Lakshmi wants to know whether Gurumurthy’s article which I referred to below is true.
Well.. his economics is definitely wrong. His reasoning is flawed and he has messed around with data. He made a valid point about the American economy, but it is not a well argued one. It has been taken out of thin air. His extrapolations for India are off base.
His reasoning goes as follows:
- Japan exported more to the US than it imported from the country. That got Japan into trouble.
- The US imports much more than it exports. Yet it is doing fine.
- America hai hai! Greedy capitalist pig! Consumerist culture!!!
- So the point is…
Step 3 is fun to read, so no one really notices that step 4 is missing. The only logical point there could be is “Neither a US nor a Japan be”, to the tune of “Neither a borrower nor a lender be”.
Gurumurthy is wrong. If India’s exports to the US exceeds its imports from that country, it will have some dollars left over. Those dollars are an investment in the US. If it goes the other way round, the US is investing in India. Which is better? From an economic point of view, it doesn’t make sense to invest in a country that is growing at 2 % per year at the best of times, when there is a country that is growing at 6% per year at the worst of times. It makes much more sense for an American to invest in India than vice versa. Which is what is happening. (Which is also why NRIs flocked to invest in RIBs – they were assured of a much better rate of interest than they’d get in the US.)
It is good for India to get investment from other countries, for the same reason that it was good for me to take a student loan to do my MBA. It was an investment, and it was easy to repay the loan after I got a job. If I had partied away my loan, that would have been a disaster. Similarly, taking loans or FDI is bad only if we fritter it away and can’t repay.
Japan did make a hash of things. There is nothing wrong with your exports exceeding your imports, but accumulating dollars without investing it anywhere worthwhile is a particularly bad strategy, akin to keeping your money in cash at 0% interest.
Yes – the American economy is a paradox – they import more than they export. They don’t save much, and they have high levels of debt. But still people are willing to hold dollars, i.e, they are willing to invest in the US. The Economist article I referred to claimed that this is only because the US dollar is treated as the gold standard – everyone hoards it because everyone else is willing to accept it as common currency.
But that is beside the point. Neither the US example nor the Japanese example is applicable to India, as I have explained. His argument seems to be that India should develop on the basis of its own savings – the Swadeshi way. That is a red herring. We already save roughly 30% of our income. We can save and borrow to grow faster.
(And finally, he also has also fudged figures. Where did the 50 billion USD we are supposed to have invested in the US versus the 20 billion they have invested in us come from? I suspect he has compared the accumulated dollar reserves with this years FDI figures – an indefensible crime for a CA)