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Saturday, December 14, 2019

Forum that facilitates cohesive thinking on economy, also has ears of political leadership, is urgently needed

Our administrative apparatus is vertically structured within silo-ed compartments. There is no forum to enable and facilitate interdisciplinary, interdepartmental and collaborative economic decision-making.

Written by Vikram S Mehta | Updated: September 2, 2019 9:36:54 am
Narendra Modi government, Indian economy, Indian economy slowdown, FDI into India, India news, Indian express Our administrative apparatus is vertically structured within siloed compartments.

Over the past few weeks, there has been much commentary on the economic slowdown. Whether the cause is structural or cyclical; whether the government should inject liquidity or allow the private corporate sector to stew in its woes. This division of views is unsurprising. After all, it is a commonplace barb that three economists in a room will eventually present four different views. What is worrisome is that this division appears to cut across the political and administrative apparatus of the government. The vice chairman of the Niti Aayog has stated that the economy faces an unprecedented liquidity situation: “Not in the past 70 years has the financial sector been in such a churn (where) nobody trusts anybody else.” The Chief Economic Adviser appears somewhat more sanguine: “Some sectors are doing well — the government does not need a fiscal stimulus”. The Minister of Transport and Highways, Nitin Gadkari, has criticised the Niti Aayog for announcing a ban on petrol and diesel vehicles. He said that the Aayog was but a think tank with no executive authority, and that such decisions were for him to take.

This apparent lack of cohesion in economic thinking is worrisome because it makes one wonder whether there is any economic body in the government that has the mandate to look at the big picture — that is, evaluate the consequences of the macro impact of seemingly unrelated sectoral economic decisions — and also has the ear of the political leadership. It is also worrisome because the consequences of lack of cohesion can, in our connected economy, lead to avoidable systemic damage. Let me illustrate this point by drawing on the plight of the auto industry.

Demand for transport vehicles (passenger cars, heavy commercial vehicles, three-wheelers and two-wheelers) has dropped by 12.3 per cent in the first quarter of FY 19/20 over the comparable quarter of the previous year. This is the sharpest decline since 2001. No one can make the claim that this is entirely the result of government policy. There are deeper reasons particular to the structure and dynamics of the industry and every auto company will need to introspect hard on the specifics of the internal changes it must implement to tide over its current market problems. But, equally, no one can argue that the industry has not been impacted by government policy. The decision last year to increase the maximum load carrying capacity of trucks knocked the bottom out of the market for Heavy Commercial Vehicles. Demand for this category has, since that decision, fallen by around 20 per cent. The generalised constriction on retail financing by banks has squeezed dealers out of their working capital and dampened consumer demand. Consumers could, at one time, borrow upto 90 per cent of the cost of a vehicle. Now, they are fortunate to get even 65 per cent. Auto loans, incidentally, account for barely 2.5 per cent of banks’ NPAs. The tightening of safety norms or the fast forwarding of the BSVI emission norms have raised the cost structure and, consequently, prices.

All of these decisions might make sense on a standalone basis. But when considered through the prism of their collective impact, they acquire some rough edges. This is because the auto industry sits at the nub of the manufacturing sector. It accounts for 49 per cent of manufacturing GDP and, according to the Society of Indian Automobile Manufacturers (SIAM), it supports, directly and indirectly, 37 million jobs. The decline in demand for its products has sent ripples, therefore, across the macro economy. SIAM has estimated that 5-7 per cent of those employed along the Auto Value Chain (original equipment manufacturers, suppliers, vendors) have lost their jobs and that all contract hiring has stopped. It has also estimated that GST collections from the auto sector during the first six months of 2019 are Rs 6,000 crore less than what was received by the finance ministry during the first half of 2018.

I cite these figures not to make a case for relief for the automobile industry — I am a director of Mahindra and Mahindra and doing so might attract the criticism of conflict of interest — but to substantiate the consequences of lack of cohesion in economic management. It is also to make the point that sectoral initiatives must be viewed through the prism of the broader economy.

In November 2008, at the height of the global financial crisis, Queen Elizabeth asked an assemblage of economists gathered to celebrate the opening of an extension of the London School of Economics, why none of them had anticipated the crisis. The academics responded by letter in July 2009. They catalogued the macroeconomic, regulatory and behavioural reasons for the crisis but they also wrote that whilst “everyone seemed to be doing their own job properly” and “on its own merit”, there was no one who understood the risks (of what they were doing) to the system as a whole. There was no one who saw the whole picture and who appreciated that “whilst individual risks may rightly have been small”, the collective impact of these risks could well trigger a systemic collapse.

Our administrative apparatus is vertically structured within silo-ed compartments. Bureaucrats have a narrow remit and few, if any, have the mandate to take a broad view in order to evaluate the consequences of their decisions on the system as a whole. There is no forum to enable and facilitate interdisciplinary, interdepartmental and collaborative economic decision-making. We do, of course, have the Niti Aayog and the PM’s Economic Advisory Council (although I must admit, I am not clear on the latter’s mandate or role). But the recent exchanges suggest they do not have the executive authority to contextualise sectoral initiatives within the broader sweep of the macro economy. There is a need to fill this lacuna.

This is certainly not the first call for an administrative overhaul. Many reports have been written on the subject and this article is treading a well-trodden path. But, against the backdrop of the current economic downturn, I am reminded of Rahm Emanuel’s (chief of staff to President Obama in 2009) exhortation to not waste a “serious crisis” and to grab the “opportunity to do what (one) could not do before”. The opportunity now exists to dust off and implement the recommendations that call for a cohesive and integrated platform for economic management.

This article first appeared in the print edition on September 2, 2019 under the title ‘Bits and economic pieces’. The writer is chairman & senior fellow, Brookings India

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