The Many Fountainheads Of India’s Economic Malaise: A Response To Dr Manmohan Singh 

An opinion piece written by Dr Manmohan Singh has justifiably attracted a lot of eyeballs and nods of approval. Written by a ‘student of economics’ as he describes himself, it is a well-written essay.

He has also zeroed in on some answers. Restore trust and confidence in administration, in the institutions and unleash massive fiscal stimulus.

He is right to call for an elimination of the atmosphere of fear. Some of us had written about it much earlier. See here and here. The government too has recognised the problem.

That is why the Finance Minister recently announced a remote system for the issuing of notices and summons. She said that permission from a two-member collegium was necessary to prosecute tax defaults below Rs 25 lakhs.

To be sure, the Revenue department might resist and is resisting these changes. That behavioural issue transcends this government. On its part, the government has recognised the problem.

The government-constituted panel has proposed decriminalizing many of the offences under the Company Law. The sooner its recommendations are implemented the better.

More importantly, the reposing of trust in the industry was exemplified by the new corporate income tax regime the Finance Minister announced in September. It provided for low tax rates with fewer exemptions and announced a very low rate of 15 per cent for new manufacturing-oriented companies commencing production from 2023.

Yours truly wrote that the significance of that measure was not the measure itself but the signal it sent. The government was no longer bogged down by the ‘Suit boot ki Sarkar’ jibe.

Indeed, that jibe should remind Dr Manmohan Singh as to the role of the Congress Party in creating an atmosphere of distrust between the government and the industry. That deserves some further explanation.

As a student of economics, Dr Singh should note that economies and societies rarely settle at equilibrium and stay there for extended periods. Humans, societies and economies, more often than not, swing between extremes.

In that sense, he should reflect on the factors that created the atmosphere of distrust. What role did his government play and the industry play in engendering an atmosphere of distrust?

The Supreme Court took the extreme step of cancelling the coal mining licenses and the telecom spectrum licenses.

This was probably too extreme but, perhaps, the Court thought that it was necessary because of the extreme breach of trust, good governance and probity in the award of such licenses. The economy is still hurting from both the action and the reaction.

An excellent article by Aarati Krishnan for BusinessLine documents the failure of many private-sector agencies leading to retail and institutional creditors incurring losses on their loans to Dewan Housing Finance Limited (DHFL).

After reading the article, I asked another journalist-friend as to who he would consider responsible for India’s economic slowdown, and he said he would place promoters of India Inc., on top of the list.

Abheek Bhattacharya has a review of ‘Bottle of lies’ and calls an Indian pharma company the ‘Theranos before Theranos’. It is useful to reflect on why it took three years for the acquisition of Essar Steel by the Mittal group.

Is it the flaw of the Insolvency and Bankruptcy code or is it the disruptive behaviour code of promoters?

Internationally, in Financial Times today, there is a report on whistleblowers in the ‘Big Four’ audit companies facing a ‘disturbing pattern’ of harassment, bullying and discrimination.

The purpose of pointing out these is not to suggest that one mistake or one wrong justifies another mistake or wrong but to remind ourselves that backlashes inevitably follow egregious behaviour and the longer the original behaviour lasted, the reaction tends to last as long.

Nonetheless, it is good to recall that the government is walking back on some of the measures, even if well-intended, that have proven to be inimical to legitimate economic activity.

Dr Singh does not train his spotlight on the Reserve Bank of India (RBI), an institution that he once headed. RBI introduced inflation targeting in 2015, through an agreement with the government of India.

Let us not forget that this was a response to five years of double-digit retail price inflation under the government led by Dr Singh.

Unfortunately, for a better period of the last four+ years since the inflation targeting regime came into existence, the central bank has been more religious rather than pragmatic in its adherence to the inflation targeting regime. It has forgotten that all economics is about context.

Many theories that policymakers from developing countries learn at the feet of their ‘gurus’ in American Universities are abandoned by them before they start implementing them here.

Inflation targeting of 2 per cent is open to review there. It might even be replaced with nominal GDP targeting, which is nothing but targeting a cumulative inflation rate rather than an annual rate of 2 per cent.

The central bank printing money to fund government deficits is now going mainstream. Since negative interest rates are not working to boost economic activity, economists call upon Western governments to splurge borrowing at low interest rates, at which markets are willing to lend to fiscally insolvent governments.

In India, whether or not demonetisation of high-denomination notes was a sound or an unsound decision, the textbook response of a central bank to the sudden withdrawal of massive liquidity would have been to lower rates.

In 2017, the RBI cut rates only once and that too in August. Then, in 2018, partly due to international pressure, it raised rates twice and has liberalized external commercial borrowings instead of lowering the cost of capital at home.

More recently, it has not unequivocally reassured markets and the Non-Banking Finance Corporations with liquidity backstops. It has allowed uncertainty to linger and the problems to fester.

Its record in preventing frauds in banks has been spotty at best and sloppy, at worst. Its blanket and indiscriminate adoption of norms for recognition of non-performing loans were struck down by the Supreme Court.

I hope that when future students of economics write the history of India’s economic performance in the second decade of the millennium, they will subject the central bank to far greater scrutiny than current and former students of economics have done.

Dr Singh has called for a fiscal boost to the economy. He is right. There again, advisors to the government – from within RBI and outside – have made fiscal prudence a cult or a religion.

That is why the NDA government of 2014-19 had to undertake a pro-cyclical fiscal tightening when it came to office. It did not demand a longer time frame to set right the fiscal imbalance that it inherited from Dr Singh’s government.

Now, when the same advisors turn around and demand fiscal pump-priming, politicians are legitimately confused.

Students of economics should resist and challenge economic theories from becoming creeds if they want governments not to stand in the way of economic activity.

Dr Singh writes that India is at risk of stagflation. He is partially right. India is at risk of economic stagnation. That said, considering the economic growth rates in many emerging economies, it does not seem to be the only country facing that risk.

That is no consolation but it helps to remind ourselves that India’s economic growth troubles are not unique to India. There could be other forces at work. As for an inflation risk lurking always in the corner, Dr Singh may have been prompted by the most recent consumer price inflation rate.

However, the core inflation rate is plumbing new lows and monetary dynamics are so poor that the inflation genie might stay in the bottle after popping its head for a few months.

Finally, Dr Singh says that India has to grasp the opportunity of lower oil prices and a higher domestic political capital. Again, he is partly right.

The considerable political capital that the government has accumulated has to be deployed to set the economy on a sustainable and slightly higher growth path than what obtains now.

The government is beginning to do the right things but more can be done and faster too. But, will lower oil prices really help? It is not that easy to burn fossil fuels anymore.

The European Investment Bank has announced that it would stop funding fossil fuel companies. That also means that projects that depend on fossil fuels will find it tough to be financed in the years to come.

This is a new installment of ‘kicking the ladder’ that keeps divergence in economic attainments between the developed and developing nations from closing. Be that as it may, it is a growth hurdle that needs to be recognised by policymakers and commentators in India.

Climate change and extreme weather events are becoming more frequent in India. That too is not a growth-friendly development.

The high-growth years of 2004-08 coincided with rising oil prices and were due to the global economic boom that boosted India’s export growth. Global demand has languished since then and so has India’s export performance.

This is not to deny the abundant scope that exists in India for improving productivity and export competitiveness. Unsustainable capital inflows and malformation of capital were short-term contributors to economic growth in that era. They are now headwinds.

In short, India faces newer growth challenges on top of the ones that have existed. It might have missed the low-hanging growth that was available in the last century.

Finally, Dr. Singh has done a useful service to the nation in reminding us all that economic activity is founded on trust between all participants. Yours truly had written a fortnight ago that restoring trust could be an effective economic stimulus.

Hence, I agree with Dr. Singh that trust and confidence are central to economic activity. Further, the weight he has thrown behind fiscal expansion is doubly welcome.

In this essay, Dr Singh has focused on what the government should do. Given his vast experience, his observations should not be ignored. At the same time, as a keen and perceptive student of economics, he should know that there are other stakeholders in the economic system.

If he subjects them to as much scrutiny as he has done the government, the economy would benefit. At a minimum, he should write on the many acts of omission and commission on the part of the central bank in the last five years.

Then, he should exhort India’s corporate leaders to reflect on their contribution to India’s economic malaise. That would be a useful service to the country that he has served with distinction in many capacities in the years gone by.

This article was first published on the author’s blog, and has been republished here with permission.