Is ‘Make in India’ faulty? Could bank NPAs be better managed? Are voters being misled? A book that answers questions like these and more.
Running a government involves tough decisions. More importantly, it involves difficult choices. For example, lower interest rates are good because they bring down the cost of capital and trigger investment. However, we all know how a period of easy money didn’t help the US economy. Nor did it help India in 2012-13 when the RBI lowered rates by one percentage point. Also, what happens to savers? And retired people, who often have no source of income other than deposits? The decision, it may be hard to believe, mostly depends on the central bank, even if it may or may not be convinced about how the government is looking at the economy and what constituents it is looking to please. There is no universal truth in economics, nor a perfectly right thing to do. More so in a democracy like India, argues economist Madan Sabnavis in his latest book, Economics of India, written around a collection of his media articles on various contentious socio-economic issues. The book makes for interesting reading because Sabnavis promises to offer an ‘alt’ view to the prevailing wisdom. Though not always a contrarian, he is more of a careful assessor of both sides of the debate. He doesn’t believe in laying all problems at the government’s door and maintains that turning over the economy to the private sector also won’t work. The truth, in his case, often falls between two stools. Sabnavis sets the tone in the very first chapter by asserting that the Indian government, with its various competing interests to look after and a very small role in the economy (government expenditure has only 12% share in GDP at current prices), is hardly an engine of growth, but a necessary condition at best.
However, the opposite isn’t necessarily true. Indeed, governments in India have been the biggest generators of bureaucratic red tape and policies that “have nothing to do with common sense”, to quote Sir Humphrey Appleby. Yet, when one looks at the risks and rewards, one sees the stark gap between the private and public sectors—just compare the salaries of the heads of public-sector banks/mutual funds and private ones, and their performances. The gap in the former is much larger than the gap in the latter!
The truth is similarly hidden in the case of subsidies, which everyone wants the government to do away with. Subsidies actually are not a waste of money at all; even developed countries have them. It’s their delivery that’s a problem, so there’s an argument in favour of plugging leaks and targeting them. Sabnavis also counters the argument against fuel subsidy by saying that the middle class, which is a major contributor to tax revenues, deserves it. Indeed, subsidies are everywhere; “special lounges and elevators for CEOs of private enterprises is also a subsidy provided for by public money, though it is called shareholder money”. Perhaps his strongest argument is in favour of the MGNREGA and he proves through data that it is effective in providing employment to the poorest. He dismisses the controversy over inflated wages, and asserts that if anything, the programme should be enhanced and perhaps government departments could coordinate to get all relevant schemes covered under the MGNREGA. Indeed, his proclivity for expansionary theories is evident in the chapter on fiscal policy, where he argues that in the years of the downturn, especially 2012-14, adherence to the FRBM limits (for deficits) made global agencies happy, but hurt our own economic growth. His research also doesn’t find any strong links between fiscal deficits and inflation over the years, so he contends that the argument that the budget is crowding out private investment or putting pressure on prices should be taken with a large pinch of salt. In fact, high interest rates, too, can’t bring down inflation, which is more reflective of supply-side dynamics. However, when inflation is high, it does become necessary for the RBI to keep interest rates high.
Not all that the government does is good though. Indeed, the accumulation of negative assets in the banking system has been a direct effect of protection of inefficiencies in the corporate sector, be it private or public, and the priority sector, including agriculture. Of course, the real world outcomes in these two cases are very different; while farmers kill themselves, corporate debt—crores of it—is restructured. Whatever be the political exigency, Sabnavis rightly argues that all rescue efforts or debt waivers should be from the budget, and sourced in a transparent manner, so that banks don’t have to carry the bad debt and put their own balance sheets under pressure. This is also applicable to newer schemes such as Jan Dhan Yojana floated by the current government. However, it is also true that in India, banking is good business and bank stocks enjoy a premium in the market. The proposed Financial Resolution and Deposit Insurance Bill, which intends to set up a corporation to replace the DICGC, is aimed at more effectively addressing bankruptcy of banks and insurance companies. Will it be another regulatory body to work as a stable door when the horse could have bolted due to poor government decisions? It is the same conundrum in manufacturing—can we have ‘Make in India’ without economies of scale and cost-effectiveness, factors essential to turning things around in manufacturing? Sabnavis contends that the government is not serious about manufacturing, and he is right. What we probably need is a government hands-off policy in manufacturing.
Interestingly, governments seldom have to answer to their shareholders, that is, voters. They are rarely pulled up for their performances. It used to be so at election time earlier. Today, elections are fought on social media, by whipping up emotions at rallies, misleading on economic issues such as demonetisation, and even vote capture. Books such as this one would help in revealing the real stories behind the cacophony of political sloganeering, and must be read for improving our voting decisions. A few minor quibbles. Two consecutive “concluding remarks” sections at the end of some chapters might confuse the average reader. Also, tighter editing and proof-reading would have really lifted reader experience. Notwithstanding these small issues, this book is a welcome addition to our economic literature, especially for its clarity in understanding and, in turn, explaining the controversial economic issues simply and elegantly.
Paromita Shastri is a freelance writer