Groping in the dark on the economy

Illustration of a long shadow hands protecting a rupee sign  

The July 5 Budget was presented originally as the government’s vision for the next ten years. But, only three months later, the government began revising it. The Budget, and the economic philosophy that had guided its formulation, were both completely rewritten through a string of amendments.

The Budget's provisions for collecting more in taxes from the capital gains accruing to the super rich, Finance Minister  Nirmala Sitharaman then explained, were aimed at redistributing wealth to bring about more equitable development. However, the tax rate hikes were rolled back later. Tax rates on corporate profits were reduced instead. Speculation is now rife about similar relief on individual incomes. In effect, the stated policy doctrine of redistributive taxation stands upended in a matter of weeks.

Shifting policy stances

A few questions arise following these steps.

First, is the government’s change of heart an outcome of serious deliberations, or merely a reaction to public outcry? Second, has Modi government grasped the nature of the economic challenge sufficiently? Or, finding itself unable to figure out what policies to follow, is it merely flitting from one type of policy stance to another?

Third, why has the Modi government’s economic record come to be defined by its constantly shifting policy stances? Fourth, why has the public discourse not shifted away from the economy’s troubles?

Narratives play a significant role in shaping expectations. Reviving expectations is necessary — but not sufficient — to reverse the slowdown in GDP growth, consumption and private investments. The tax cuts were bold and corrective but insufficient to revive optimism. Reform of the taxation policy regime is long-awaited and remains incomplete. If the sentiment in business circles remains bleak even after the tax cuts, it is because an economic revival will take many more reforms. More importantly, though, there is growing realisation among captains of industry that the government has consistently demonstrated an inability to settle into a set line of thinking.

Back in 2014, ‘Make In India’, a manufacturing-driven strategy for economic growth and generating sustainable livelihoods, was announced from the ramparts of the Red Fort. More than five years later, the grand plan for replacing red tape with red carpets for factories is caught up in, well, red tape. Manufacturing is in a slump; its growth crashed to 0.6% in the April-June quarter this year. Later in 2014, the resolution for setting up the NITI Aayog proposed a ‘Bhartiya model’ in which the state would take on a curtailed role, with limited influence in the industrial and services sectors of the economy.

The faith in market forces did not last long, though. The 2015 Budget reprised, as first pointed out by economist Jean Dreze, the Nehruvian strategy for growth — building physical capital with public investments. However, the 2015 Budget allocation of ₹70,000 crore towards this strategy proved too modest to generate an infrastructure push or stimulate an economy as large as India. Defence Minister Rajnath Singh recently reaffirmed faith in another ingredient of Nehruvian socialism: import substitution. In fact, contrary to the faith professed in market forces by the proposed ‘Bhartiya model’, the Modi government has resuscitated a host of pre-1991 policy tools that shrink rather than deepen markets — from price caps to import tariffs.

Ideas rejected more than two decades ago during the liberalisation phase are back in circulation, such as printing rupees to cover up for shortfalls in tax collections and raising sovereign debt in foreign currency.

No ‘creative destruction’

The BJP’s September 2018 political resolution explained away the hardships demonetisation and the messy Goods and Services Tax (GST) imposed on smaller firms as ‘creative destruction’. The implication was that the closure of informal-sector firms that had failed to cope with the GST’s byzantine compliance system was welcome as it had led to greater ‘formalisation’ of the economy. This was an inaccurate reading of the Schumpeterian principle of creative destruction. The only way the GST may have led to more formalisation of the economy is by putting bigger companies at an advantage over smaller ones in coping with the chaotic and ever-changing compliance system.

The 2019 Interim Budget returned to the public spending-led approach with cash supplements for farmers and taxpayer-funded ‘welfare measures’ of toilets, tapped water, cooking gas and subsidised loans. Along with the Interim Budget’s income tax sops for the middle class, this approach was also supposed to rekindle consumption, and pump-prime the slowing economy. No such gains accrued. The economic pain continues unabated.

The government’s economic philosophy resists easy characterisation because it changes so frequently. The ever-shifting policy stances are defended as “being responsive to public opinion”. Critics see it as evidence that the government is struggling to grasp the nature of the economic challenges and, therefore, groping in the dark.

Policymaking has three essential ingredients: technical elements, administrative inputs and political goals and packaging. Technical inputs come from economists. The government has no stomach for plainspeak. Without saying so openly, it expects professionals to desist from speaking truth to power and assist party spokespersons in shaping narratives complimentary to the government. Naturally, it is losing economists who value national economic progress, personal integrity and professional reputations. Increasingly, as qualified economists are getting sidelined or fired, the chief determinant of economic policies is just politics.

The government believes it will succeed in reversing the economic slowdown using an approach that has worked for it in consolidating political power. It is working on the assumption that the phenomenon of the personality cult can be replicated when it comes to the economy. This is a mistake. Even in a highly imperfect market economy like India, the government is merely another significant player.

Puja Mehra is a Delhi-based journalist

This article has been edited post-publication.

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Printable version | Feb 26, 2021 8:38:42 AM |

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