Yashwant Sinha’s recent article (‘I need to speak up now‘, IE, September 27) about the economy concludes more in hope, than on facts, that the economy is headed for a “hard landing”. He joins some others in a desperate attempt to build a narrative of a failing economy. This is wishful thinking because nothing is further from the truth.
P. Chidambaram’s rush to embrace Sinha’s article is amusing and ironic because despite inheriting, by his own admission, a robust economy from the NDA 1 government in 2004, he presided over a spectacular destruction of the economy when UPA 2 was in office. Sinha himself has described Chidambaram as the FM who caused the GDP to decline. Perhaps Chidambaram too hopes, as Sushil Kumar Shinde had after the UPA’s scams: “The memory of the Indian public is short.” But those dark days of the UPA aren’t easily forgotten.
I have served with Sinha in the parliamentary committee on finance and so I wish his economic analysis was factual and not dictated by his antipathy to the government. He ignores how far the economy has come from the dark and dangerous days of 2014. The UPA had left behind a broken economy: Over 12 quarters of successive GDP decline, 24 quarters of rising inflation, a record Current Account Deficit of $400 billion, fiscal profligacy, declining capital formation, flight of foreign investors and scam-inspired plummeting of investor confidence, a banking system wrecked by years of politically-directed lending, a tenth of the jobs created by NDA 1, an economic model that created jobless growth, corrupt crony capitalism of the worst kind (written by Raghuram Rajan himself), a cash and high-denomination note dominant economy that was, in turn, inflating asset prices and a dysfunctional administration — this list can go on. The Indian economy in 2014 was on the brink, both qualitatively and quantitatively. The fact that the UPA was responsible for that cannot easily be erased from the public memory.
This government inherited such an economy and has steadily built it back over the last three years to one where the GDP has grown, per capita income has increased, foreign direct investments are at a historic high of almost $160 billion, foreign exchange reserves are at the record level of almost $400 billion, inflation has moderated, and government finances are following a roadmap of fiscal discipline after years of reckless profligacy. Decades of crony capitalism and piggy-banking on public sector banks have come to an end, a battle against corruption is underway, ease of making investments and doing business has increased and medium- to long-term investor confidence is high. This transformation of our economy into macro-economic solidity required calm and determined policy action. Challenges do remain in creating jobs but governments all over the world are facing disruptive changes in manufacturing – a sharp increase in automation and robotics has led to a reduction in jobs. For the economy to respond to such a deep — and permanent — transformation of the job market requires some more time and effort.
Sinha talks about “managing better” the petroleum windfall. That is vague. He should know the government has used the resources to fix the devastated balance sheets of the oil marketing companies that had been driven to the brink by the UPA, and to increase public spending in programmes, subsidies and infrastructure. Hindsight is always the best free-pass to score points. But that’s as appropriate as me saying the situation that required Sinha to ship gold (in the early 1990s) could have been “managed better”. I could say so but that would not be the right thing to do. The affliction of “I-can-do-better” is best avoided.
Stalled private investment is a big hurdle to higher growth; the problem is an inheritance from the UPA and remains unsolved in the past three years. At the heart of the problem is a broken government banking system, itself a product of reckless lending and building bad assets during the UPA with little or no oversight by the RBI as the banking regulator or the finance ministry. Indeed, Chidambaram first responded to NPAs when I raised the issue in Parliament in 2010. The NDA has tried to minimise taxpayer-funded bailouts of these banks. The RBI’s belated response with a flawed model of bad debt provisioning is exacerbating the NPA problem and so the problem has ballooned and the ability and the desire of the banks to lend has shrunk. When over 80 per cent of all credit is delivered by the public sector banks, this deadlock is the biggest hurdle to boosting private investment. Fixing this legacy of the UPA to the economy should be a priority for the government.
Demonetisation and GST have, expectedly, caused short-term disruptions. Introducing GST so soon after demonetisation has, perhaps, compounded the tax regime’s short-term impact. But the timing of GST was determined more by successive parliamentary sessions, where it was blocked.
The rush to come to a judgement about demonetisation ignores that an elaborate trail of deposits has been created to expose illegal deposits and networks. The criticism of GST is laughable given that its design was arrived at after a consensus with the Opposition in Parliament, state legislatures and in the GST council.
There is increased compliance with GST, both upstream with suppliers to companies and downstream in sales to consumers. If this holds true in the coming months when the dust settles, the GST slabs could be revised and simplified. GST can and will be an industry and consumer-friendly indirect taxation regime as was envisioned but give it time to evolve into that. The initial issues with GST have to do with the transition to a complex indirect taxation regime and to a tax administration system based on technology — both challenges in themselves. Dealing with these challenges in a compressed time-frame has caused predictable pain in the export sector, MSMEs and traders.
So, admittedly there has been moderation of the GDP in recent quarters. There is a legitimate request for intervention to support those impacted — during the transition. This must not be a knee-jerk response like the one by the UPA in 2008, which even Raghuram Rajan was critical of in later years because it caused inflation and fiscal challenges. This transition support could be about focussing on bank capitalisation, credit for housing, credit for MSMEs, exporters, stabilising GST and creating a permanent roadmap for public sector banks.
In 2014, Sinha had famously charged Chidambaram of committing fraud with his budgets. Politics, in this case, has created the unlikeliest of combines, where two people are bound only by their personal/political dislike of the present government. The truth is in stark variance from the picture the duo are trying to paint. Challenges remain but the current state of economy is a far cry from 2014. After three years of repair and rebuilding, the Indian economy is in a better place and is better prepared to deliver longer periods of higher rates of growth. There is space for honest discussion on the economy, about further reforms and transformation to make sure every citizen benefits but not political fake-point scoring.
Sinha is right that economies are destroyed much more easily than they are built. The UPA did that to what was left by the NDA 1 government, combining profligacy and corruption. With respect to him, Sinha is off the mark in his assessment of where we are today — perhaps a case of personal dislikes overcoming facts and reality. To Chidambaram, thank you for asking me to speak up, and yes, truth does prevail.