A Cambridge economist, Maurice Dobb, had an interesting model of the errors of centralised policy where a dog chases a ball. When the ball zigs, the dog zags and when it zags, he zigs. The dominant approach to policymaking in India was that in the 1970s, institutional reform would have done the trick. Since then, in any case, high growth came with the 1990s liberalisation. This is being questioned but would only have been of historical interest. Its contemporary relevance arises when, in an increasingly globalised economy, we use structural paradigms to explain economic events and design policies when macro rules are the need. To some, the economy is still a gamble on the monsoons; to others, desirable redistribution policies like NAC even in an economy with huge reserves and resilience of high growth needs direct interventions rather than rule-based policies. Zigging then and zagging now.
In an invited piece in this paper, Kunal Sen has given a refreshing interpretation of the origins of the high growth phase. He isolates bank nationalisation and monetisation, higher public investment of the mid-70s and the trade reforms of the late-70s onwards, as the triggers. One of the interesting empirical pieces of Kaushik Basu is the argument that the shift in the aggregate savings function in the mid-70s originated the high growth phase. This is now increasingly accepted but was an anathema not very long ago. The 1970s were widely cited in publications as the decade of stagnation and, in fact, it was KN Raj and then me who pointed out that while the economy decelerated from the mid-60s, it reversed itself in the mid-70s. To be fair, Isher Ahluwalia, a principal expert of the stagnation school, in a not widely circulated piece, accepted what she called the turnaround hypothesis. I had in the mid-80s, in my Pant Memorial Lectures, pointed out that the break came in the mid-70s on account of a break in public investment, the exchange rate reform on account of the basket of currencies to which the rupee was latched and the first round of industrial reform.
While it is a good feeling to have turned out right after all, one must accept that all this has little relevance now. This kind of structuralist reasoning for the period when the economy was emerging from its intense dualistic phase cannot be used to explain or advise an economy growing at 8%, with the kind of latent resource pools India has access to today. In fact, such arguments can be counterproductive. Take the argument?given time and again last year?that the drought has been a major block to macro performance. This is just incorrect, and some of us have been saying so since last August. I said so in this column. But also made the point in an Investor Conference Call organised by Morgan Stanley in mid-August 2009, which they a little later released in a fairly widely quoted research report called Drought, Agriculture and GDP growth.
In fact, with rainfall failure of more than 40% only in highly irrigated areas, it was clear that with a normal rabi, agricultural growth would not be negative. In fact, agricultural growth is around zero in spite of all the dire negative forecasts we have had. The difficulties that emerge are that policies of a macro nature are put behind a smoke screen of an economy, which is still a gamble on the monsoons. The brave policymaker is fighting a perverse god, rather than doing what he/she can and should do.
If agricultural output was not going down and food stocks would be what they are, we could have much greater degrees of freedom in macro policies. It is difficult to convince people that agriculture is not declining but inflation is supply-determined. Also, more incentive-oriented policies for agriculture should have been designed.
Finally as we save NREG and work on food security or even assure energy to the poorest, which we must for we have the muscle to do it now, we must not fall back on the control mindset. It is much better to go in for direct giveaways or use smart methods of transfers, rather than distort all market signals. This economy has the reserves to allow experimentation with rule-based policies rather than strong-arm stuff, which causes more damage than good. The Economic Survey was an abject lesson in all this and must not be used only in class room teaching.
The author is a former Union minister