Open Essay

The Economy Beyond Numbers

There is much to feel good about Modi's four years in office

TCA Srinivasa Raghavan TCA Srinivasa Raghavan | 22 Mar, 2018

BACK IN 1989, The Economic Times decided to write a series on Rajiv Gandhi’s five years since 1984. The late Gopi Arora, principal secretary to the Prime Minister, gave a good suggestion: “Analyse what Rajiv has done, rather than what all he has not done.” Arora was a learned man and the Shakespeare in this was clear, namely, ‘The evil that men do lives after them; the good is oft interred with their bones.’

So that is how the series was structured—because the list of things that prime ministers must do in a democracy is impossibly long; the list of what they manage to do is correspondingly short. Jawaharlal Nehru recognised this best with his Robert Frost quote about miles to go before he slept. This doesn’t mean the focus of that exercise was only on the good things; we also looked at the mistakes, which were plenty. But there was no lamenting what Rajiv had not done because mistakes are bound to happen when anyone tries to achieve a paradigm shift, as Modi has done.

Nehru tried a paradigm shift by focusing on the public sector, which was a mistake. Indira Gandhi tried her ‘direct attack on poverty’ which was a mistake. Rajiv Gandhi tried a fiscal push, which was a mistake. Narasimha Rao tried liberalisation, which for some is a mistake. And Modi has tried to improve service delivery via the bureaucracy and digitisation. The results are yet to come in.

The Prime Minister’s insistence on internal reforms in government processes, his emphasis on outcomes and the overall toning up of the Central bureaucracy are quite remarkable. The benefits will be seen after a couple of years. But there is a problem: most of the services he has tried to get delivered belong in the domain of states, over which he has no direct control. Whenever he has tried to rectify this, he has ended up annoying chief ministers. India, after all, is not China where if the chief ministerial counterpart delivers on what the Central government wants, he is promoted to its higher echelons. Here he may lose the next election.

Modi’s four years have to be seen in this overall context because the numbers alone do not tell the whole story. If they did, then, as a former Indian cricket captain said, Mohandas Menon would be India’s captain. He was the team statistician.

Nor can we get away from the fact that the UPA left the economy in the direst straits imaginable, both internally and externally. As Modi said in Parliament last month, India had been placed in the ‘fragile five’: that is, economies that could go bust any time.

I recall meeting a secretary-level officer in the Finance Ministry in 2012 who said he was spending sleepless nights over whether we were going to have a repeat of 1991—high inflation and high capital outgo, both caused by a very high fiscal deficit because the Congress party wanted to spend its way to victory in the 2014 General Election.

Remember, too, that the banking Non-Performing Asset (NPA) problems hadn’t even been flagged then. There was a sense of unease, but that’s all. The virtual come-and-help yourself policy of the UPA-II between 2010 and 2013 came as manna from heaven for large corporate borrowers whose names now figure prominently on the list of defaulters.

It was left to the Reserve Bank of India under Raghuram Rajan to kick it right up to the highest level in September 2014.

DON PATINKIN WAS an Israeli economist who said one way of judging how an economy was performing was to draw two lines at right angles to each other, forming four quadrants. Three of these, he said, represented manufacturing, labour and finance. The fourth quadrant combined them so that you could see how these three major sectors were coming together to give high or low growth. In my view, this is the best way of judging Modi’s four years because it leads to a highly paradoxical result: if you go by numbers alone, things look absolutely fine, which is what the Government is emphasising. But in spite of this, an overall positive outcome is necessary but not sufficient. It is, if you will, like a T20 match where everyone is playing well and yet the match is a bore. Those who are old enough will recall that this is exactly what had happened in 1989. Every indicator showed that the economy was performing well. Yet, in 1990, India slid into a massive balance-of- payments crisis because with allegations of corruption against Rajiv Gandhi by VP Singh, the political atmosphere was not right. Business confidence was missing.

This is not to say that we are in for an economic crisis. Far from it. But bad practice is making all economic agents sulk. The simple point is that everyone is feeling worse off. True, inflation has been low for the last three years. But at the same time, many of the Government’s policies—like the ban on cattle trading and slaughter, demonetisation, the badly designed and implemented GST, the lower interest rates on deposits— have lowered the incomes of all except the super rich. Patinkin would have been aghast at this outcome.

LET US START with Patinkin’s labour quadrant because politically that could be the BJP’s Achilles heel. The harsh truth is that the Modi Government has not delivered on its promise that it would be raining jobs. And the best way of seeing this is not through official employment statistics, but adverse election results. Only die-hard supporters would argue that the Government has done well.

The Modi Government has not done badly. Given what it inherited, it has actually done quite well. It has undertaken over a thousand small reforms. Each is significant and will bear fruit in the next couple of years

Jobs mean two things: one, a regular monthly income paid on a pre-specified date; two, benefits like Provident Fund, pension, medical insurance, leave travel assistance, etcetera. By the way, for government jobs at least, which are the most sought after, I define employment as the right to receive a regular, monthly income without a concurrent responsibility to work.

Be that as it may, everyone thinks the young are unhappy because the NDA Government has not created enough jobs. But if you look back, no government in India has been voted out on this grievance. Yet, jobs are an issue and the reason is the extravagant promises made by Modi.

The problem is that no one is quite sure just how many more jobs a government must create to ensure re-election. A little perspective is helpful here. India’s workforce is around 500 million, where ‘workforce’ is broadly defined as people willing and able to work. At present, while about 470 million of these people do some work, only about a tenth of them are employed in the accepted sense of the term. These 470 million include unpaid homemakers.

There is also massive under-employment. Because of our labour laws and trade unions, this definition holds for both the private and public sectors. It is especially true of direct government employment, where work and income bear no relation to each other because Article 311 of the Constitution says no one can be sacked for not working.

A very high level of investment is needed to create enough jobs to keep voters happy. And, as we are seeing, the employment created is bound to be technology-intensive at every level because, as Marx pointed out 150 years ago, that’s the only way to increase efficiency and maximise profits, even for the public sector.

Suppose the investment level does somehow go up from the current 30-odd per cent of GDP to 40 per cent or more. Then what? The resulting number of jobs—regular income for 365 days paid on a monthly basis—will still be far fewer than needed or expected by voters. Result: disappointment. This is what we are seeing now. The political moral is clear: never promise jobs, only livelihood or rozgaar.

That is why the Modi Government has been trying to steer the debate away from jobs to work, of which there is plenty. It is seeking to link people’s earnings to productivity, rather than regardless of it. But thanks to the high preference for the reverse—naukri instead of kaam—he has been unable to change expectations such that the Indian workforce starts linking wages and salaries to productivity instead of status.

That is what the Prime Minister meant by his pakora (a fried snack) metaphor, which was perhaps an unfortunate choice but full of deep economic meaning.

AT THE HEART of the finances problem lies a simple political fact: governments, which are made by political parties, want to be the leading economic agents. For that, they need money. To have enough of it, they need to tax more. But if they tax more, they annoy voters. So they tax less and never have enough money.

The Modi Government has tried to fix this problem, though in the wrong ways. First, it tried demonetisation, which has not led to the hoped-for increase in Government revenue. Then it introduced GST after handing over a traditional sovereign right to a committee comprising all state governments. The result is a mess of monumental proportions. It will be sorted out eventually, but for the moment it has left the Government so cash-strapped that it has lost an important political ally in Andhra Pradesh. More may well follow.

Tax revenue shortfall is not the only problem, however. Thanks to UPA-II’s policies, public sector banks are in deep trouble. When YV Reddy demitted office as RBI Governor in September 2008, he had ensured that Indian banks were in excellent health. You can check their balance sheets for that year. P Chidambaram as UPA Finance Minister also played an important role.

In steering the debate away from jobs to work, of which there is plenty, the Government is trying to link people’s earnings to productivity. This is what Modi meant by his pakora metaphor, which was perhaps an unfortunate choice but full of deep economic meaning

Five years later, the scene had changed completely. By the time the Modi Government took office, most of the public sector banks were, to put it in a word, broke. They could only survive on massive capital infusion from tax payers. We can only speculate why this happened. But it is important to bear in mind that the global economic slowdown was only one of the causes. There were other moral and political reasons which are outside the purview of this analysis.

When we judge the Modi Government’s four years, another extremely important aspect has to be kept in mind. This has to do with the fact that from 1970 onwards, Indira Gandhi decided to use bank finance to fund projects that should be funded by governments, both Central and state. This may have saved fiscal stress, but it was an invitation to financial disaster. Under UPA-II, another very perverse thing happened: banks, instead of funding social schemes, ended up funding crooked businessmen.

The Modi Government was expected to fix this, and it has tried via its various loan schemes, Direct Benefit Transfer, Jan Dhan, and so on. But that has been the easy part. The tough part was to change the work culture in these banks, and to eliminate the political control over them. That has not happened.

Public sector banks need to be privatised, but the Modi Government—like all other governments before it—has chosen not to. The reason is the same as it has been for previous governments: the patronage that these banks allow politicians to offer. This will go down as one of the Modi Government’s biggest failures because it had the opportunity, the political goodwill and the numbers in the Lok Sabha to push through at least the intent to privatise these banks. Now it is too late. We don’t know when such an opportunity will arise again.

IN PATINKIN’S THIRD quadrant, we have the production sector, comprising manufacturing, agriculture and the residual called services. For any Central government in India, agriculture is the biggest political millstone, placed there by history. Moreover, no government can do anything to improve its condition. This has been true of all governments all over the world since time immemorial. Whether it is the weather or pestilence or the Cobweb theorem, one thing is for sure: farmers take the biggest risks and earn the least rewards. That’s just the nature of farming.

In India, the Central Government can tinker at the margin, but that is all it can do. It is the states that carry the load of agriculture, but when they fail the blame goes to the Centre. Most states have been unable to tackle the problem of productivity and irrigation on the scale needed. The last time it happened was during 1969-72, when the Green Revolution took place in Punjab and Haryana.

The blame is being placed squarely on the Modi Government. But as Central governments over 70 years have discovered, there is little they can do. In manufacturing, however, they can. This was clearly demonstrated by the Narasimha Rao Government when it dismantled controls and licensing. Since then, however, including the NDA’s four years now, India has not been free of business cycles. The manufacturing sector booms for a while and then goes into a decline. It has been Modi’s bad luck that he took office when the decline was gathering pace after having started in 2012. But now there are signs of recovery, and in another six months, the cycle will be on the rise again.

THERE HAS, of course, been the controversy over GDP growth statistics. But this is mostly because of a failure of understanding the new methodology by experts who have found no problem with it when the rate of growth has slowed down but only when it has gone up. All things considered, the Modi Government has not done badly. Given what it inherited, it has actually done quite well. The Government has undertaken over a thousand small reforms. The list is very long, as can be seen from its press releases at the end of every year. Each is significant and each will bear fruit in the next couple of years.

Yet, there no feel-good factor. This lies at the heart of the Modi Government’s four years in office. The paradox is that while political confidence in Modi’s leadership remains rock solid, economically it has turned to jelly, which is why new investment is so slow in coming forth. The World Bank’s thumbs-up on ‘Ease of Doing Business’ will help, but not much. The problem is not so much about economic policy as apprehensions in the minds of both buyers and sellers, their fear of erratic and arbitrary government demands executed by an ill-prepared bureaucracy. The Government may want change, but its agents are unable to deliver.

This is not going to be easy. This is because it is not just a matter of reassurances by the political top brass. It is not even a matter of new laws and rules. It is, above all, about an ill- trained and venal bureaucracy hugely empowered by the Modi Government that has fallen down on the job.

banking BJP economic reforms employment Narendra Modi UPA