Good politics but bad for country

By Swapan Dasgupta

Finance Minister Pranab Mukherjee’s Budget speech reminds me of an essay written some 150 years ago by the celebrated Bengali writer Bankim Chandra Chatterjee.

In that essay, Bankim addressed the question of India’s subjugation over the centuries. “Hindu kings or the rulers of Hindustan,” he observed, “have been repeatedly conquered by alien people, but it cannot be said that the bulk of Hindu society has ever been vanquished in battle, because the bulk of Hindu society has never gone to war.”

On Friday morning, Pranab babu took a lesson from the collective experience of Hindus and did what was politically most prudent: He refused to join the fight and made the Union Budget a complete non-event. This was not because he is inherently a dull person or, worse, a dreary accountant. In a pre-meditated move, he refused to be bowled over by those clamouring for a bold, reformist Budget similar to the ones presented by VP Singh in 1985 and Manmohan Singh in 1991. Neither was he impressed by those on the populist and Left wings of the UPA Government to squeeze the rich and the corporates and go on a spending splurge with money that the Government did not have. He did absolutely nothing and postponed all serious decision-making to a time when the Government could have the luxury of making a relaxed choice. The late PV Narasimha Rao, the man who mastered the art of management by inaction, would have been proud of him.

The Finance Minister was aware that any hard choice — either to go in for fiscal consolidation or undertake profligate spending — would have triggered a political reaction. After the debacle of the Assembly elections and the theatre of the absurd over the Railway Budget last Wednesday, what the Government needed was a period of calm and a time to get its house in order. As the Congress’ foremost fire-fighter, Mukherjee earned a breather for the Government.

Of course, the Budget did contain proposals that will add to the inflationary spiral in the short term. The widening of the service tax net and the hike in excise duties will lead to consumers paying more. The salaried class will be angry that the retention of high interest rates for loans has been accompanied by an unreasonable cut in the interest paid on Provident Fund deposits — the latter decision was craftily detached from the main Budget.

At the same time, Mukherjee deftly protected himself from any flak from his inability to meet last year’s Budget fiscal deficit targets by once again committing himself to bringing the deficit down. The Budget has deliberately understated the subsidy bill of Sonia Gandhi’s newest philanthropic venture — the proposed Food Security Bill. If this measure can be made to do the rounds of the parliamentary committees and sub-committees for the next 12 months, it will be a big boon for the Finance Ministry. If it becomes law midway through the fiscal year, the deficit targets will go completely awry — especially if coupled with a rise in the fuel bill — and bring India close to a 1991-type situation when the Government had to mortgage its gold reserves.

Some economists believe that the Budget proposals contain a hidden proposal for removing the subsidies on diesel. That may well be the case. However, the point is that Pranab babu has merely postponed having to take hard decisions. In six months or so, he hopes, the UPA will be better placed to decide which course is politically more rewarding.

In essence, this Budget has delayed an economic crisis that many people legitimately believe is already upon India. If industry, already weighed down by crippling interest rates, remains sluggish and if the woes are compounded by persisting stagnation in agriculture, India will move from a political crisis of the UPA to the dissipation of the larger Indian growth story.

It is a risk that only beleaguered politicians who have lost sight of any larger purpose of governance are willing to take. The Congress at this point in time has lost its way. It is confronted by a crisis of credibility and a crisis of leadership. It is possible that in six months or nine months things will improve. On the other hand, the loss of direction may turn into panic. Mukherjee’s Budget is based on the most common assumption of the beleaguered — a belief that things can only improve and that the Opposition will score innumerable self-goals. He also hopes that the Budget will be a one-week wonder and that after the initial excitement is over, the political class will get back to its more humdrum interests: Monitoring the shenanigans of Mamata Banerjee, hounding Narendra Modi and cheering or taunting Rahul Gandhi.

The magnitude of the economic downturn has been inadequately appreciated by politicians cutting across the political divide. The belief that entitlements are sacrosanct and once given cannot ever be taken away is now part of conventional wisdom. This is why the focus is always on increasing revenue and not curtailing Government expenditure.

Sooner, rather than later, these assumptions will be brought into question, particularly if India heads towards fiscal anarchy. The Budget has traditionally given the political system a small window to discuss the economy and, maybe, even digest a few hard lessons. Mukherjee’s genius lies in the fact that he deprived India of an opportunity for engagement. It was good politics but bad for the country.

Sunday Pioneer, March 18, 2012

SLEEP WALKING - Economic reform is meaningless without intellectual revolution

By Swapan Dasgupta

P.V. Narasimha Rao, 1992

In these troubled times for the global economy, it may be worth narrating a story about the mentality of Indian politicians.

When the Congress returned to power in the summer of 1991 after the Janata Dal interregnum, the cabinet of Prime Minister P.V. Narasimha Rao was presented a note by the ministry of finance advocating dramatic reforms that included the deregulation of the economy. The note was greeted with predictable scepticism, if not outright hostility by the cabinet.

Looking for a way out of the logjam, Rao despatched a young aide to one of Indira Gandhi’s trusted confidants for advice. The hard-nosed veteran read the finance ministry note and then offered his suggestion. Wouldn’t it be more advisable, he asked, to preface the document with appropriate passages from Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi? It would, he suggested, definitely enhance the comfort level of the cabinet to know that the proposed measures were in conformity with the scriptures.

The wily Rao didn’t hesitate to accept the sage advice. A reworked cabinet note was circulated and this time, the opposition melted away, giving the prime minister the mandate to pursue liberalization as the highest stage of Nehru and Indira’s socialism.

This delightful story may well be true, partially true or plain apocryphal. What is remarkable, however, is not the revelation that the Congress party is made up of dinosaurs, but the extent to which orthodoxy takes hold of the political imagination to resist change. This is, of course, true of India but it is also a global phenomenon.

In her autobiography, The Path to Power, Margaret Thatcher spelt out the insidious hold of the post-War consensus on the British political imagination: “By 1964 British society had entered a sick phase of liberal conformism passing as individual self-expression. Only progressive ideas and people were worthy of respect by an increasingly self-conscious and self-confident media class.” Thatcher may well have been talking of India.

Nominally, India may have travelled a long way from the days when inefficiency and sloth were regarded as economic virtues and when personal rates of taxation for the highest slab touched 97 per cent. What is significant, however, about the massive economic shifts that were first brought in by Manmohan Singh’s 1991 budget is the remarkable extent to which change has been ushered without fanfare and, more often than not, by stealth.

It required the 1991 balance of payments crisis and the emotional trauma of the physical mortgaging of some of India’s gold reserves to begin the assault on the licence-permit-quota raj. Likewise, it required the Western sanctions against India in the aftermath of the 1998 Pokhran-II blasts to lift many of the curbs on foreign capital and rid Atal Bihari Vajpayee of his party’s accumulated swadeshi baggage.

As 2011 draws to a close, India is at a similar crossroads. The economic downturn in the United States of America and the Eurozone crisis has left no economy untouched. Complemented by what is called the ‘governance deficit’, India’s economic indicators have moved southwards. The gross domestic product projections are down from nine per cent to seven per cent; the already-large fiscal deficit is expected to breach the budgeted five per cent level and touch more than six per cent of the GDP; inflation has been hovering around 10 per cent for nearly a year and shows little sign of coming down despite 13 interest rate hikes since March 2009; the sensex has lost 22 per cent since January and foreign direct investment inflows have virtually ceased after touching a record $29 billion in 2010; in the preceding quarter, the profitability of Indian companies fell by an average of 30 per cent; and the Indian rupee, now blessed with a distinctive symbol, has lost some 15 per cent of its value in barely three months, thereby making imports prohibitive and adding to the inflationary spiral.

Middle India’s overall comfort level with Prime Minister Manmohan Singh rested on two beliefs: first, that he was a man of integrity and innate decency and, second, that he had the requisite skills to manage the economy. On both these counts, Singh’s reputation is in tatters. No one accuses the prime minister of being personally dishonest, but the sheer scale of the corruption charges before the courts have put question marks on his ability and willingness to tame his roguish colleagues. Worse still, there is complete consternation at the prime minister’s inability to ‘fix’ the economy. That he doesn’t possess the proverbial ‘magic wand’ is conceded by all reasonable Indians. What strikes them as odd is that the senses of urgency and purpose that should have accompanied the economic slide are missing. The government appears to have simply given up. Particularly disturbing is the extent to which a beleaguered political class seems ready to fall back on the ideological shibboleths that many imagined had been steadily discarded since 1991. The approach to the fiscal deficit is a classic example of a government that seems unconcerned.

There is a stalemate in the US over the failure of the White House and the Republican-controlled senate to agree on measures to reduce a trillion dollar deficit, and in both Britain and the Eurozone, the deficit is at the root of a political and diplomatic stand-off. Yet in India, fiscal consolidation has been deleted from the vocabulary of the ruling party and its allies. The hugely expensive and inefficient Centre-sponsored welfare schemes are not merely regarded as holy cows but there are moves to expand the net. So whimsical is the sop culture that last week the commerce ministry announced a Rs 3,844 crore ‘package’ for weavers in eastern Uttar Pradesh because Rahul Gandhi demanded it. No wonder Mamata Banerjee believes that handouts are her birthright too. In Europe, it is said that ‘austerity is the new normal’. In an economically fragile India, fiscal profligacy is the norm — the preferred Rahul alternative to beggary. India is living beyond its means but no one seems to care.

In most of the countries gripped by the downturn, the trend is towards removing as many obstacles to growth as possible. In Britain, for example, stringent planning norms have been relaxed to facilitate a growth in housing. In Italy, the new ‘technocrat’ prime minister has announced a series of measures that include fiscal prudence, welfare cuts and the dismantling of restrictive practices. In India on the other hand, there are moves to add a statutory premium on land acquisition for housing, industry and public utilities. Additionally, limited progress has been made in enlarging the scope of foreign investment in insurance and retail because of the government’s failure to secure agreement within the ruling coalition.

India, it would seem, is sleepwalking its way into an economic disaster zone. Yet, there are two remarkable features of this death march. First, there is no widespread realization that the troubles aren’t confined to inflation and price rise but affect the nerve centres of economic growth. Second, there is the presumption that statist intervention and a more rigid regulatory regime (that deters private sector corruption) is the way out.

Nehru, it must be said, did a remarkably good job in turning progressivism into common sense. Even two decades after liberalization transformed India and heralded far wider levels of prosperity, India has not yet turned its back on the belief structures of the bad old days. Economic reforms, it would seem, become meaningful only when accompanied by an intellectual revolution.

The Telegraph, November 25, 2011

Economy on the cusp of crisis

By Swapan Dasgupta

Last Friday, for a short while and until the Reserve Bank of India intervened in the forex markets, the US Dollar breached the Rs 50 mark. The steady decline of the Indian Rupee, even at a time both the American and European economies are deeply unsettled, may be greeted with whoops of delight in circles that specialise in body shopping from India. However, for those who have a stake in the well-being and prosperity of the Indian consumer, the decline of the Rupee is bad news. It means higher fuel prices, higher prices of imports (which, sooner rather than later, will also come to include foodstuff) and high inflation. Corporates who wisely availed of the low interest rates on Dollar borrowing may find that their budgetary estimates are likely to go awry by the free fall of the Rupee.

There is a clear writing on the wall that suggests the Indian economy is in for a choppy journey in the coming months. The rating agencies have already downgraded the shares of State Bank of India because of a problem with equity infusion. But anyone who is attentive to the market will know that the warning is not directed at the minority shareholders of SBI but aimed at the majority stakeholder—the Government of India.

Prime Minister Manmohan Singh may well think that life is good this Diwali—and this assessment is certainly true if you believe India is made up of babus and others with inflation-protected incomes. However, there are strong reasons to believe that like the US, India is on the cusp of a ratings downgrade which will damage it more seriously than it did the US.

“We believe India’s policy mix is worsening with a much tighter-than-expected monetary policy and looser-than expected fiscal policy”, wrote the Asia economics analysts of Goldman Sachs in the October 21 bulletin. In less abstruse language it means that those entrusted with managing India’s economy are making a complete dog’s breakfast of their responsibilities.

The signs of the mess are staring people in the face. The GDP growth has already been estimated to fall below 8 per cent, and the question that should be in everyone’s mind is whether the growth rate remains above 7 per cent for both this and the coming year. Secondly, with both food inflation crossing 10 per cent and general inflation also nearing double figures, it is clear that the RBI’s aggressive hiking of interest rates—yet another one is due as the RBI’s Diwali gift to a beleaguered India—will only serve to erode the competitiveness of Indian industry more. Thirdly, the Government’s monetary profligacy is calculated to raise the fiscal deficit from the budgeted 4.6 per cent of GDP to around 5.8 per of GDP. The mismatch between the Budget proclamation and the grim reality suggests that the Government had absolutely no intention of adhering to responsible spending. Like the socialists in Greece, this Government too believes that in the event of a crisis someone is always there to take care of the sick patient.

It should be clear to anyone with an elementary awareness of household finances that individuals and institutions should not, by and large, spend more than they earn. They should also know that borrowing from the market to meet current expenditure means incurring outstanding debts that have to be serviced. Of course, these are basic rules governing individuals with common sense—they aren’t the rules for economists who run and advise governments.

When normal people run short of money, either because they earned less or spent more, they do the next best thing—they tighten their belts and reduce unnecessary expenditure. Confronted by a problem of a mismatch between revenue and expenditure, what does the UPA Government do? Blessed with superior knowledge of economics it proceeds to increase expenditure more and borrowing more from the market.

It is astonishing, for example, that the Government, aided and abetted by a slavish Planning Commission, is unfazed by the fact that the ambitious Food Security Bill will raise the outlay on food subsidies by 66 per cent from Rs 60,000 crore to Rs 1,00,000 crore. Creating an ambitiously elaborate welfare net on the lines of Europe may be warranted if the Government revenues are continuously swelling on account of increased economic activity. But, as the Goldman Sachs report warns, tax revenues are expected to grow by 14.8 per cent this fiscal year as opposed to the 18.5 per cent growth projected in the Budget. At the same time, expenditure growth is expected to grow by 9 per cent, compared with 3.4 per cent stated in the Budget.

The message is clear: India is living well beyond its means and the burden of this profligacy is going to haunt the country for the foreseeable future. What compounds matters further is that measures such as the Land Acquisition Bill (stipulating payment of four times the market value to rural land purchases) will cripple the growth of manufacturing and benefit China. No wonder corporate houses are investing enthusiastically overseas than in India.

That India is sleep-walking into an economic crisis is evident to most people who have a stake in India’s future. But it is something that appears to leave the political class unmoved. The message that “It’s the economy, stupid” has been lost on a country that is wallowing in delusion. 


Sunday Pioneer, October 23, 2011