2013 is not 1991; but it feels much worse and matters more

We are repeatedly told that 2013 is not 1991, the year of near external bankruptcy which put India on the road to reform and rejuvenation. The latest to tell us this is Kaushik Basu, Chief Economist at the World Bank, and during whose tenure as chief economic advisor in the finance ministry inflation stayed stubbornly high, the fiscal deficit hit the roof, and the current account deficit (CAD) went from bad to worse.

Basu told Business Line yesterday: “The economic situation is not good. India is nowhere near potential. But the gloom is overplayed. There can be no question of comparing the current situation with the 1991 situation, when we were on the brink of a major crisis. We are nowhere near that situation now.”

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He is right. 1991 was an external payments crisis when we had less than two weeks’ imports worth of foreign exchange reserves at one point. This time we have $278 billion in reserves, enough for seven months’ imports.

But here are the vital differences which make 2013 seemingly worse than 1991.

[caption id=“attachment_1046277” align=“alignright” width=“380”]  The most important difference, however, relates not to the macroeconomy, but human feelings. Reuters[/caption]

The most important difference, however, relates not to the macroeconomy, but human feelings. We react more negatively to fears of anticipated loss than expectations of gain. In 1991, we were a poor country, with a very small middle class and nothing much to lose. Today, we are four times richer as a nation, and the size of the middle and consuming classes has been growing in leaps and bounds. We have EMIs to pay, increments to chase, gadgets to buy and everyday goodies to splurge on at malls. All these are under some threat.

In 1991, the economic crisis did not matter to most Indians. Why would the aam aadmi care whether you have enough forex to pay for two weeks’ imports or not? It doesn’t impact him.

Today it does. Several hundred millions of Indians are now part of the consumption story. They buy consumer goods, eat out, buy mobikes, and shop at malls. They also had, till recently, rising incomes to look forward to. In fact, the UPA’s economic mismanagement helped foster this sense of entitlement in all classes of people - from the poor to the middle classes to everybody.

Behavioural economists will tell you that human beings are more primed to avoid losses than seek gains.

This loss aversion tendency was established by behavioural economists Amos Tversky and Daniel Kahneman, who noted that “losses and disadvantages have greater impact on (human) preferences than gains and advantages.”

For the aam aadmi, 2013 is therefore worse than 1991. He has more to lose this time.

Now, to this entirely human sense of impending loss, add the broader reality, and it is not difficult to see why the rupee is crashing, the market is skittish, and people are rushing to embrace gold. In many ways, 2013 looks worse than 1991.

First, in 1991, the world was not in crisis. There was the IMF to run to, and if we took the medicine prescribed, the rest of the world could absorb our new export buoyancy. The world also had surplus dollars to bring to India for investment. This time, the world is in deep s***, and there is no one to go to even with a begging bowl. We have to rescue ourselves.

Second, in 1991, due to the assassination of Rajiv Gandhi in the midst of an election campaign, the Congress party won enough seats to manage with just a few MPs’ outside support. This time we have a weaker government at the centre with no credibility, and which is trying to hold on to power even at the cost of economic disaster.

Third, 1991 had one restaurant owner (Rao) and one chef (Manmohan Singh) cooking up a recipe for reform: this time no one knows who is running the show, and the government has so many cooks trying to rescue the economy - and arguing with one another - that it is going steadily downhill.

Consider the number of cooks advising this government on what do: one economist is heading the government; he has a band of economic advisors under Dr C Rangarajan; the Planning Commission is stuffed with another lot of economists under Montek Singh Ahluwalia; then there is finance minister who is busy drawing “red lines” on deficits without a clue on why no one is listening to him; and we now have his chief economic advisor heading for the Reserve Bank, a bank whose outgoing boss has been in constant combat with P Chidambaram. This circus is being presided over by an economically-challenged political dispensation under Sonia and Rahul Gandhi.

Fourth, the political power structure is completely different. In 1991, the centre dominated the states; this time, the states are calling the shots in politics and economic issues. Today, no single economic issue - from FDI to GST to food security - can be decided by the centre in isolation. It has to carry the states. But the Congress party is particularly inept in the way it deals with the opposition. It needed a friendly BJP to get at least some of the tougher things done; or it needed a coalition of state parties to do deals with. It has neither. For the regional leaders are the Congress’ rivals in their own states; and the BJP is the Congress’ national rival. And Narendra Modi has sent the Congress running for cover.

2013 is not 1991. It may not be worse than 1991, but it will certainly feel very much worse.