We were flying to Mumbai where the Prime Minister was to address a gathering of business leaders. I had drafted a speech that he found time to read only on the plane. Half way through the journey he returned the draft with his notes scribbled in the margins. “I have added a quotation from Keynes”, he wrote. “But this is from memory. You will have to check it against the original.”
As soon as we reached Mumbai’s Raj Bhavan I asked the university library for a copy of John Maynard Keynes’s The Economic Consequences of the Peace (first published in 1919). A soiled old copy arrived in time. The quote in the printed volume matched, almost to the last word, the one scribbled by the PM on the margins of the draft.
This was October 2006. Prime Minister Manmohan Singh was addressing an audience that included every big name in Mumbai’s business community, quoting Keynes from memory:
“If the rich had spent their new wealth on their own enjoyments, the world would long ago have found such a regime intolerable. But like bees they saved and accumulated, not less to the advantage of the whole community ... [they] were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of “saving” became nine-tenths of virtue and the growth of the cake the object of true religion.”
Prime Minister’s religion
Ensuring the “growth of the cake” has been Dr. Singh’s religion for over three decades. In his first term, growth accelerated on account of a sharp rise in both the savings and investment rates, the latter rising sharply from 24.6 per cent in 2003-04 to 32.3 per cent in 2008-09. However, the second term has been hit by a decline in the investment rate largely on account of the government’s own acts of omission and commission. Quite understandably, therefore, the focus has again shifted to stimulating investment.
The clue to Dr. Singh’s thinking on economic policy lies in the lasting intellectual impact of Keynes and his disciples on him. Dr. Singh’s teachers included Nicholas Kaldor and Joan Robinson, two of Keynes’s greatest disciples, and one of his tutors at Cambridge was Gautam Mathur, the architect of Osmania University’s economics department who thought of himself as a post-Keynesian messiah!
Uninformed commentators in the media often view Keynes only as the doctor who had a medicine for depression. Undoubtedly that was his most important policy contribution. Which is why, quite understandably, Keynes’s celebrated biographer, Robert Skidelsky, titled the second of his three-volume tome, covering the period 1920-1937, The Economist as Saviour .
However, among Keynes’s many contributions to economics was his analysis of the role of ‘expectations’. Investors and consumers are ordinary people responding to a variety of economic, social and political signals. Their response is shaped by experience and hope, price and prejudice.
Understanding why investors and consumers, savers and sellers do what they do is not just about analysing past data but requires getting a grip on what motivates them. Human behaviour, even in taking economic decisions, is motivated by a variety of stimuli and so economics is, in its essence, a behavioural science.
An important behavioural idea that Keynes introduced to modern macroeconomics was that sentiment plays as important a role as rational calculus in shaping investor behaviour. His now famous quote on ‘animal spirits’ (that many in India have discovered after last week’s use of that phrase by Prime Minister Singh), is in fact a fine exposition of the idea.
In his magnum opus, The General Theory of Employment, Interest and Money (1936), Keynes writes: “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits — a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”
Apart from the weight Keynes gave to sentiment in economic policymaking, he was a liberal who preferred what Skidelsky terms “The Middle Way”. Manmohan Singh too is a liberal, centrist Keynesian walking the “middle way.”
Keynesian or neo-liberal?
Far too many of both his critics and enthusiasts think of him as a “neo-liberal”. I recall once asking Prabhat Patnaik, the distinguished Marxist economist, a CPI(M) ideologue and my teacher and doctoral supervisor, why he referred to Dr. Singh as “neo-liberal” when he knew that he is in fact a Keynesian. Professor Patnaik replied “Manmohan Singh is a Keynesian but the policies of his government are neo-liberal.”
The policies too are a mix of contending ideas. It is perhaps not an accident that Dr. Singh has chosen to surround himself with economic advisors of very different intellectual persuasions. His longstanding policy aide, Montek Singh Ahluwalia, can be dubbed a neo-liberal, a traditional neo-classical economist. The chairman of Dr. Singh’s council of economic advisors, Chakravarti Rangarajan, is in fact a traditional monetarist, and proud to be so. On the other hand, the more recently inducted policy wonk Kaushik Basu, chief economic advisor to the Government of India, is more of a post-Keynesian.
What this diverse intellectual upbringing of India’s key economic policymakers has meant is that Indian policy has not been orthodox, but flexible. Skidelsky also dubbed Keynes a “Practical Visionary” — a description that aptly describes Manmohan Singh as well. As a “practical visionary”, Dr. Singh listens to the advice he likes and rejects what he does not.
Thus, while Mr. Rangarajan is a fiscal conservative and would like to see the fiscal deficit brought down sharply and monetary policy deployed more forcefully, Dr. Singh has opted for a “middle way”. Similarly, while Mr. Ahluwalia would like to see more privatisation and a more open economy, here too Dr. Singh treads a middle way. Dr. Singh has always encouraged internal debates within his team of advisers, picking and choosing ideas based on their political practicality and feasibility, almost always treading the “middle way”, a term that has more recently become globally fashionable — from Washington to Beijing, Brussels to Brasilia.
The best exposition of the “middle way” in Indian politics was in fact given by Dr. Singh’s “political mentor”, former Prime Minister P.V. Narasimha Rao, who dedicated a large part of his presidential address to the Tirupati Session of the All India Congress Committee in 1992 to an exposition of how the policies that he and Dr. Singh were following at that time were in fact neither “pro-market” nor “anti-state”, but aimed at a judicious mix of public policy and private enterprise — the “middle path” as Narasimha Rao eloquently put it, seeking inspiration from the Buddha!
True, Congress governments have always walked the “middle path” and the sooner all Congressmen/women understand this about Dr. Singh’s policies the better. There is much that a government can do for business without succumbing to cronyism. Today, the government’s biggest contribution would be to alter the ‘state of expectations’ for the better, stimulate the ‘animal spirits’ of enterprise and end this long summer of uncertainty that has come to grip Indian business.
This requires an economic strategy, a political strategy, as well as a media strategy. If economic policymakers operate in a political vacuum and fail to properly communicate to the general and the investing public, their efforts would be in vain, as we have seen so often these past three years. There has to be a meeting of minds between the government and the political leadership and out of that must come an effective strategy of policy intervention and communication.
India remains one of the world’s faster growing economies and there is no reason why it should not become the fastest growing one before Dr. Singh’s term is over.
(Sanjaya Baru is Director for Geo-economics and Strategy, International Institute for Strategic Studies, and Honorary Senior Fellow, Centre for Policy Research, New Delhi)
Like Keynes, Manmohan Singh is treading the middle way, balancing contending ideas in an effort to stimulate the animal spirits of enterprise