In times when violent political intimidation, social polarisation and moral pathology have, rightly, become overriding preoccupations, it is hard to focus on the listlessness of the Indian economy. BJP president Amit Shah was reported as explaining away India’s economic slowdown to 5.7 per cent, as one due to “technical reasons.” It is hard to know what that means.
It could be of a piece with the government’s contempt for “technical reasons,” or it could mean, we don’t care to explain and neither should you ask too insistently. Fortunately for the government, other than a few “technical” people, no one is asking about the economy too insistently. And that should worry us.
The economy now seems to be locked in a realm of inglorious uncertainty. By common consensus, India needs to grow at least 7 to 8 per cent a year, and it is now, as T.N. Ninan, pointed out, six years since we crossed that average. Several indices like private investment, index of industrial production, continue to disappoint. We draw some consolation from macro-economic stability, but whether these great macro-economic achievements are a precursor to growth or signs of a comatose economy is not entirely clear. But if any other government had generated the kind of numbers this government has, its feet would have been held to the fire. The fact that it is not being done requires diagnosis.
The government is getting a free pass on the economy. First, there is still a sense that the economy is in the doldrums because of the astonishing banking and regulatory mess bequeathed by the previous government. This government is slow in untying the knots, particularly around the relationship between big capital and the banking system. But the previous regime still gets a fair degree of blame for this logjam. And the inability of the Opposition to muster more credibility makes it a non-starter on the issue.
Second, this government has, for the most part, managed inflation well and except for a few items, food inflation. It seems that the old adage, that low inflation mitigates political worries, still holds true. Growth is about future prospects; lack of jobs affects those who are unemployed. But inflation probably still remains the great psychological measure of economic discontent that affects large sections of the population; and the government is reaping some benefits of low inflation.
Third, a big ticket reform item like the GST, notwithstanding its expected teething problems, allows the government to signal that it is serious about major structural reforms. So there is still an air of expectancy about the future. Fourth, there is a sense in which the government is capitalising on a general political discontent with “technical knowledge.” This is a global phenomenon in many ways. But it has blunted the edge of technical critiques of the economy. A lot of people have come to believe that economic growth is less about templates, more about fortuitous conjunctures. While many economists had pointed out the dangers to the economy post 2009, there is a sense that we misdiagnosed why we were successful in the period leading upto 2008, and therefore failed to anticipate the big structural slowdown that followed. So, trust in economic diagnosis has faltered.
Fifth, there is diminishing faith in the private sector. Capital in India has never been a voice of independence or reform. It was only in a brief period, 2011-2013, that it became a vocal critic of government, becoming almost alarmist, raising the spectre of everything from capital flight to virtual economic stagnation. That voice, and the material support that came with it, was instrumental in helping the revolt against the Congress. Indian capital now faces a deep crisis of credibility. Its record of hubris, bad judgment, governance problems and bad debt means that the government has got Indian capital by the scruff of its neck. If Indian capital had been half as vocal about ill-thought-through policies like demonetisation, as it was about capital flight under the UPA, the government would have felt under more pressure.
Finally, there is demonetisation. Most observers seem to agree that relative to the costs it imposed, it was a failure. What it might manage to achieve in the future, could have been achieved by other means and at far less cost to the poor. The full politics of demonetisation is yet to unfold; a lot of the discontent around it is not finding organised outlet. But in retrospect, the political support for demonetisation does not bode well for the economy. This is not in the sense that the people are wrong; they can judge their interests best. But in retrospect, the political support for demonetisation is also reflective of deep economic pessimism: We have convinced ourselves that we have not much to lose by ill-thought-out total mobilisations of this kind. The confidence in government was a consequence of the low nadir to which the economy has reached. In a dynamic economy, we would have felt there was more to lose.
The government is aggressively invested in the narrative of its own success. This will prevent it from considering one factor in the current economic slowdown. The full story of the current slowdown is complex: Institutional logjams, export growth slowdown, adjustment to GST, may have all have played a part. But demonetisation had a major impact. The impact is not just direct, in the disruption it inflicted on the economy. The indirect psychological effect it had, whose power has been underestimated, is this.
Demonetisation converted thinking about the economy into a moral crusade rather than an exercise informed by a sophisticated and just practicality. The more government remains invested in the narrative of its success, the more it is going to send a signal that the economy will remain vulnerable to voodoo interventions. Private investment is not picking up for a variety of reasons: Bad debts, excess capacity etc. But surely part of it is psychological: No one is quite sure when the need to show success of demonetisation on black money will turn into another disruptive crusade.
The lack of focussed intellectual and political outrage at what is at best a very modest economic performance should be worrying. It is of a piece with the government’s constant success in trapping us in an air of unreality. It also means that the political pressure to deepen the politics of polarisation will continue. The invisible “technical reasons” behind the slowdown will have to be masked by the visible and intimidating reasons of political polarisation.