What Do The Four Years Since 2014 Mean For 2019?  

It is about two weeks since the National Democratic Alliance (NDA) government completed four years. I had written my own evaluation, together with Ajit Ranade for Mint. Many thought that it was a balanced critique. Coalitions involve compromises. So, both of us accommodated each other’s points of view on some aspects. But, predominantly, we converged in our assessment.

Our article had a very brief critical comment on demonetisation. Personally, I have a nuanced take on it. It was motivated for the wrong reasons. However, the verdict on its impact will change depending on the horizon over which we evaluate it. Take bank nationalisation for example. It certainly helped the government to take financing to rural areas. The benefits exceeded the costs in the first 20 years (1969-1989) of nationalisation, perhaps. In the next 25 years, the costs have vastly exceeded the benefits. We are still cleaning up after the biggest saga of non-performing loans. So, the judgement on bank nationalisation – over 45 years is different from the judgement one would have had after the first 20 years. I feel that it would be the reverse with demonetisation.

For now, the judgement is bound to be mixed to negative. The fact that we still have the Rs 2000 negates the corruption argument. Political funding through anonymous bearer bonds with the identity of the donor known to a very few negates transparency and sets back the cause of integrity in public policy. So, as an anti-corruption and as an anti-terrorism initiative, it has question marks hanging over them because the seriousness of these goals has been diluted by subsequent government actions. But, demonetisation might have set in motion some other big and irreversible trends towards digitisation, towards tax compliance and towards formalisation whose impact will be felt later and in a big way.

Few days ago, Shekhar Gupta, formerly with the Indian Express, India Today and now the promoter of print.in, had published an interesting piece. I read it in Business Standard. It was a good piece in the sense that it contains important warnings that the Bharatiya Janata Party (BJP) leadership would do well to reflect upon.

One of the better critiques I read on the fourth anniversary of the government was written by Shankkar Aiyar for Bloomberg Quint.

I read the four-part evaluation of the NDA government’s policies on agriculture by Ashok Gulati, the agricultural economist and his co-author. While it is clear that the farmers are unhappy and that the NDA government has been blamed for it, it is really the case that not too many in the world and in India surely have answers for the financial viability of farming except through heavy subsidies. The lag between market signals and production decisions, the role of the weather and climate change and the fact the demand for food is income-inelastic make farming inherently a difficult economic proposition. In India, several other factors compound it – poor reach of irrigation, dominance of intermediaries, fragmented land holdings, excessive extraction of groundwater and application of fertilisers resulting in diminished soil fertility, etc.

The four articles actually show us that the NDA government had much better answers than its predecessors for farm sector woes. It relaunched crop insurance. It tried to create a national agricultural market. These two help farmers with two key requirements – one is risk management (crop failure, etc.) and the second is price discovery and remunerative prices. On the distribution side, the government had promised to unbundle the Food Corporation of India and immediately appointed a Committee to recommend actions.

The execution on crop insurance and on the national agricultural market was in the hands of states and they have muffed it. One of the four articles mentions that several states have not paid their insurance premium subsidy dues to the insurance companies for 2016-17 even now! The dominance of the middle men continues with unreformed or half-reformed Agricultural Product Market Committees.

Gulati and his co-author in their four-article series have mentioned more than once that the Union government should have or could have tried to move the reform process forward at least in BJP-ruled states, given that the BJP is in power at least in 20 + states. I agree with that very strongly. That missed opportunity is not just with respect to agriculture. In education, in labour (some modest labour reforms have happened in BJP-ruled states), there could have been a serious push to set the agenda for other states through initiatives and pilots in BJP-ruled states. That is a big missed opportunity.

Some of the government’s critics point to the fact that the economic growth numbers are overstated. That is true. But, that is a problem of the Central Statistical Organisation and not that of the government. I do not think it is mala fide because, more importantly, there is a more egregious overstatement of gross domestic product growth from 2011 to 2014 too. The bank Non-Performing Assets (NPA) numbers are telling their story. Industrial production growth (or, the lack of it) tells its own story.

Tax terrorism has continued and may have expanded. Even the government’s supporters have conceded that.

Of course, on the credit side of the ledger, there is Jan Dhan Yojana and Direct Benefit Transfer using Aadhaar. Then, there is infrastructure push. Goods and services tax (GST) and the insolvency and bankruptcy code (IBC) implementations are good and they will be very important. Cooking gas connections to women, last-mile electricity to villages and Swachh Bharat must count too.

Good chance that a Congress-led government would have done GST and IBC too but then, there is an equally good chance that the initial design and starting troubles with both would have been the same. That has to do with the nature of the political process in the country. See the excellent interview by Arvind Subramanian in ‘Finance & Development’ of the IMF.

In his article in Business Standard, Shekhar Gupta notes that the election to 2019 might be more open than it was a year ago. But, the prospect of a return to 2004 or the 1996-98 days must make many Indians nervous. There is a feeling that coalition governments have worked well for India. I have to say that the evidence is very mixed or unconvincing.

In general, in the last 35 years, India, at the level of the Union government, has had roughly six years of good governance: 1984-86, 1991-93 and 2002-04. I very much doubt that they were due to coalitions. Some point to the first NDA government (1998-2004) and the United Progressive Alliance (UPA) government in its first terms for evidence that coalition governments resulted in better governance. I beg to differ. My recollection of the first UPA government was that it was held to ransom by the Marxist Communist Party on almost everything it tried to do. Then, I do recall a minister who was a fugitive from law. Not many reasonable people disagree on the overall disastrous rule of UPA II and not just with respect to the economy.

UPA-1 basked from the growth effects of NDA government policies and infrastructure push, global boom and capital inflows. Their incompetence and venality of the first term showed up in the second term on top of the consequences of the second term venality and incompetence. The most egregious example is banks’ NPA. We are still grappling with them.

The first NDA government did well in its last two years due to infrastructure reforms, privatisation, global and Indian economic recovery and corporate balance sheets being in great shape after being put through the wringer. It had nothing to do with coalition.

After 2019, if there is a coalition government – whether or not the coalition is led by the Congress or supported by it – there is a very high chance of it being fiscally ruinous. Fiscal irresponsibility and imprudence are not just some economists’ fancy pet peeves or themes. They are directly responsible for higher inflation.

This government has been, until now, a model of fiscal virtue. Government market borrowing including from small savings schemes has hardly budged in the first four years. They had gone up by nine times from 2005 to 2014!

Of course, the NDA government has probably botched its copybook with farm loan waivers and it had managed to achieve the revised fiscal deficit target for 2017-18 only by postponing payment to Food Corporation of India – similar to what UPA did between 2013 and 2014. NDA had to make good UPA’s fiscal numbers and the oil price crash helped them do that, hugely.

So, how do I pull all of these together and summarise?

(1) The NDA government has been somewhat more efficient and reasonably less corrupt than the two UPA governments.

(2) The Congress or the opposition will take off from where they left off in 2014. That will be quite a setback for the nation and not just with respect to the economy.

(3) The NDA government has done quite a bit to boost the long-term growth potential of the economy. That is the big difference and clincher for me. The UPA government – in the two terms – managed to pull India’s economic growth potential down considerably. From around 8 per cent in 2006, it had dropped to 6.5 per cent by 2013, as per IMF estimates. Some of the policy decisions that the NDA government had taken will actually lift India’s potential growth up in the years to come.

If only the NDA government had thought of their role as doing precisely that – how to enable the potential growth to keep rising – then, they could have done much more.

But, what they had done on lifting India’s potential growth – in spite of their failures mentioned here and in spite of a sluggish global growth environment and rising hostility to globalisation of which India was a beneficiary – is a big contrast to what happened in the 10 years between 2004 and 2014.

Some would mock the silence of this post on social issues that many are agitated about. Two reasons explain my silence. Most of the outrage is manufactured around election time and built on dubious claims. It is hard to separate the truth from propaganda and noise. Second reason – and this is the important reason – is that democracy is very active, vigilant, vigorous and healthy when a so-called ‘Hindu-Right’ (this government has not been pro-Hindu nor has it been an ‘Economic-Right’ government as is conventionally understood) government is in office in this government.

Come to think of it, lifting economic growth potential is one of the most secular things any government can do.

This article first appeared in The Gold Standard and has been republished here with permission.