Our Industrialists - And Industrialisation

The title of this news report reads: "India Inc. pleads for cheap money." A quote follows:

"What is required is greater credit availability and reduction in high interest rates to stimulate manufacturing, construction, electricity, mining and other core sectors," trade apex body FICCI said.

Note that under our current inflationary conditions, real interest rates are already negative - and if things proceed the way FICCI wants, then, apart from hurting poor people and savers with higher inflation, we would end up fueling an artificial boom, and with "malinvestments." A "bust" will surely follow. Disaster!

Thus, artificially low interest rates are extremely hazardous for economic health. They are the prime cause of business cycles - the boom-bust routines that plague the world. The painful depression that follows the euphoric boom occurs only because artificially low interest rates destroy rational economic calculation among businessmen. Whereas some businessmen are always to be found making errors, artificial booms result in "clusters of errors" - and these are unraveled when bubbles burst. Low capital cost makes projects seem profitable, just as inflation exaggerates expected returns - and these cause massive "malinvestments." Thus, what FICCI is demanding will not "stimulate industry," and certainly not in the long term.

In independent India, the goal of "rapid industrialisation" has been pursued relentlessly - but wrongly. Nehru's "heavy industrialisation" is now our "common loss." And as for the private sector, the policy of "import-substitution industrialisation" has only resulted in cronyism - and in huge losses for consumers. If we add to these wrong-headed policies the further ill of central banking and interest rate manipulation, we realise that laissez faire and "sound money" would have enabled our economy to fare much, much better. Let me begin with sound money - that is, the gold standard.

If the rupee is based on gold, redeemable on demand, then its value would always appreciate against the rest of the world's fiat paper currencies. This would make imports cheaper - and the consumption of even the poor would improve. Further, this means that imports of raw materials, components and technology would also become cheaper - and it is these factors that would give Indian exports their competitive advantage. There would be a "new industrialisation."

Surely this is far superior to the long-standing strategy of our The State - which is, to let the rupee continually depreciate in order to "promote exports" while at the same time halting all imports. Such a strategy not only impoverishes the Indian citizen-consumer; it also works to make the whole world poorer.

Free trade promotes industrialisation too. What happens then is that factories spring up to serve local demand that is being catered to by traders - in order to save on the costs of transportation. This is industrialisation based squarely on market conditions - and not on State intervention. Hence this is eminently "sustainable," because it is entirely "natural."

In the India of today, I can think of quite a few ways that free trade would promote domestic industries that are lying dormant now. For example, wine and cheese-making. If trade was free, a taste for wine would surely develop among Indian consumers. It is only then that Indian winemakers would flourish. Ditto for cheeses. It is only because of the popularity of pizzas that there are now many domestic manufacturers of mozarella. Yet, there are many hundreds of cheeses in the world, while Amul advertises itself as "The Taste of India."

India has remained a largely agricultural country - backward and poor - principally because our strategies for industrialisation have been wrong. Today, with a entire host of factors that give this nation the potential to become a "factory for the world" - like cheap, technically qualified labour, the English language and so on - we are being held back by our rotten infrastructure. Factories for the world require good roads, efficient ports, reliable electricity, livable cities and towns and so on. It is indeed pathetic that all these are areas of State failure. We should ask our The State to exit these areas too. Instead, our chambers of commerce continue to demand more interventionism.