STATE OF THE ECONOMY

With the former Finance Minister Yashwant Sinha letting off steam about the state of economy, the habitual and professional Modi baiters in politics and academia lost no time in gleefully latching on to the hoopla and painting a dooms day scenario. If one were to go by the expert views echoed in electronic media, NDTV and CNN 18 in particular, one would but conclude that the skies have fallen, Indian economy is on the brink of collapse and a financial emergency is around the corner. It’s a field day for the Cassandras.

What then is the truth?

The economic growth has certainly slowed down vis-à-vis the previous quarters. For a Government that prided itself on the fastest growing economy in the globe, logically the responsibility for the decline can only land on its lap.

Still, given the current grim global economic scenario, 5.7 in itself is not a mean achievement. There is no impending gloom; the economy is not bottoming out. The situation is not as alarming as the 1991 crisis that had the Government scraping the bottom of the barrel and not in a position to honour the maturing foreign currency deposits, attendant sovereign default looming large.

There is, nonetheless, ground for concern and need for some sober thinking.

Two ostensible reasons are advanced for this decline. One is the demonetization and the other is implementation of GST rather hastily on the heels of demonetisation.

The efficacy of the demonetization drive can be debated endlessly, depending on the side of the spectrum you are in. It has been discussed ad nauseam. No conclusive, incontrovertible view about its prudence or otherwise has emerged. All said and done, you cannot burke the fact that quite a sizeable amount that was hoarded earlier has now come into banking channel and is thus available for productive activities. One thing that can be said with utmost certainty is that a Government that works will take decisions and all decisions will not be judged correct, particularly in hindsight. Some of the decisions will lend themselves to criticism as being ill-thought and ill-advised, but that is the risk a decision-maker takes. Only a non-functional Government can escape a similar criticism. Quiescence is not a substitute for risk of committing mistakes. The situation is certainly not like the policy paralysis accompanied by monumental corruption that we witnessed during the UPA second term. TIME magazine listed the 2G scam in the Top 10 of the swindles ever. The coal scam had not surfaced when the list was drawn up!

With such a distinguished record, for the Congress to comment on the decline so disparagingly is rank hypocrisy. The Congress’ heir apparent while holding forth to a left-leaning audience in USA ascribed the Congress defeat in the election to people’s anger (as was Trump’s win, in his erudite view). The wiseacre did not of course mention the scandals that kept tumbling out of cupboard with every passing day. For a political party that ran an unbridled kleptocracy for a decade and led the economy to ruin, Congress is least qualified to comment in the matter.

GST has been in the works for a considerable length of time. It was on the anvil during the Congress reign.  The present Government tried to introduce it but was thwarted repeatedly, Congress disowning its own baby. It has to be brought into force one day or the other. Finally, when it has been introduced, to think that there would be no teething problems would be imbecile. It was well known that there would be transient disruption, slow-down in the growth rate before the system stabilized The only question should be whether the Government is adequately seized of the problem and addressing it.

On the flip side, it must be said that even when the growth was around 7 and more, the resultant feel-good factor was not palpable on the ground.  The GST has had unintended ramifications, hitting the lower middle class. Even bus tickets have not been spared. In some self-service restaurants, even the cost of coffee and tea has gone up. An auto-driver in Bangalore quipped the other day that next the public conveniences would come under GST.

There is a need to take stock after implementation of hard decisions and mitigate the unintended hardships. Demonetisation saw Government reneging on its own words of keeping the exchange counters open in RBI upto 31^st March. This didn't go down well with the public. To assess and adequately respond to a rapidly unfolding situation with agility is the test of any Government.

That said, Jaitley’s rejoinder of Sinha being an 80 year old job applicant is an uncharacteristically below the belt jibe. Sinha is a competent person, had a grip on the intricacies of the finance portfolio.  He and other seniors, adroitly eased into retirement, have contributed to what BJP is today.  Even if it were true that Sinha is an FM aspirant, even if it were a case of sour grapes, Jaitley, given his standing, ought to have had the generosity to overlook it and address the issue. Taking criticism as personal affront and resort to ad hominem is the last resort of a person who has run out of arguments. Jaitley is obviously not one. It was a very bad faux pas.

Jaitley is undoubtedly intelligent, articulate, has a quick grasp of knotty issues, is quite quick with sharp ripostes, but Finance Ministry is not his cup of tea. The requisite qualities are of a different order.  Finance is not to be intellectually or theoretically comprehended but largely instinctively.  It is not for nothing that the street wisdom has it that a Marwari or a Gujarati or a Chettiar boy can teach a thing or two about finance to a Harvard scholar. 

The possible causes for the decline including the multi-layered structural issues have been so extensively discussed and commented upon that I will touch only two issues pertinent to the downturn.

Agricultural infrastructure has been neglected for so long and we are only harvesting the bitter fruits of our criminal insouciance. Ever since independence, every student is taught and is fond of quoting in all exams, “Indian agriculture is a gamble in monsoon.” That even after seventy years, the situation remains unchanged, is an eloquent commentary on the utter failure of successive Governments. Congress which ruled the country for the better part of these 70 years has to bear the lion’s share of the blame not just for this grave neglect but more importantly for having  institutionalized the style of governance by shibboleths without ever bothering to address the core crisis. Thus we had gabri hatao, jai kisan jai jawan, so on and so forth to beguile the masses, with precious little alleviation.  But seventy years is a sufficiently long time t time for a serious Government to have successfully tackled the problem.

And let’s admit, for God’s sake, agriculture is a commercial activity. The farmer is in it not for charity, but to make money. He doesn’t deserve any more drooling sympathy than somebody engaged in a commercial or industrial activity.  With a plethora of financial institutions at his service, the Co-operative Banks, Land Development Banks, Regional Rural Banks, mandatory lending of 40% of total advances by commercial banks under priority sector et al, if he is starved of credit, then something is seriously amiss somewhere.  Add to this free electricity and massive subsidies for fertiliser and other inputs. Why isn't the farmer delivering then, but is more prone to suicide? To waive the loans with tax payers’ money is easier done than to get to the gut of the problem, apply oneself and create a conducive environment for remunerative agriculture production. It takes a different mettle than our politicians are endowed with. The unfailing annual ritual of write-off of agricultural debts is akin to the indulgence certificates of yore (paying cash to the Church in exchange of forgiveness of past sins).

The non-performing assets of banks have suddenly caught the fancy of sundry economists and policy advocates. This did not happen overnight. It does not mean that the entire quantum of bad loans is a result of injudicious lending. Political interference does entail a severe cost. Down turn in specific industrial spheres does impair the performance of heavy industries. As Dr. C. Rangarajan has been advocating repeatedly, there is a need for term lending institutions to take care of infrastructure lending. Lending for long gestation infrastructure projects is not the call of commercial banks. That’s a specialized activity in the exclusive domain of term lending institutions. Conversely, the trend has been for term lending institutions to turn into universal banks – ICICI, IDBI, IDFC for instance.

The raucous clamour for reduction of interest rates has remained steadfast since UPA II days. Successive RBI Governors have been sought to be brow beaten, hustled, into reducing the repo rate. The basic idea of low interest rates is for economies that have bottomed out, that need to be resurrected, like the USA for instance in the aftermath of sub-prime crisis resulting in a complete melt-down of financial sector,. An industrialist first finalises his project, validates its viability and then looks for funding to make it happen. Every middle class borrower first decides to buy a house, a car or a two wheeler and then starts scouting around for the lowest interest in the market. Have you ever heard of a project of proven viability being shelved because of the cost of funds? One does not induce a person to borrow, but make funds available for genuine needs. Funds made available at a low cost will only result in wanton borrowing and borrowing without pre-determined productive avenues of deployment will in all likelihood be squandered. It is trite but true that what matters is the availability of funds in time and in adequate quantity rather than the cost of it. The only assured result of this strident demand would be insulating the corporates from ravages of inflation.  In the circumstances, this is of course not a panacea it is trumpeted to be.

Modi has bought into the Congress criticism of ‘suit-boot sarkar’ (instead of retorting that theirs was veritably a loot-scoot-sarkar). Against his own natural instincts and conviction, he has allowed himself to become a welfare economist rather than an aggressive reformer in response to changing times. The repeated utterance of BJP spokespersons in TV debates of how they are helping the poorest of the poor underlines the point. But being a reformer and a welfare economist are not mutually exclusive. Major reforms on land and labour would have reignited the animal spirits. Instead of creating an enabling environment for robust growth, the Government has now to decide whether to go in for significant public expenditure to stimulate the economy.

Keeneth Galbraith narrates in his memoirs how Keneedy asked him to prepare his presidential acceptance speech. Excited, Galbraith went into an overdrive and prepared a draft to the best of his considerable abilities. As the President stood up to make the speech, he looked around proudly, the President was going to read his speech.. To his utter surprise, Kennedy used only one line from his draft. Obviously, he had asked many others to prepare a speech and took most apt portions from each of them. Modi needs to have an independent, intrepid council of advisors, not beholden to any ideology but unafraid to play the devil’s advocate. He does not have to accept the precepts proffered. The central idea is to have a diversified cross-section of views for him to pick the best or to reject them in toto and go in for what appeals to him. There is a need to expand the range of views the present triumvirate now has its ears tuned to.

We in 21^st century are witness to the failure of all isms and economic models. Communism mutated into a totalitarian nightmare. Laissez-faire crumbed in the citadel of capitalism in the sub-prime crisis with the Federal Government having to dole out massive assistance packages, proving the axiom, ‘privatising the profits and nationalizing the losses’. Idealism can produce reams of eminently readable text, but appreciation of realty enjoins one to jettison the jaundiced glasses for a clear sight. RSS’ doctrine of economic growth is equally not free from flaws.. It has already shunted out Arvind Panagriia from the country, not that he is indispensable (nobody is), but the trend is disquieting. Its advocacy of emulating Japan is a good idea, but as writers from Nirad Choudhri to Kushwant Singh had delineated our characteristics in detail, we are different, we’re like that only. We cannot even drive a motorized vehicle with discipline, leave alone imbibe the admirable Japanese discipline and commitment to work During 1991 crisis, the honourable NRIs rushed in to encash their foreign currency deposits even pre-maturely, but during the East Asian crisis, the Koreans queued up to deposit their gold with the Government in  a bid to salvage the economy.

End of the day, what is clear is when there is significant development, percolation does take place and benefits do reach the bottom of the pyramid. If you decry an entrepreneur making 1000 Rupees but paying only Rs.5 to 100 persons for it, he will move elsewhere to make his 1000 and the 100 will be without their 5 Rupees. This is reality. The task before the government is to let the entrepreneur go on, intervene intelligently and ensure greater public good. 

The productive 20 percent of any population has to perforce support the indolent 40%. This is the law. You can’t rewrite it. Don’t be obsessed with the 40% because of the votes they have, concentrate on the productive 20%.