Globalization & The Indian Economy: Road to a Convertible Rupee by Satyendra S Nayak, Book Review Example

Goldman Sach’s updated BRIC Report of 2007 has predicted that by 2050, India would become the world’s second largest economy pushing the U.S. to third place with China leading the pack (Goldman Sachs 11). However, for such predictions to come true, the managers of Indian economy will have to make some fundamental changes to their fiscal policies in face of the challenges posed by globalization. Satyendra S Nayak’s book, Globalization & The Indian Economy: Road to a Convertible Rupee examines the impact of Globalization on the international monetary system and on India in specific. Nayak argues that the Indian economy today is poised for high growth rates if it invests in infrastructure development which will lead the way for the Indian government to allow full convertibility of the Indian Rupee.

Nayak develops his argument by first explaining the dynamics of the global financial system as it rebounded from the ruins of the Second World War. Nayak emphasizes the role of the Breton Woods system that allowed countries to import directly from the U.S to rebuild their war shattered economies. An analysis of the old ‘Gold Standard’ and why it had to be discarded is then offered by the author as also why the world adopted the flexible floating exchange rate systems in 1971 (Nayak 11).   Nayak explains that Keynesian economics gave way to free markets and greater privatization that ushered an era of nascent globalization in the 1980s. Nayak then provides a clear exposition of Keynesian dynamics to explain the ‘boom and bust’ cycles of global economics.  Nayak’s analysis of U.S. government fiscal practices concludes that governmental tweaking of interest rates had a poor record in spurring investment and economic recovery (Nayak 79). According to Nayak, rather than governmental intervention, it was institutional investors such as pension funds, mutual funds, and insurance companies chiefly from the developed world who became crucial for capital and financial markets in the 1990s. Nayak then carries out a comprehensive analysis of Foreign Exchange (forex) markets and concludes that globalization has increased the volatility of forex markets. Because exchange rates fluctuate so rapidly due to a host of factors, emerging markets in Asia tended to peg their currencies to one currency to keep it stable, which till now has been the U.S. Dollar (Nayak 95).

Asian countries (other than India) liberalized their foreign ownership rules, which in turn brought in foreign money quickly and helped fuel a boom in their economies in the 1980s. In the late 1990s when America was in midst of a boom, the Dollar started appreciating, which in turn led to the appreciation of the pegged currencies that had a concomitant effect of making their export goods more expensive and hence less attractive. Thus when the imbalances in external debt servicing could no longer be handled, institutional investors began withdrawing out of the so-called ‘Tiger economies’ leading to the Asian economic crisis of the 1990s. This event according to Nayak, exposed a key weakness of the international financial system in it’s over reliance on the Dollar, which needs to be corrected (Nayak 109).

Having Devoted Half the Book to Explaining the Dynamics of the International financial system Nayak then focuses his attention on the Indian experience to explain that in the initial years, being a newly independent country with rudimentary infrastructure, government policy was dominated by the Keynesian theory (Nayak 116).   Since own industries and markets were nascent, a heavy dose of state guidance and protection was considered vital by the Indian government. A socialist model was followed where high income tax, wage control, price control and tariff protection became the key guiding principles for developing the Indian economy. Indian Planning Commission’s strategy was to drive public sector heavy industries and place the markets on a tight leash (Nayak 116). Tight curbs on foreign exchange and foreign direct investments meant that the private sector could not even approach the wider world for infusion of funds. This directed approach worked in setting up heavy infrastructure, but the growth figures were excruciatingly low and slow. Realizing the dangers of stagnation and seeing the ‘Asian Tiger’ miracles, the Indian government cautiously decided to liberalize the economy in the 1990s that brought about significant change in the rate of economic growth. However, the natural caution built into the system over four decades meant that Indian economic integration into the globalization paradigm was still conducted at a gradual pace as compared to the other Asian countries.

Indian Gradualism according to Nayak proved to be more prudent as the Asian economic crisis of 1997 ravaged the Tiger economies but left India almost unscathed because of low exposure to foreign investors. One of the reasons for this caution had been India’s own forex crisis in early 1990 when the country had to pledge its Gold holding in international financial markets (Nayak 127) as also proceed with depreciating the Indian Rupee and raising interest rates to an astronomical 11 percent. The crisis was a wakeup call which then galvanized the Indian government to liberalize the economy, allow 51 percent stake for foreign investments in the Industrial sector and allowing “Foreign Institutional Investors (FIIs) to invest in new issues and the stock market” (Nayak 131).These reforms helped kick start an economy and achieve six to eight percent growth that has been surpassed only by China in this decade. The government however, has not lost its caution and still maintains a high degree of control over all banking policies. Unlike the U.S. where private banks have a free run over their own affairs, in India, the Reserve Bank of India (RBI) maintains a cap on funds that a bank has to maintain called Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) (Nayak 133), which in India is amongst the highest in the world. The effect of this measure has been that commercially available credit is limited that in turn makes explosive growth difficult. The government has now lowered the CRR and SLR to allow greater credit availability in the market.

Pricing controls too have been progressively relaxed to allow greater freedom for the markets to operate. Thus the approach of step by step liberalization and sequencing has prevented large scale shocks and oscillations to the Indian economic system allowing the economy to integrate with the forces of globalization. Since then Indian forex reserves have ballooned and national savings rates have increased exponentially allowing the country to progress to the next step of integration with global market forces. India’s faster development has been hampered by poor infrastructure, which would require budgetary allocations (Nayak 213) by the Indian government. The crux of Nayak’s argument is that today, India with its high forex reserves and a vibrant young educated population can ill afford continuation of cautious Keynesianism. He exhorts the government to emulate Roosevelt’s New Deal (Nayak 217) and take a leap of faith in following the free market principles of Adam Smith. This recommendation is considered rather speculative because the conditions that obtained in America during the 1930s are far different from those being faced by the Indian government. As of today, India’s 1.1 Billion people are roughly three and half times the size of the American population packed in a land mass roughly one third its size.

Nayak’s book is an easy read for even a lay reader as he does not confuse the reader with complicated economic jargon. The author’s development of the argument by first providing a base to understand the international financial system through an exposition on the U.S. and the developed countries is logical. The appreciation of dangers of uncontrolled liberalization as  exemplified by the Asian financial crisis of 1997 is  well covered and comprehensive. Nayak;s unique contribution lies in his analysis of the success of Indian gradualism in providing the launching base for India to take off in the global economic sphere. Nayak’s next observation that the same caution now needs to be shed however requires to be treated with due care as India is not America and what worked for Roosevelt may not necessarily work for Manmohan Singh.  Nayak’s main argument that India needs to mobilize its significant forex reserves for infrastructure development and discard cautious Keynesianism is compelling but requires further examination. Nayak’s roadmap to full convertibility of the Indian Rupee after India develops strong infrastructure is echoed by the Prime Minister of India  (Hindu 1). Should the Government of India follow Nayak’s formulations, with its time tested caution, Goldman Sachs predictions may indeed become a reality.

Works Cited

Goldman Sachs. “BRICs and Beyond.” 23 November 2007. 24 October 2009 <http://www2.goldmansachs.com/ideas/brics/book/BRIC-Full.pdf>.

Hindu, The. “Prepare Road Map For Full Rupee Float: Manmohan.” 19 March 2006. The Hindu Business Line. 24 October 2009 <http://www.thehindubusinessline.com/2006/03/19/stories/2006031902920100.htm>.

Nayak, Satyendra S. Globalization and the Indian Economy: Roadmap to a Convertible Rupee. NY: Routledge, 2008.