Sliding down the mountain

To arrest the economic downturn, the government should take a leaf out of Manmohan Singh’s book

October 30, 2017 12:15 am | Updated 12:15 am IST

KARNAL DISTRICT, HARYANA, 05/12/2016: Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) women workers seen at the site in Karnal Distric in Haryana. 
Photo: Ramesh Sharma

KARNAL DISTRICT, HARYANA, 05/12/2016: Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) women workers seen at the site in Karnal Distric in Haryana. Photo: Ramesh Sharma

More than three years since the National Democratic Alliance (NDA) government came to power, the economy occupies centre stage. Partly because of the effects of demonetisation and partly because of the way the implementation of the goods and services tax (GST) has played out, the continuing slowdown in economic growth in the last few quarters is now a reflection on the government’s performance. Time and again this government seeks to deflect criticism of its handling of the economy by blaming the previous United Progressive Alliance (UPA) government under Manmohan Singh.

It is worth looking at what Dr. Singh achieved at the helm of the UPA and the circumstances in which he became Prime Minister. Dr. Singh’s appointment as Prime Minister in 2004 came at a time when oil prices were on an upward trajectory, fiscal deficit was slightly higher than 4%, and he was tasked with managing a government with a large and demanding set of coalition partners.

The economy then and now

During his first term, crude oil prices increased by more than 100% till 2008. Then the global economy crashed with the sub-prime mortgage crisis. The next year, oil prices began to ascend again, at one point crossing $100 a barrel. Following the rise in oil prices was inflation, which resulted in rising interest rates for the entire period of UPA-1. Contrast this with the current government that came to power with an independent majority in Lok Sabha and got an incredible oil bonanza for the first three years of its rule.

Today, the primary lending rate is at a three-decade low and the fiscal deficit target is well within reach. It is thus the paradox of plenty that this government is unable to boost a stuttering GDP, encourage private investment, revive exports, or boost consumption.

The average growth rate of the economy under Dr. Singh’s watch was close to 8%. Merchant exports grew from nearly $76 billion to $317.5 billion in 2014, while software exports, including business outsourcing, reached nearly $100 billion.

During this time, direct taxes grew at a rapid pace from ₹1,05,089 crore in 2004 to ₹6,38,543 crore in 2014, a growth of six times in a decade. In fact, for the first time in history, direct taxes collected more revenue than indirect taxes in a fiscal year, a sign of progressive taxation policy.

In stark contrast, indirect taxes today are up to 10.5% of GDP, the highest since the advent of taxation in India. The current government has chosen to show little concern for the common man as it has repeatedly increased indirect taxes on the sale of petrol and diesel.

Dr. Singh had to be creative to weather the storm of high oil prices and a depreciating rupee. He managed to protect the common man from the pain of hyperinflation by introducing the mechanism of petrobonds to finance the deficit incurred by oil marketing companies. This helped stymie the pain of the financial shock caused by high oil prices.

Another example of Dr. Singh’s insight is the Japan-India currency swap deal that ended in December 2015 and is being sought to be renewed by the current government. Dr. Singh set up a bilateral swap facility, first put in place in the midst of the global financial meltdown in 2008 with a small size of $3 billion, then fortified to a three-year $15 billion arrangement in December 2012, and again upgraded to a solid $50 billion a year later. In 2008, with the global recession, the rupee declined to ₹51 to a dollar, after having appreciated to ₹39 to a dollar. In 2013, with the American Federal Reserve deciding to taper off the liquidity in the market, a flight of capital led to a 20% drop in the rupee. In both scenarios, the deal with Japan stopped and even reversed the path of a rupee in a free fall.

Jobs and education

The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), UPA-1’s flagship scheme, was launched in February 2006 to enhance the livelihood and security of millions of rural landless labourers and marginal farmers initially in 200 districts. It was rolled out nationally in 2008 and covered 625 districts by 2010-11. The World Bank in its World Development Report (2014) called it “a stellar example of rural development”.

I believe Dr. Singh saw MGNREGA as less of a welfare scheme and more of a necessary market intervention to correct the supply-demand imbalance in the rural labour market and provide the poor with an instrument to enforce a decent minimum wage. The years after the introduction of MGNREGA saw substantial increases in the rate of wage growth of both male and female labour, including among unskilled female workers. Significantly, this improvement was not confined to MGNREGA workers alone. A study by Crisil in 2012 showed that the increase in rural consumption was partly due to MGNREGA and another by the Consultative Group to Assist the Poor-World Bank (2013) in Andhra Pradesh showed that MGNREGA became a major source of income for poor households (40% of their income) in the lean agricultural season (May-June), saving them from falling back into poverty.

The importance of MGNREGA today — that the government dismissively suggested as a programme that reflected the Congress’s failures — is seen in the fact that rural demand for employment increased in the months following demonetisation. In other words, MGNREGA, a legacy of the UPA, provided succour to millions and helped keep the rural economy on its feet.

The landmark Right to Education Act (RTE) was passed in 2009, which made education a fundamental right for children aged 6-14. This law put an end to the inhuman practice of using children as low-wage labour and has given millions of underprivileged children an opportunity to access high-class education. The RTE led to a grand expansion of infrastructure as schools were built in districts across the country and teachers were paid higher than market salaries to attract the best and the brightest to teach in government schools.

We are today sliding down the other side of the mountain that Dr. Singh helped us climb. The economy was gasping for breath with high indirect taxes coupled with poor exports, low credit growth, and abysmal private investment when demonetisation and a hurried implementation of GST brought it to its knees. Job creation has all but come to a standstill as for every 30,000 job seekers a day, only 400 find meaningful employment.

The fundamental difference between Dr. Singh’s government and the government of the day is in their respective approaches to solving problems. Dr. Singh’s actions were silent, consultative and surgical, and always protective of the common citizen. The present government is loud, solitary, and acts with a blunt force object, adopting a take-no-prisoners approach, lacking even a modicum of empathy for the common man. Looking at where we are today, I am all but certain that history will be kinder to Dr. Singh than his contemporary intellectuals and journalists were.

Rangarajan Mohan Kumaramangalam is a member of the Indian National Congress

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