The latest monthly report published by the Finance Ministry highlights a three-year trend of declining economic growth, slowing agricultural output, stagnant investment spending ratio, rising current account deficit and rising inflation. Over the past five years the net addition to exports has been zero. Banking and power sector woes are well known, to which is added fresh problems in civil aviation. This has come to pass despite a spectacular debut of a government which won a thumping and unprecedented absolute majority in 2014 and was rewarded by a fiscal bonanza in the form of a steep fall in global oil prices. How does one understand the true context of this underwhelming economic performance? This is a story of what could have been, of growth that did not happen, of missed opportunity.
Politics in economics
The story of underperformance is actually a decade old, straddles two separate governments, and it is what Puja Mehra calls “the growth story that devolved into a growth without a story.” Her book The Lost Decade is a lucid chronicle of the unhappy marriage of economics and politics, where the latter undermined and ignored the good sense of the former. Anti-reformists were in the driver’s seat, and political considerations trumped economic wisdom. Mehra, a journalist and economist, has put together an engaging account. She is unhesitant to jump into the narrative as a journalist, asking bold and blunt questions to the key players. Her tone is uniformly objective, and yet the verdict is clear and self-evident. She brings out vividly how individuals and political personalities impacted the trajectory of the economy derailment. And often the motivations of those decisions were inexplicably petty or purely political. For instance, the author points to a Prime Minister who could not overrule his reckless Finance Minister, because the latter had once been his boss.
Mehra laments that it is not as if there was a dearth of economic talent in the government, or lack of strategic thinking or inability to identify priorities. But ultimately if the economy did as well as it did, it was despite the agenda of reforms being completely sidelined by politics. This just shows that if economics and politics had been more aligned, the economy could have had a quantum jump in its performance. If the post 1991 unleashing of economic growth was validation of the bold decisions taken in the wake of a balance of payments crisis, the post-Lehman Brothers collapse decade is certainly one of missed opportunities.
The first National Democratic Alliance (NDA) government under Prime Minister Vajpayee saw the virtuous cycle of declining deficits and interest rates, and increasing investments and infrastructure spending. It laid the basis for rising growth and this trend continued in the first term of the United Progressive Alliance (UPA). But subsequent years saw all the good work unravelling.
Two unrelated developments, the terrorist attack in Mumbai and coronary bypass surgery of the then Prime Minister, led to a new Finance Minister Pranab Mukherjee occupying North Block. He continued to occupy that office till his elevation as President of India. His term was marked by excessive and overextended fiscal stimulus, leading to double digit inflation, the rising stress of high leverage and borrowings leading to the non-performing asset (NPA) crisis, and a widening current account deficit which eventually led to the rupee panic of 2013. To add to this was the “policy paralysis” phase of the government under UPA-2. To top it all, a scathing indictment by the Comptroller and Auditor General, and allegation of the spectrum and coal scam led to a maelstrom and virtual stoppage of Parliament.
Arbitrary moves
If UPA-2 was plagued by “policy paralysis,” it was quite the opposite during NDA-2. Decision making was speedy, but perceived as arbitrary, and highly centralised. The sudden decision of demonetisation and ill-prepared rollout of GST are but two prominent examples, but both of these had an adverse impact on the economy, output and job creation. Increasingly, the pro-poor rhetoric has drowned out many reformist calls, such as disinvestment, deregulating agricultural exports or reforms in land, labour and administration. Mehra concludes that Prime Minister Modi is closer to Nehruvian socialism than what right-wing economists had hoped for. Her book is a must-read for students of contemporary economic history of India. It is a persuasive account of why India is not performing at its full potential.
The Lost Decade (2008-2018) ; Puja Mehra, Penguin Random House, ₹599.
