India’s growth prospects are increasingly uncertain. Economists can diagnose the dynamics behind the slowdown and the prospects for recovery. India is nowhere near economic Armageddon. But the complacent assumption that 8 per cent growth is our birthright now seems laughable. There is also a danger that the same complacency will reassure us that we cannot fall much below 6 per cent, though it seems that the Planning Commission has finally woken up to the idea that the prospect of a slowdown is real. If you look at the fundamental drivers, like the savings rate and the availability of capital for investment, there is no reason we should slow down dramatically. But our biggest challenge will be facing up to hard truths. Mendacity is the biggest political economy driver in India.
The central driver of good economics is recognising the problem. Despite the slowdown, government will continue to produce lawyer-like alibis: the whole world is slowing down, the global conditions are adverse, five-and-a-half per cent is not bad. These arguments are patent nonsense. Given India’s demographics and the need to absorb labour, 5 per cent is flirting with social catastrophe. The global economy may be slowing down. But most of our slowdown has little to do with global conditions. Rather than using global conditions as an alibi, we ought to have been asking a reverse question: how could we take maximum advantage of adverse conditions elsewhere?
After the recent Democratic convention, there was a lot of nostalgia for Bill Clinton’s astonishing ability to have a political touch and be a policy wonk at the same time. He did not insult the intelligence of the voters. Though, as my colleague Patrick Heller points out, Clinton can get away with being a policy wonk because he speaks in a Southern accent. He does not sound condescending even when being high-minded because he has the vernacular touch. On the other hand, we have three challenges in economic communication. Our policy establishment, including the prime minister, does not have the vernacular touch. They act as if the people are too stupid to be persuaded of anything sensible. The phrase “constraints of democracy” has now turned from an analytical insight to a self-fulfilling prophecy. Many vernacular politicians are quite smart, but unwilling to step out of their narrow vantage points. And the media crowds out serious discussion. So the preparation of narratives that will gird us for clear action is largely absent.
The most criminal example of government mendacity has been its talk on the banking system. During the financial crisis, we patted ourselves on the back for having a prudent approach to banking. Guess what? The government told you lie after lie as the banking system became the main conduit through which crony capitalism flourished. Banks were running Ponzi schemes, giving out loans when there was no rational basis, failing to do due diligence if the borrower was too big to fail, shutting out small and medium enterprises and letting a handful of big players mop up credit at will. Of course, no government will talk the economy down. But no one is being held accountable for the major catastrophe in the making. Banks were put in this position in part because of a prior failure to bring in reforms. Now that they are in bad shape, their fragility is being used as an argument to not diligently clean up the system.
The same goes for inflation. Government mandarins have been making one specious argument after another about the causes and desirability of inflation. The real challenge is that inflationary expectations are now deeply entrenched, with potentially catastrophic consequences. It is hard to unleash the animal spirits if you don’t know what growth-inflation combination to plan for. Inflation makes it harder to undertake other reforms: raising fuel prices at a time of entrenched inflation is obviously going to be tough. The government tried to be too clever by half and the chickens are coming home to roost.
The list could go on. The government is finally making the right noises about the fiscal deficit. But for years, it kept telling us not to make a fetish of deficits. It converted a truth that applies in special circumstances into a cover-up for fiscal profligacy. But its hopes of reining in the deficit are mainly pinned on letting the taxmen loose, rather than on sensible expenditure rationalisation. Government savings are declining. And the economic message is still confusing. The government keeps promising the moon and the stars on the expenditure side: everything from health to infrastructure is set for expansion. Some of this expenditure is desirable. But the numbers don’t add up. It also does not take a genius to figure out that with the election cycle coming up, there is going to be even more pressure to be profligate.
Apart from government mendacity, the unspoken political economy driver in the room is still Indian capital. After the financial scandals of the early nineties, we cleaned up the working of capital markets in part because it was in the interest of Indian capital to do so. The billion dollar question is this: Indian capital can complain about government, but is Big Indian Capital now willing to say, we are ready to compete in a fair rules-based system, rather than one open to arbitrary manipulation? The scandalous attacks by sections of industry on independent watchdogs like the CAG suggest that Indian capital is still not willing to act as a pressure group for cleaning up the system. Partly, of course, it is vulnerable. It is not a happy frame of mind when everyone from the CBI to the taxmen is let loose on you. But Indian capital will have to stop this oscillation between craven defensiveness and brazenness to act as a sensible pressure group. It has also fed lies about the nature of its own animal spirits that depend less on fair competition and more on negotiation.
The solutions to many of our challenges are not difficult. What is going to be more difficult is for us to talk ourselves out of the lies government is used to feeding us. We are in a mess because the government that stood for the aam aadmi believes the aam aadmi is stupid. If you want evidence of this, consider the response to increased consumption of gold. It described it as an idiosyncratic consumption trait of Indians, never mind the fact that most of the recent rise is in the demand for gold coins rather than jewellery. Ordinary people were trying to tell the government they found the future uncertain; the government responded by declaring them pathological.
The writer, president of the Centre for Policy Research, is contributing editor for ‘The Indian Express’