A New Economics for a New World

Editorial of the Day: A New Economics for a New World (The Hindu)

The article is discussing India’s current “poly crisis” such as managing inflation, interest rates, and exchange rates, negotiating trade agreements to protect farmers.

Table of Contents

Context: The article is discussing India’s current “poly crisis” such as managing inflation, interest rates, and exchange rates, negotiating trade agreements to protect farmers’ interests and ensuring secure employment with adequate incomes for all citizens and their associated economic challenges. The article highlights the complexity of these challenges and the lack of a systemic solution as various systems (Ministries and Organisations) work in silos surpassing the requisite coordinated effort that has become a principal cause of social tensions and political conflicts in India.

Background of A New Economics for a New World

India has tackled this poly crisis over the years: Let us have a look at some of the Policy measures that so far handled the downfall:

Managing inflation: India adopted fiscal and monetary policies. Eg: Reserve Bank of India’s (RBI) flexible inflation targeting framework to manage inflation. As of February 2023, India’s inflation rate was 5.7%.
Interest rates: India has a dual interest rate regime, with different interest rates for different types of loans. The RBI regulated interest rates:
- The repo rate, which is the rate at which the RBI lends money to banks, has been reduced to 6.50% in 2022-23, from a high of 8.00% in 2013-14.
Exchange rates: India has adopted a managed floating exchange rate regime, where the value of the rupee is determined by market forces, but the RBI intervenes in the foreign exchange market to smoothen volatility.
- As of February 2022-23, the exchange rate was approximately 82.6 INR per USD.
Protecting farmers’ interests: India has implemented various policies to protect farmers’ interests, such as minimum support prices, crop insurance schemes, and loan waivers. However, these policies have also faced criticism for not reaching the intended beneficiaries effectively.
Ensuring secure employment and adequate incomes:
- Eg: Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and various skill development programs.
- However, unemployment remains a major challenge, with the unemployment rate at 7.5% in February 2022.

Decoding the Editorial

The article specifically mentions disagreements among economists on issues such as central bank independence, prioritizing inflation versus employment, balancing consumer interests versus worker protection in trade agreements, and the impact of rupee depreciation.

Problem with the Current Economic Paradigm: Some of the problems that the current economic paradigm of India faces are:

Linear and Mechanical View:

The current economic paradigm in India is too linear, too mathematical, and too mechanical that assumes that the number of policy instruments must equal the number of policy goals.
This approach justifies the necessity of independent monetary institutions for managing inflation, separate trade and industry specialists, and separate policies for environment management and agriculture.
This approach fails to take into account the complex socio-economic systems that interact with each other.

Separation of Disciplines: Economists have separated themselves from other disciplines which have resulted in a narrow perspective that fails to take into account the broader social, political, and cultural context in which economic decisions are made.
Lack of Human Development: In India, the economists have historically been dismissive of economists who advocate the human development theory of growth.

They argue that the size of the economic pie must be increased before it can be redistributed.
However, this approach fails to recognize that basic human development (education, healthcare, and basic infrastructure) must precede growth because it is the means for sustainable economic growth.

Failure to Understand Complex Systems: The current economic paradigm in India fails to comprehend complex socio-economic systems as it is too simplistic and fails to take into account the interdependencies and feedback loops that exist in complex systems.

Lessons to Learn from Other Nations:

Lessons from China: The article suggests that China’s economy has diversified more successfully compared to India’s, despite both countries opening their markets to global trade around the same time 35 years ago.
- China attracted significantly more foreign investment than India, leading to faster income growth and development of industry and technology (currently a threat to the US).
- However, with wages in China now higher, India has an opportunity to attract global investors and compete with other countries like Vietnam.
Key economic policies and performance indicators of India and China since their respective independence/market-opening reforms:

Category	India	China
Economic Policies
Economic System	Mixed economy with socialist leanings.	Socialist planned economy (1949-1978), then transitioned to a market-based economy with state control of certain sectors.
Liberalization Reforms	1991 economic liberalization (LPG Reforms) reforms opened up economy to foreign investment and reduced government control.	1978 market-oriented reforms introduced private enterprise and foreign investment, reduced state control of agriculture, and established special economic zones
Trade Policy	Protectionist policies until 1991; then shifted to liberalization and integration into global economy	Export-oriented policy focused on attracting foreign investment and expanding exports
Infrastructure Development	Investment in infrastructure, including roads, railways, ports, airports, and telecom, but still lags behind China in many areas.	Massive investment in infrastructure, including high-speed rail, airports, ports, and highways, has led to significant improvements in transportation and logistics.
	Performance Indicators
GDP Growth	Average annual growth rate of 6.7% from 1950 to 2019.	Average annual growth rate of 9.6% from 1979 to 2019.
Poverty Reduction	Significant reduction in poverty rate from over 60% in the 1980s to around 20% today	Even more significant reduction in poverty rate from over 80% in the 1980s to under 1% today
Foreign Investment	Relatively low levels of foreign investment ($64 billion) compared to China.	Attracted significant levels of foreign investment, with inflows of $144 billion in 2020.
Trade	Exports have grown steadily, but still lag behind China’s; large trade deficit	Has become the world’s largest exporter of goods, with significant trade surplus
Human Development	Improvements in education and healthcare, but still lags behind China in many indicators. (HDI: 128/191 countries)	Rapid improvements in education and healthcare, with higher levels of literacy, life expectancy, and access to healthcare compared to India. (HDI: 79/191 countries)

Lessons from Vietnam: The article suggests that India should

Prioritize human development: Basic human development, such as education and healthcare, must precede economic growth. Investing in human development is the means for achieving sustained growth.
Increase incomes simultaneously: Increasing incomes of citizens must be a simultaneous goal with economic growth. This will enable more consumption and attract more investments.
Attract foreign investment: India needs to compete with other countries, like Vietnam, to attract foreign investment by creating a favourable business environment, providing incentives, and addressing concerns of foreign investors.
Focus on agriculture and labour-intensive industries: Vietnam has shown success in these sectors and India should focus on developing them further to generate employment and increase exports.
Address social and political tensions: Secure employment with adequate incomes should be a priority for the government, as it can help reduce social and political tensions in the country.

Way Forward

Therefore, India must emphasize on the need for policymakers and economists to move away from the current linear and mechanical paradigm of economics and explore complex self-adaptive systems to comprehend the complex socio-economic systems in India. This can be done via prioritizing basic human development as a means for growth and simultaneously increasing incomes to enable more consumption and attract more investments. The article suggests that India’s policymakers will have to find a way to strengthen the roots of the economic tree while harvesting its fruits simultaneously indicating the need for a comprehensive and holistic approach to address the “poly crisis” the nation faces.