As economics takes a backseat

There is a general consensus now that the Modi government, which came to power in 2014 on the back of great public expectations, did fail to takeeconomic growth to the next level. What happened? Did the anti-reforms voices overpower the reformist ones, including that of Finance Minister Arun Jaitley? Or did PM Modi turn to the Nehruvian strategy for growth?

In The Lost Decade 2008-18: How India’s Growth Story Devolved in Growth without a Story , Puja Mehra helps us understand what went wrong with India’s recent governments including the Modi regime — which had everything going right: from the right people to the right to-do-list. It had even started announcing its work initially, (as early as in 2015), but soon started veering away from the reformist paradigm. Even Modi’s speeches started reflecting a sharp ‘pro-poor’ rhetoric.

According to Mehra, for a large economy like India, you needed to do sequencing of reforms, which was not done and, worse, a measure such as the demonetisation was introduced, jolting the economy.

“If demonetisation was not enough, a badly designed GST was implemented. These two decisions hurt the economy more, instead of helping, and the recovery got derailed,” says Mehra as she chats with BusinessLine .

Basically, politics started overruling economics and anti-reformers got more voice, while pro-reformers were not able to resist them. The book clearly differentiates on how an economist, a statistician, a politician, a bureaucrat and a journalist interprets the country’s growth story. The economic reforms of the 1990s transformed India from a low-income county to a middle-income one, says Mehra, “But, without new reforms, this momentum will not be sustained. To become a high-income country, India must liberalise the economy much further.”

Today, India’s GDP is growing at a world beating rate, but little on the ground suggests that people are actually feeling better off or experiencing the promised ‘ acche din ’.

Accelerating the rate of growth is not sufficient. What sets apart successful economies from the unsuccessful is the duration for which fast growth is sustained. India’s economy was thriving and GDP growth was at an impressive 8.8 per cent before the global financial meltdown in 2008. Sequence of events prove that in the decade that followed each time the country’s economy came close to returning to that growth trajectory, political events derailed it.

An interesting element in the book is about “Twin balance sheet crisis”. Few know that for Jaitley’s first Budget (July 2014) the then Finance Secretary Arvind Mayaram had drafted a paragraph with the aid of Additional Secretary KP Krishnan, Principal Economic Advisor Ila Patnaik and the IMF’s Joshua Felman. Mayaram called this principal challenge to an economic rebound the ‘twin-balance sheet problem’.

The economic consequences of the stress on the balance sheets of banks and much of the corporate sector needed to be addressed on priority. This was much before Arvind Subramanian, who joined the government a few months later, would popularise.

A paragraph prepared by Mayaram and the rest was part of the first draft of Jaitley’s speech, but “the political bosses, however, showed no appetite for the steps outlined in the paragraph. And so a paragraph on the idea for dealing with MSME bankruptcy was smuggled into later drafts of the speech, through the MSME Secretary, Madhav Lal. Jaitley decided against restricting the bankruptcy proposal to this category of firms.”

Mehra recounts, each of the officials who had drafted the junked paragraphs for Jaitley’s first Budget speech was over time shunted out of the Ministry. A high-profile IAS officer hand-picked to replace one of them was soon frustrated with the state of affairs, she shares.

“The government has no appetite for even small and easy-to-reforms, forget the difficult ones…As far as I am concerned there are no half reforms… But government is in ‘we-are-the-champions mode’ and competing with the UPA in announcing schemes and programmes’, he told me in 2015,” says Mehra quoting the officer.

No big bang reforms

The last ten years have shown that half-baked, ill-thought-out measures produce uncertain results. As Mehra rightly points out, “Be it the land acquisition law, the national food security law, demonetisation or GST, The big bang economic reforms agenda has plateaued. We need to rebuild consensus for a steady stream of reforms and revive the spirit of 1991.”

As Mehra says, the speed of growth is one thing, quality quite another. “Modi, who advocates development in his electoral campaign, did not pick any proposal on the poverty line from the options on his table. Neither the poverty line proposed by the C Rangarajan Committee nor the alternative proposal submitted by Arvind Panagariya caught the Prime Minister’s attention. Modi’s record on poverty reduction, therefore, remains unknown.”

So is India shining after all is the question? “The renewed plan to make India shine had the same blind spot — the farm sector, employer to the bulk of India’s poor, and in desperate need of structure reforms, received inadequate attention,” she says in the book.

Is there a policy paralysis here? Not really. The government paid no heed to the warnings, the price for which was paid by economy. “There was no policy paralysis. On the contrary, decision making was speedy. But it was poor quality. The ill-informed idea of demonetisation and the half-baked GST roll out demonstrated the growing disconnect between policy tools and objectives. They betrayed Modi’s abiding suspicion of qualified experts, disdain of expertise, rejection of evidence-backed analyses, valorising of feelings of people and weakness for simple, quick but ineffective solutions,” she says.

The economy could have recovered and returned to the high-growth path with bold reforms, but the policy response was feeble, says Mehra, adding “As a result, new jobs were not being created, which meant consumption would grow only up to a point. The country had missed a third chance at a sustained economic recovery.”