Economy in the ICU – How incompetent are the doctors?

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Published: March 5, 2020 6:30 AM

The answer lies in whether Manmohan-Chidambaram-Montek could have done better in critical reform areas.

Planning Commission, Montek Singh Ahluwalia, ICU, NPA, GST, UPA legacy, Manmohan singh, Flipkart, NDAAhluwalia rightly points out that UPA catalysed PPP-led infrastructure development, but this also contributed significantly to today’s huge NPA mess.

At the launch of former Planning Commission deputy chairman Montek Singh Ahluwalia’s Backstage, former finance minister P Chidambaram said that while the economy was being wheeled into the ICU, the attending doctors were incompetent. At a subsequent Express Group Idea Exchange (IE), Ahluwalia gave several instances of the government getting it horribly wrong—not cleaning up NPAs aggressively enough, a bad GST, raising import protection, etc.

While this is broadly correct, the economy was in the ICU even before the NDA came to power (see graphic), and the twin-balance-sheet crisis hobbling the economy is a UPA legacy. That is why investment levels were falling, as was credit growth and, worryingly, the current account deficit was also getting out of control; it was 4.8% of GDP in FY13.
Also, while a lot is said about the NDA’s mistakes, it has made some big reforms, too—IBC comes to mind immediately, as does the extensive use of Aadhaar for making payments directly into Jan Dhan accounts, UPI making digital payments soar, etc.

How competent the doctors are depends on your view of whether, had there been a UPA-3 in 2014, its dream-team of Manmohan-Chidambaram-Ahluwalia would have made the critical reforms that were needed; Ahluwalia’s book is a good reference point for what the UPA was likely to have done. Given his record as an economist and bureaucrat, the book is a must-read for anyone who wants to know how to sequence reforms—the famous M-document explains how reforms need to be internally consistent. At IE, Ahluwalia explained how, in the case of exports, the commerce ministry alone can’t come up with a revival plan since the real problem lies in the exchange rate policy, labour laws, FDI policy, wage rates, tax costs, etc. Indeed, given the depth of the 1991 crisis, when Manmohan Singh was FM, it is to the credit of the team, of which Ahluwalia was an integral part, that the reforms were sequenced and handled well.
Lack of labour reforms is the main reason for India continuously missing the bus on labour-intensive export areas like garments and footwear; this is where China stole a march and, later, cemented its leadership. Ahluwalia says Singh’s view was that labour reforms could only come after several years of a 10% GDP growth; well, four of the UPA’s 10 years saw 9-10% growth, and three saw around 8% levels. A UPA-3, then, wouldn’t have undertaken any major labour reform since, by 2014, growth was in the 5-6% range.

Given the Indira Gandhi legacy of bank nationalisation, and the UPA winding up Vajpayee’s privatisation of even non-banks, bank privatisation wouldn’t have been on UPA-3’s agenda either. Ahluwalia believes that creating a holding company for all banks, and letting its directors appoint reputed professionals to run banks, is better as it would free banks from government control. Apart from the structure sounding suspiciously like IL&FS’s, how can the government pump in lakhs of crore rupees into banks and then not take full responsibility for running them? Privatisation is really the only way out of the mess. So, even if UPA-3 had pushed for a bad bank to clean up the financial sector, the lack of privatisation would have brought the problem back once lending picked up.

Ahluwalia rightly points out that UPA catalysed PPP-led infrastructure development, but this also contributed significantly to today’s huge NPA mess. The model resulted in exorbitantly-priced power plants like the Enron one, the refusal to simultaneously reform the power sector meant the dues kept piling up. The lack of a dispute resolution mechanism for infrastructure projects also contributed to the problem, as did the government’s inability to stick to its promises of availability of land, coal, etc.

It is unclear how Ahluwalia thinks the telecom revolution was the UPA’s baby since this was totally a Vajpayee initiative. And, like there-was-no-loss Kapil Sibal, Ahluwalia dismisses the CAG’s 2G loss estimates as hyperbole—he feels a CAG official’s Rs 2,645 crore loss was more realistic than the official Rs 57,666-176,000 crore estimates.

Ahluwalia quotes Singh as saying that A Raja giving out spectrum in 2008 at the prices arrived at in a 2001 auction was providing a “level playing field” to new entrants; how could two brilliant economists fall for this? Ahluwalia tries to suggest that Raja’s low-cost spectrum allocation was responsible for India’s low-cost telephony, but ignores that Raja’s favourites didn’t add to telecom capacity; this was done by the older telcos, and tariffs continued to collapse even after spectrum was auctioned at market prices after 2010.

Sadly, for a book written by one of India’s best economic administrators, it is not sufficiently critical of major UPA failures like the retrospective tax, the 90% food subsidy to 66% of the population, the land acquisition act that made buying land prohibitive and time-consuming, the killing of Sterlite’s Niyamgiri project, the spanners put in the way of GM crops, etc. Ironically, while the M-document talked of the need to amend Article 12 of the Constitution to set PSUs free in 1990 itself, this was never done by the UPA.

While the NDA has rightly got flak for not conceptualising GST correctly, and for its import protectionism, the biggest surprise was it not doing enough to facilitate investment—it actively hit big investors, like those in telecom, it started implementing FDI rules after Walmart spent $16 bn to buy Flipkart, it tried to drive out Monsanto, it went after Cairn (bit.ly/32M9cOk), it didn’t fix the UPA’s retrospective tax… It is safe to say that were the NDA more investor-friendly, investment levels would have risen.

This makes the doctors incompetent, as Chidambaram has repeatedly asserted, but if UPA-3 wasn’t going to push the major reforms required, including on agriculture, the picture isn’t as one-sided. The 1991 reforms were born out of a crisis, and we’re clearly in one today—maybe that will get the NDA to move. Some action is being planned in telecom, the package to get big brands like Apple to move out of China could well be finalised soon, privatisation is finally being planned… Fingers crossed.

sunil.jain@expressindia.com
Twitter: @thesuniljain

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