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Manmohanomics 3.0

The challenge is to manage expectations while stimulating ‘animal spirits’

The challenge is to manage expectations while stimulating ‘animal spirits’

Late afternoon on Friday,May 14,2004,Manmohan Singh,then leader of the Congress in the Rajya Sabha,hurriedly convened a press conference to convey a message to the markets before they closed: “Investors can be rest assured that the new government will pursue policies to create favourable climate for growth in savings and investment,leading to rapid growth in output. The new government recognises the role of a healthy stock market. The investor community can be rest assured that the new government would not pursue any policy that will create fundamental difficulties for growth in savings and investment.”

This was in response to a massive 6.10 per cent fall — the fourth biggest ever — in the Sensex that day. On May 13,there had been a 5.13 per cent fall. Investors were worried that the Left Front-supported coalition government would pursue policies that would hurt growth and business. To allay these fears,Congress president Sonia Gandhi chose Singh to reassure the markets. The media immediately assumed that he would be the new finance minister. It then enthusiastically welcomed his taking charge as prime minister. The markets,of course,bounced back and retained their bounce for a full four years.

Recent media commentary on Singh’s resumption of the finance portfolio refers to it as his “second coming”. That “Team 1991” — including Singh,C. Rangarajan and Montek Singh Ahluwalia — is back in the saddle. Wrong. This is the team’s third coming. Moreover,Team 1991 also included P. Chidambaram,then commerce minister,who became finance minister in Team 2004. He would have to return to his old post for the team to be truly complete.

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Why did this foursome make a difference in 2004? Because they had proved,individually and collectively,that they had a grip on the modern,post-liberalisation,entrepreneurship-driven Indian economy. India’s economic turnaround in 1991-95 was testimony. While Singh was the author of the fiscal correction of 1991-93,Chidambaram led trade liberalisation and subsequently,direct tax reform with his “dream budget” of 1997. In 2004,Singh and team took charge again and crafted the unprecedented economic boom of the 2004-08 period,when India logged 9 per cent growth,year after year,for four consecutive years.

India’s high growth was part of a global trend and benefited from it,but it was also driven by a rising savings and investment rate (savings and investment as share of national income) — which rose sharply from 29 per cent and 24.6 per cent respectively in 2003-04 to 32 per cent and 32.3 per cent in 2008-09. The steep increase in the investment rate was driven by business optimism and activism — what John Maynard Keynes famously dubbed “animal spirits”!

Why did this positive trend receive a setback after 2009? There are at least three important reasons. First,the transatlantic financial crisis of 2008-09 has contributed to a global slowing down. While India continues to remain one of the top five major economies in the world in terms of rate of growth,it too has been hurt by the global crisis and slowdown. Second,in the second Manmohan Singh government,popularly referred to as UPA 2,the “animal spirits” of enterprise were systematically dampened for a variety of reasons but,most importantly,because leadership in economic policymaking had slipped into the hands of those more comfortable with the old way of doing things. On top of this,a regime of fear and harassment came to be imposed. Businessmen would openly say that they now preferred investing abroad to investing in India.


Even though the underlying “fundamentals” of the economy were still robust,“expectations” (to use another Keynesian term) turned negative. Consequently,there has been a deterioration in both the savings and the investment rate at home,not to mention a weaker external profile and a rising current account deficit. The state of affairs that came to prevail in India was best captured more than a year ago by Jeffrey Immelt,CEO of GE,who told the Mumbai media that in India “the business is better than the mood”.

But,as any good student of Keynes would tell you,economic policymaking is ultimately about shaping the mood — of investors,consumers,savers,bankers,entrepreneurs and such economic agents. The “spontaneous urge to action”,as Keynes defined “animal spirits”,of millions of investors and entrepreneurs in India was dampened these last three years by the various acts of omission and commission of UPA 2. If UPA 1 promised less and delivered more,contributing to positive expectations,UPA 2 promised more and delivered less,contributing to negative expectations. The most recent example of such poor expectations management was what happened in the last week of former finance minister Pranab Mukherjee’s term in office. News reports suggested that Mukherjee hoped to end his term with a bang and there would be some big policy announcements on his last working day. The day came and ended in a whimper. Cynics won the day.

The reason why expectations have suddenly turned positive this past week,boosting market sentiment,is that Singh and his team have been saying all the right things. But if there is no quick delivery,sentiment can easily turn negative and unrelentingly critical. Managing expectations in the process will remain a key challenge.


Manmohanomics 1.0 (M1) was crafted in the cradle of a crisis and so focused on fiscal adjustment,trade liberalisation,decontrol and delicensing. Manmohanomics 2.0 (M2) was built on the foundation of a much stronger economy and based on the idea of inclusive growth. M2 was in part a response to the aberrations of M1. That is,it sought a balance between equity and efficiency,redistribution and growth.

Manmohanomics 3.0 (M3) will have to be a response to the aberrations of the last three years. It must restore credibility to economic policymaking and fiscal management,changing spending priorities so as to boost growth and stimulate saving and investment. The ministries of finance and industries and commerce require modern-minded,transparent and efficient leadership. While Singh will and should use the opportunity that presents itself now,he would have to get himself a full-time finance minister,given the day-to-day requirements of that job,and a more capable and energetic council of ministers. The finance ministry must once again have the best and the brightest.

The writer is director for geo-economics and strategy,International Institute for Strategic Studies,London; and honorary senior fellow,Centre for Policy Research,New Delhi

First published on: 03-07-2012 at 03:40:07 am
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