Government has lost the plot

Emboldened perhaps by the near-certainty of the ruling party’s candidate becoming India’s President — a victory of sorts for a government starved of any in the recent past — the Finance Minister offered some stirring policy rhetoric last weekend. Readers may wonder: why did it take so long for Mr Mukherjee to acknowledge the popular perception of what is required to galvanise the organised economy?

From the supra-national arbiter of healthy economies and governance — Standard and Poor’s — to financial experts, and a section of policymakers and the financial media, all have believed that the best way to get the economy revved up (organised sector only, please) was to contain the twin deficits, cut subsidies and best of all, get the Reserve Bank of India to cut interest rates; then just sit back and watch industry and markets hit the deck running.

At the Assocham meeting, an unusually cheerful Finance Minister also threw in the need to stimulate domestic demand. As discrete items on an agenda, these are indisputable. But string them together into a workable package of reforms and policymakers can get cross-eyed: what is laudable may not be do-able. To cut subsidies and spur public investments in order to goad domestic demand requires more than a sunny disposition and a laundry list; it requires a strategic action plan that involves every ministry, (certainly not the PMO), working consensually for a common purpose: stimulating domestic demand without the usual leakage of funds into drains or pockets.

Right now, that seems too tall an order. Just the other day, the Commerce Ministry decided to stoke flagging interest in SEZs by diluting a crucial requirement — to which, the Finance Minister went back to its old objection of revenue loss and flung it right back at the Commerce Ministry.

This lack of consensual policymaking was an echo of an earlier, more disagreeable difference between the two ministries — headed, in 2006, by Mr Kamal Nath and Mr P. Chidambaram — over the generous fiscal incentives the Commerce Ministry was offering SEZ developers. Mr. Chidambaram as Finance Minister was not willing to forsake revenues and figures were trotted out by both ministries, with Mr Kamal Nath, in some despair, appealing to the Prime Minster.

In an environment turned sour by months, if not years, of listless policymaking and assertive inaction, with some cabinet colleagues ploughing their own furrows in ‘distant’ fields (think of Mamata Banerjee at Railways or, less obviously Sharad Pawar at Agriculture), team effort seems far too alien a notion when it comes to governing. Grandstanding at global forums may earn India some mention in global media and lots in the domestic, but it won’t nudge a listless economy into shape.

Atrophy of perception

What we have now is atrophy, the paralysis of a government that has never had to do much to ensure growth’s momentum, other than simply cheer the players along. If there is one aspect of governance to which UPA-I could lay claim, it was in collectively cheering from the stands. Not even the RBI’s dour sense of its own job of maintaining price stability, which led it to spike interest rates in 2006 itself, could spoil the party.

But the growth coinciding with the UPA-I’s first term had already set in when the UPA assumed power in 2003-04. It was the outcome of reforms over the past fifteen years and a global environment of booming trade, providing India with immense opportunities. Equally, policies of various governments, particularly since 1991, prepared the grounds for two specific results, both of which combined to lift GDP from its previous levels.

Capacity creation

The first was the creation of fresh capacities in a new industry that was to define India’s self-image of a high-tech nation with global reach.

The second consequence was the utilisation of latent capacities in the ‘old’ industrial sector of manufacturing and, of crucial importance, in existing infrastructure.

After the Bombay Club’s sputtering protests, Indian manufacturing jumped right in, tweaking its existing capacities principally through technology imports, collaborations for domestic market sales, to cater for the new, rising-income middle class consumer.

Day into night

The UPA-I reaped the benefits: star-struck at first, key policymakers got busy manufacturing its own role in shaping GDP growth of 8 per cent. Worshipping the accomplished fact of current “growth”, policymakers did not bother about its sustainability: Nothing for infrastructure; less for agriculture. One attempt at key infrastructure growth, the SEZ, turned upon itself to create even more problems over “land acquisition.” The party seemed never to stop.

But it did. And in a strange coincidence that gave rise to the impression of India’s global coupling, indigenous growth began to fall just as the global economy started to unravel. But here’s the thing. India’s domestic demand had already begun to exhaust its potentialities as a key driver of growth; the financial collapse and Western economies’ troubles simply pushed overall demand even lower.

Gung-ho dispositions can help a celebratory mood, but are of no service to an exhausted economy: out of steam and up against road blocks at the same time. So far, none of the sunny forecasts on inflation or GDP growth has turned out to be true; the Finance Minister now says GDP will hit the high road in 2013 fiscal.

But Dr Kaushik Basu, the Chief Economic Advisor, visualises danger through 2014, the year of general elections here, and in Europe a time of reckoning.

In the meanwhile, something has atrophied, but it’s not policy. It’s the government’s self-image that has taken a beating and congealed its power to simply think like a government composed of eminent professionals and seasoned politicians.

Blinded by the illusion of leadership-as-optimism, “Team” UPA-II needs a new self-definition. Its magic wand, so to speak, has to heal, not delude; one way to start is to stop promising the implausible.

Policymakers must cease from predicting inflation’s decline and focus on achieving it. Setting modest targets for GDP is not an admission of failure for the vast majority of Indians and even less so for the affluent. From the policymaker’s viewpoint it’s more politic to claim success at scaling a modest target than admit being beaten by an ambitious one.

>blfeedback@thehindu.co.in

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