Opinion UPA by another name?
NDA has embraced previous government’s worldview. It differs only in implementation.
Instead of using industrial policies and government exhortations to promote manufacturing, the playing field between industry and services should be levelled, letting the market choose which of these sectors will drive India’s future growth.
If for nothing else, 2014 will be remembered for the decisive electoral verdict in May, a stock market that refused to be fazed, the acceptance of inflation targeting as the primary objective of monetary policy and the unexpected crash in commodity prices. The change in government ended the dysfunctional decision-making of the last few years and promised transformational policy shifts to restore the economy to a high-growth path. This pushed the equity market to an all-time high, and ensured a steady and abundant inflow of foreign investment. With some help from the better supply management of the new government, the shift to inflation targeting finally ended four years of rabid inflation. And the 50 per cent collapse in global oil prices has massively helped contain India’s fiscal and current account deficits.
Yet, a sense of uneasiness hangs over the economy. Growth has not only disappointed but prospects of an upturn remain uncertain as its key driver — corporate investment — is yet to show any sign of life. Even with the unexpected decline in oil subsidies and a scorching stock market, this year’s fiscal deficit target looks increasingly difficult to meet without large cuts in capital spending. While the commodity price fall has reduced the run rate of the current account deficit by an annualised 1.5 per cent of the GDP and record-high equity prices have kept capital inflows strong, the rupee ended the year weaker than when it began. In spite of its majority in the Lower House and winning almost all the state elections held in the last six months, the government hasn’t managed to push any meaningful legislation in Parliament.
One can proffer many ad hoc explanations but the key reason driving this uneasiness has been the government’s failure to revive corporate investment.
The binding constraints to corporate investment are more entrenched than just bureaucratic plumbing or 100 basis points of lending rate cuts. Most of the projects approved in the past year are unlikely to see the light of day as they were designed based on the old global order, which no longer exists. Corporate leverage, especially in infrastructure, has risen to a such point that it is now even holding back new financing of feasible projects. This debt burden needs to be reduced, not just restructured, regardless of who committed the sin (bad judgement by the investor or bad government policies).
Doing this entails a much larger recapitalisation of PSU banks than currently budgeted for. Extant environmental laws, the land acquisition framework, resource-pricing mechanisms and PPP contractual arrangements need to be redesigned, not just tinkered with, as has been done so far. Instead of using industrial policies and government exhortations to promote manufacturing, the playing field between industry and services should be levelled (through equitable taxes and FDI norms), letting the market choose which of these sectors will drive India’s future growth. Supporting manufacturing as a bigger and more sustainable source of employment than services seems ill conceived — not only because there is little evidence indicating that this is indeed the case but also because the timing seems odd, with the global economy reeling under excess manufacturing capacity with deflating prices.
No one doubts that these constraints are not of this government’s making and that they will need to be overcome one at a time. What has been problematic is the government’s reluctance to articulate the underlying principles that will shape these policy changes. The inference drawn from its election manifesto, the measures taken since it assumed office seven months ago and the bills it has tabled in Parliament is that this government seems to believe that the previous dispensation’s inability to take timely decisions was the root cause of India’s woes. Not the latter’s worldview and the consequent policies and reforms it pursued.
Consistent with this belief, the government has tinkered with bureaucratic procedures, changed the parameters of old legislation and introduced variations of programmes planned by the previous government. These efforts have been seen as tactical moves of limited benefit, not as decisive breaks from the policies of the past.
But the BJP’s sweeping electoral success was not just because of disappointment with the UPA’s inability to implement policy. It was also because the electorate wanted a transformational change in India’s economic policies as the world around us had changed but our policies hadn’t. Externally, global growth has fallen sharply since the pre-2008 days and is likely to remain muted over the coming years. This has robbed emerging markets like India of the easy option of plugging into the global economy and riding the globalisation wave to prosperity. Domestically, the Indian state’s capacity (spanning parliamentarians to municipal workers) has been dangerously depleted. The government no longer appears to have the capacity to either design or implement policies based on the old framework of a paternalistic state.
These tectonic shifts have made it necessary for the government to articulate the principles that would drive its policymaking framework. The previous government didn’t and paid a heavy price for it. So far, the new government hasn’t either. Instead, it seems to have embraced the previous government’s worldview, disagreeing only with its implementation. This has pushed corporates into waiting mode. They are waiting to see a minimal set of policy changes before committing to invest and won’t act on the faith that the government’s policymaking framework would choose the right policies in a world with much lower global growth and depleted state capacity.
Analysts and apologists (including this writer) have justified the government’s reticence in articulating its economic worldview on the grounds that fixing the bureaucratic plumbing was needed more urgently to restore faith in the government and that small changes — which don’t provide a focal point for the Opposition to rally around — are more effective in bringing about big shifts (for example, the previous government’s 50 paise per month increase in diesel prices). But the proof of the pudding is in the eating. At the end of the day, what we analysts believe is largely inconsequential. What matters is what households and corporates think. So far, they haven’t been impressed. To change this, the government needs to start talking about the forest, not just the trees.
The writer is chief Asia economist, JP Morgan. Views are personal
express@expressindia.com
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