Comment

A self-inflicted economic slowdown

One of the visitors to pay a courtesy call on Prime Minister Narendra Modi after his re-election this summer was a former Secretary to the Government of India holding a high-profile constitutional office. During the conversation, the Prime Minister asked: “Arthvyavastha ka kya karna chahiye? (What should be done about the economy?)”

The former bureaucrat , who had studied economics at college, replied: “All of that listed in the presentation I made to you in 2015,” referring to the marathon brainstorming sessions the Prime Minister’s Office (PMO) had held nearly four years ago to set the policy agenda for Mr. Modi’s first term. It was a sharp remark to make. For it implied that Mr. Modi’s government had made little progress on translating agenda into action.

Ending the paralysis

Back then, the economy was still in recovery phase. In the final 18 months of its 10 years, the Manmohan Singh-led United Progressive Alliance (UPA) government had moved the economy into repair phase.

For all its faulty handling of the economy, the Manmohan Singh-led government did manage to end the parliamentary paralysis and pass its land and food Bills in 2013, the choice of legislative action dictated by ideological inputs, rather than the wisdom of the then Prime Minister expressed by his key economic aides. A mechanism for handling projects which had been stalling for both economic and administrative reasons was set up in the Cabinet Secretariat and the PMO. The economy that had been named as one of the so-called ‘Fragile Five’ was no longer counted so and had exited the ignoble clubbing.

The policy paralysis —an administrative and political bottleneck — had ended. The fiscal and current account deficits had been compressed, and GDP growth was slowly picking up momentum year after year, a recovery that continued till 2016-17, the year of demonetisation. Inflation remained out of control, also, in part, due to the sharp uptrend in global crude prices. In May 2014, after Mr. Modi’s Cabinet was sworn in, it was made clear to the new government that purposeful steps would strengthen this recovery. Without reforms, though, the recovery would be difficult to sustain.

Among officers that made precise recommendations on action needed was the Prime Minister’s close aide and IAS officer, Hasmukh Adhia, who, as the Financial Services Secretary, made a presentation that detailed in the strongest possible terms the crying need for corrective action in public sector banks: the quicker the banking sector recovered its health, the speedier a pullback in the overall economy could be expected. A recovering economy would have meant, borrowers would be less likely to default on loans and bank NPAs (non-performing assets) would rise at a slower pace if at all.

Ignoring advice

But advice on action needed and decisions that should be avoided were ignored. The Reserve Bank of India (RBI) cautioned the government against demonetisation in writing; the former RBI Governor, Raghuram Rajan, did so orally.

Ahead of the rollout of the Goods and Services Tax (GST), on invitation from the government, well-regarded economist and former Finance Secretary Vijay Kelkar briefed the Prime Minister and key Cabinet ministers on the criticality of avoiding the business-unfriendly rate structure and compliance system that had been worked out for introduction. He was invited to the midnight launch in Parliament’s Central Hall of the GST, but his advice went unheeded.

As late as in the run-up to the July 5 Budget, economists openly sympathetic to the ruling party called for bold steps aimed at reversing the slowdown. After the Budget was tabled, economist Surjit Bhalla drew attention to the need for changing the status quo in agriculture and the impossibility of doubling farmer incomes. Economist Subramanian Swamy has consistently drawn attention to the dire consequences to be expected as a result of the Modi government’s approach to the economy. Members of the Prime Minister’s Economic Advisory Council have been a measured voice of wisdom. Arvind Panagariya is writing with concern over the lack of appetite for growth-accelerating reforms.

The consequences of five years of ignoring advice are, well, hard to ignore now: the weak recovery inherited in 2014 has indeed petered out. A growth slowdown has been on for three years. The loss of growth momentum in the three years from 2016-17 to 2018-19 is significant: 8.2%, 7.2% and 6.8%. GDP growth hit a 25-quarter low of 5% in the April-June 2019 quarter.

Scores of private sector jobs are getting axed. Growth in car sales, retail loans and property has plummeted to multi-year lows, as the impact of the slowdown spreads across the economy.

Several policy pronouncements have been made since the day the courtesy call was paid. These include the July 5 Budget and the weekly press conferences of the Finance Ministry aimed at announcing measures for accelerating GDP growth. That the measures fall woefully short of the recommendations made by economists and bureaucrats over the last five years is an understatement. The government has also failed to take the steps required urgently at this stage of the slowdown.

When there is a mine of advice sitting in government files, gathering dust for five years, who should be blamed for the unfolding economic slowdown?

Puja Mehra is a Delhi-based journalist

 


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Printable version | Sep 18, 2022 2:49:37 pm | https://www.thehindu.com/opinion/op-ed/a-self-inflicted-economic-slowdown/article29452530.ece