Chirpy economists on overdrive

Development and growth are the two buzzwords that Prime Minister Narendra Modi has chanted for more than a year now, during the election campaign and after the impressive victory last May. The infectious optimism has spread all around. People have bought the Modi mantra and they are waiting for the magical turnaround in the sluggish economy.  Modi is keeping his chin up and continues to utter the brave words of hope. It seems that the economic upturn is not going to happen too easily, nor too soon. It will take time and it will be be tough.

The Modi government is not yet set to steer the economy. It has not got the grip so far. The setting up of the National Institution for the Transformation of India (NITI) Aayog in place of the old plan panel is being projected as the new way forward in charting national economic growth. The government has also pushed for amendments to the land acquisition law through an ordinance and finance minister Arun Jaitley had introduced what is considered to be a major reform measure, the Goods and Services Tax (GST) Bill, in the winter session of Parliament. The impact of GST on the economy will be felt only in the long term. The government will learn the hard way that NITI Aayog will not have much to contribute to the growth story when it happens. Market forces are generally immune to policy interventions.

The government has been fortunate on two counts: the sharp fall in international crude oil prices and the equally sharp decline in the inflation rate. The oil prices have reduced by 40%. It has been a windfall for the new government and it has been helpful in reining in the current account deficit (CAD). The fall in inflation has been mainly due to fall in food prices, except milk and pulses. The Reserve Bank of India in its bi-monthly monetary policy in December has warned that upward pressures on inflation still remain.

These factors might not be sufficient to give a push to the economy. There is need for other things for that to happen — greater investments and increase in demand. The investment outlook is none too bright. The prognosis in the mid-year economic analysis issued by the finance ministry on December 19 is that private investment in infrastructure is going to be difficult because of issues connected with land acquisition and environment clearances. It is because of this that the public-private partnership (PPP) model is not working well, and therefore the need for greater public investment. The growth in demand is iffy. An example offered in the review is the fall in rural wages under the Mahatma Gandhi National Rural Employment Act (MGNREGA) and reduction in minimum support price (MSP) for cereals that has helped in reining in inflation. The flip side, however, is that it will keep demand down.

It is at this juncture that economic pundits from the public galleries enter the stage. They talk glibly about the great leap forward India can make if Modi were to push the reforms agenda. They have been offering unsolicited advice to the government as to what it should do to get the economy going full throttle. It is a good thing to throw up ideas and it is for the government of the day to pick them up. The experts are not offering good ideas to deal with the economic challenges. They are telling Modi that he can set things right and this is a golden opportunity for him to redeem his promises, that he is the man of the hour if not the man of destiny. They chant the mantra of reforms and urge the Prime Minister to go ahead with the reforms, without going into specifics.  

Most of Modi cheerleaders among the economists are believers in the virtues of globalisation of the economy. But they refuse to refer to any of the problems, both external and domestic. They do not mention that if the US raises interest rates, then there could be a reversal of fund flows, which is a fact recognised by the RBI and by the mid-year economic review. There is also scepticism about growth in exports because the Asian and European markets are yet to look up, and the US recovery is yet to stabilise. The oil prices are expected to remain at low levels at least in the medium-term, but they will not be a permanent feature. It is also the case that low oil prices cannot sustain further exploration and production. The advisory of the pundits does not include a single cautionary note about the potential hurdles.

The pundits and the BJP leaders had assumed before the elections that it was the corrupt Congress-led United Progressive Alliance (UPA) that had stalled economic growth and if it is thrown out of office, then the economy would be back on track. The BJP could be forgiven for ignoring the protracted financial crisis of 2008 and the worldwide recession that followed. The experts should not have been blinkered in the manner of politicians. Corruption was indeed one of the factors that hobbled many of the infrastructural projects, but there were also structural aspects to the problem. 

The review refers to the issue of “over-exuberant investment”. It points out that as compared to the 15 per cent gross capital formation during UPA-I, private sector investment jumped “East Asian-style”  from 6.5% in 2003-04 to 17.3% in 2007-08, and that it was “based largely on the assumption that growth rates of 8.5% would continue indefinitely and banks, especially public sector banks could lend to private investors in infrastructure.” This has stressed out the public sector banks and it pushed the corporations into a partial debt-trap, which the review refers to as stretched balanced-sheets. The emphasis is now on greater public investment because private investors would not take on the burden of risk. 

Pundits eager to win the confidence of the Prime Minister and the finance minister may have to learn to address the structural snags in the system. Sales pitch alone will not help. There is a need for hedging the bets as it were. The review does it well by resorting to the standard economist's ambiguity: “In sum, there is growing ground for hope but narrowing room for complacency.” 

The author is a consulting editor with dna