Over the past three months, there have been an increasing number of people who have expressed their concern over the course and pace of economic growth in India. At a facile level — which, however, should not altogether be discounted on account of its simplicity — this has taken the form of taunts directed at the Narendra Modi Government for its inability to deliver Achchhe Din in 18 months. On a more serious level, there have been murmurs against Finance Minister Arun Jaitley, leading to a source-based (and possibly motivated) Reuters report suggesting that he may be dropped soon.
Both political conversations have one important thing in common: A belief that the fate of the economy is determined by either the Government or by a combination of domestic players. That the scope of a ‘national’ economy is limited hardly warrants reiteration. However, the fact that the lehman Brothers collapse in 2008 set in motion a chain of events that led to a slump in most economies wasn’t adequately appreciated when viewed from a ‘national’ perspective. likewise, there will not be too many takers in India for the theory that epicentre of the most recent economic turbulence can be located in China. Electorates, especially in the larger democracies, are inclined to limit their understanding of both politics and the economy within a national framework.
It is both necessary and pragmatic to recognise the reality of this ‘false’ consciousness. The political executive in India will neither secure brownie points nor earn the sympathy and understanding of the electorate by arguing that when China sneezes, the rest of the world will also catch a cold. Electorates — perhaps unreasonably — expect their national Governments to be well equipped with accelerators, brakes and shock absorbers.
later this month, when Jaitley presents his Union Budget, he will be confronted with one very awkward reality. Political parties, especially those in the Opposition benches for long, invariably base their programme of governance on assumptions that turn out to be flawed. In hindsight, the biggest mistake made by the BJP was its belief that the advent of political stability and clear direction would automatically see the return of high economic growth, spearheaded by the private sector. Prime Minister Narendra Modi believed that by removing the irritants in the path of legitimate business, reducing cronyism and addressing policy issues, he would trigger an avalanche of domestic investment. This in turn would be a trigger for both foreign portfolio and direct investments.
To suggest that the approach hasn’t worked is to be economical with the truth. Despite the global turbulence, India is widely regarded as among the few bright spots in the world. It certainly seems to be an attractive investment destination for technology, automobiles and financial services. However, the growth in these sectors has been offset by a slump in key infrastructure areas and the crash in commodity prices. Consequently, many of the big players in construction, engineering, steel and cement lack the fiscal depth to take on many of the challenges.
This is further complicated by the non-performance of that section of industry that over-borrowed from banks and was lax in its debt management. This threat of an unacceptable growth in corporate debt — leading to high bad debts — is a problem the Modi Government inherited from an earlier regime. However, the belt tightening the public sector banks have been encouraged by the Government and the Reserve Bank working in tandem to squeeze the defaulters and prevent the problems of a few jeopardising the many.
This was one of the areas the Congress used its leverage with the banks to bail out those corporate houses in difficulty. It was the most well known example of cronyism in the corporate sector.
By remaining unmoved by sustained corporate pressure to go soft on the defaulters, both the Prime Minister and the Finance Minister have incurred serious corporate displeasure. More to the point, they have faced a domestic private sector investment strike. The consequences have been interesting.
First, in the matter of big investment, especially in the creation and upgradation of infrastructure, the lead role has been assumed by the Government. It is the private sector’s relative disinterest and lack of capacity that has added to the quantum of State investment in the economy. Secondly, the Government has turned to overseas sovereign funds and other foreign investment to bankroll most of the big-ticket projects undertaken by the Government. Finally, in the face of the private sector’s non-cooperation the Modi Government has undertaken an imaginative strategy to promote start ups, and in effect create a new breed of success-hungry entrepreneurs with the energy to be a counterweight to the more corrupted fat cats.
It is not that all these approaches are calculated to succeed in time for the next election. However, to understand the imperatives of the coming Union Budget, it is important to appreciate some of the political games being played behind the scenes.