observes minimum standards and trades with the world; we do neither. We too have scale but it is not consolidated.
All these little producers -- and there are a few score million of them -- access credit informally because the banks will not lend to them. Mostly, it is loans from within the family. It is on easy terms, usually an unwritten guarantee to contribute to a joint family.
It is rolled over easily. It is these producers who are responsible for the low inflation rate and the low demand for foreign exchange. But since official data cannot see them, India continues to have a low rate of industrial growth and GDP.
What should be done? I would urge my dear old friend Ashok Lahiri to fund a survey of the informal sector. If he asks nicely enough NCAER might agree to conduct it. It is the only research outfit with an in-house survey staff. That, indeed, was why it was set up.
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