There is this unalienable truth in economics: “The chickens will come home to roost.” And as many years of poor economic strategy and management start manifesting themselves in our country, the chickens have indeed come home to roost.
It is difficult even for the most cynical amongst us not to shake our heads in bewilderment at the sharp decline of our economy, which was till recently being paraded and tom-tommed as ‘resilient’ and ‘insulated’ from global economic problems. An economy whose statistical illusion had convinced the ruling elite in Delhi about the inevitability of India’s economic superpower status. This was joined by the predictable chorus from industry, fawning at the government’s economic strategy and drowning out the few voices that challenged it.
The sharp depreciation of the rupee and unabated inflation has hit the common household the hardest. We are witnessing declining GDP rates and consequent fall in investment. Judged on virtually every macroeconomic parameter, the similarities between today and the crisis period of 1990-91 are striking. At 4.8 percent of GDP, the current account deficit is, in fact, higher than the 3 percent during the 1990-91 crisis. The GDP growth rate at constant market prices is 3.3 percent, which is only slightly better than what it was then.
This collapse of our economy has led to heightened uncertainty among the people, especially as we continue to struggle with poverty and destitution. A recent survey conducted by the National Sample Survey Organisation (NSSO) points towards a job crisis in rural India, where a staggering 9.1 million jobs were lost by rural women between 2009-10 and 2011-12. There are economic, social and gender empowerment implications to this. When growth falters, it hurts not just the balance sheet, but every aspect of the developmental process.
The chickens coming to roost has its basis in a flawed economic vision — a vision that has changed little from the early 1990s, with its focus on foreign investment as “reforms”. It has left everything else untouched, including government, political and institutional restructuring. The same marketing pitch about how “India has great potential” was made in the mid-1990s and is made even today by our current finance minister when he embarks on futile road shows.
The current model of economic growth is driven almost lazily by statistics like GDP alone, and is better described in terms like entitlement-driven, big profligate spending, crony capitalism, cartels, little respect for public money or assets or indeed the public — rather than enterprise, competition, consumer choice, efficiency — the language and lexicon of modern economies. What is disconcerting, and indeed disturbing, is that there is hardly one real innovation in economic management that has been demonstrated by the government in recent years. To the contrary, there are individual decisions arising out of ministries that seem disconnected with each other, lending credence to the widely prevailing theory that there is no economic strategy, rather, a series of panic-driven reactions from different corners of the government.
As recent decisions in sectors like telecom and petroleum show, public policy continues to be weighted in favour of friends and families of politicians. This is cronyism, not enterprise. It places the burden of fiscal negligence on millions of hardworking citizens and their families. Despite “liberalisation”, the economy is still not competitive due to absence of true competition. They are helped by non-functioning regulators and a cosy government-corporate nexus.
To compensate for this — at least to sound politically correct — the government talks of large outlays for welfare measures. However, public spending is inefficient and institutionalises corruption. Government programmes, ostensibly to tackle poverty, continue despite evidence of them being leaky. Only a small percentage of funds reach the intended beneficiaries.
While a nation like ours with vast inequities does require a social security net, to do so in the manner we are doing today, is a recipe for disaster. As such, the current strategy of “inclusive growth” is only characterised by the government’s profligate spending. This neither promotes genuine growth nor is it truly inclusive. It is only putting at risk the direction and options for India. As economist C Rangarajan recently wrote, “Quite apart from following a contra-cyclical fiscal policy, another object lesson from advanced countries is that generous social compacts are difficult to renegotiate. It is, therefore, imprudent to put in place generous compacts that are affordable, when societies are young and trend growth is high, but become unaffordable as society ages and growth moderates.”
In plainspeak, we are moving our nation from a vision of enterprise and competition to one where entitlements will rule. It would be wise for us to learn from the fates of Greece, Spain and Portugal where entire future generations have been indebted forever, it seems, by the profligate spending of the previous generations.
The solution to this is relooking at the role of government and architecting an economic strategy that moves away from spending to one that focusses on recreating the spirit of enterprise. Creating a framework, where the government isn’t the big spender, but is rather a catalyst and enabler.
The government can be a catalyst by creating a framework of transparency and institutions, which make investors confident about investing and competing, where political connections and last name do not determine ability to compete, but, ideas, innovation and skills do.
The government can be an enabler by providing the social security net for those that require assistance and help, but with an outcome that each of those Indians would be able to stand up and fend for himself and succeed over time.
The government can be an institution that brings in a sense of purpose in dealing with taxpayer assets and money, through a value for money culture — a culture that recognises they are trustees of public money, rather than owners of it, and therefore, sees the need for disclosures and transparency in all contracts and deals that involve taxpayer money.
Unless the core structural concerns of investors — related to governance, openness and regulatory consistency — are addressed, we will not see large investment capital flows.
To go back to Rangarajan: “The first lesson to be derived from the policy response to the current crisis in advanced economies is that while monetary policy is a powerful macroeconomic tool for stabilising business cycles, it cannot revive growth by sweeping structural problems under the carpet.”
In 2008, in Parliament, I had said our inflation trends were all to do with capacity constraints and that the government must focus on boosting investments, and not just consumption. In simple terms, this means prices are high because supply is limited. We need to encourage more production and greater supply to tackle this problem.
The government must also address the increasing concentration of risk in the banking sector, where 10-11 corporate sector borrowings account for almost 95 percent of the net worth of Indian banking. This is unprecedented and far worse than any comparable emerging economy. In addition, the government must end the practice of using taxpayer money to recapitalise PSU banks. The taxpayer and common citizen should not be made to pay for corporate failures.
A few months ago, during the debate on the Union Budget in Parliament, I had suggested that the government put together an inter-ministerial group focussed on incomplete projects worth thousands of crores and bring them to fruition. This will have a positive impact on many projects that are waiting to contribute to the economy. More importantly, addressing this last-mile problem will rectify the issue of unlocking capital and putting it to productive use.
Finally, there is a need to take a relook at our disinvestment policy, and examine the options that maximise returns to the nation, rather than just attempt the least politically controversial option.
Beyond the politics of economics, India needs real structural reforms to give the economy a shot in the arm. As events around the world and indeed in our country are showing us, sloganeering and profligacy are no substitute for growth through enterprise. A recent newspaper column talked about the damage inflicted on our country as a result of our silence or mute acquiescence. Amidst the political drama over the impending election, one thing is imminently clear: the economy should be a key issue. Going beyond the mathematics of power, the state of economy should be a major deciding factor as the voter makes his or her choice. We can’t afford any more silence!