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Will Modi grasp the economic nettle?

By B S Raghavan
Last updated on: June 30, 2014 16:55 IST
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In putting the country's economy back on the rails, it is best that Narendra Modi and Arun Jaitley draw on grass-roots feedback and their own practical sense and native wisdom without allowing themselves to be sucked  into the quicksand of economic punditry, says B S Raghavan.

Although it was widely known that the country's economy was in poor shape, the revelation by Prime Minister Narendra Modi that the United Progressive Alliance government had "left everything empty" and that "the country’s financial health has hit the bottom”, requiring “tough economic decisions to bring the country out of the current economic mess”, has come as a rude shock. All the ruder, indeed, for the reason that the UPA government was presided over by Dr Manmohan Singh, no mean economist himself.

What happened to his expertise and experience as the chief economic adviser and secretary in ministries of finance and commerce, as the governor of the Reserve Bank of India, and as the finance minister credited with the economic reforms of the P V Narasimha Rao government? 

And what was a whole bunch of seasoned economic theorists and strategists in his Council of Economic Advisers, headed by Dr C Rangarajan doing all the while? What about P Chidambaram, Montek Singh Ahluwalia and a whole host of advisers and consultants in various economic ministries?

The demonstrable fact is that the country's economy is proving to be too serious a business to be left to the conventionally brewed economists. And it is not that only our breed is to blame. Whether it was the Depression of the 1930s, or the South Asian meltdown of 1980s, or the sub-prime mortgage crisis of 1990s or the recent global financial crisis, the economists all over the world, many of whom held distinguished chairs and some were Nobel Laureates to boot, were as much taken by surprise as the man in the street when they occurred.

During a visit of Queen Elizabeth of Britain to the London School of Economics, the assembled economists squirmed in their seats when she pointedly posed the question as to why they failed to predict the various financial crises. They frantically scrambled together a response and sent it to her. The media and the academic community promptly dismissed it as far-fetched and unconvincing. All that the economists did was to cast about for some convoluted explanations replete with highfalutin jargon to mask their own helplessness.

Speaking at a function some time ago, P Chidambaram, came out with home truths that are seldom expressed in public. Admitting that the government was as much at a loss as the lay public as regards the phenomenon of rising prices, he said: “I am not sure whether we understand all the factors that contribute to price rise, nor am I sure whether we have at our hand all the tools to control inflation….At least in the case of food inflation, I have not heard anyone arguing convincingly that we have all the tools to control food inflation.” 

Chidambaram has said nothing more than what we, the people, in our hearts and minds, had long suspected. That he chose to do so in the presence of Dr Rangarajan and the chief economic adviser Dr Kaushik Basu, who are considered the country's economic czars, tells its own tale.

The message clearly is that all the paraphernalia of the panels of experts, think-tanks and professional statutory bodies such as the Reserve Bank of India do no more than play blind man's buff whenever the economy is on the skids. Or they assume oracular positions and indulge in soothsaying with gay abandon. Dr Rangarajan and RBI governors are particularly given to it. They will blithely toss out predictions about rates of inflation at various months in the future hoping that no one would bother to verify. But unsurprisingly, over the last few years, at no time did their forecasts match facts!

The RBI, in particular, has only a limited number of instruments to fashion its monetary policy: the CRR or the Cash Reserve Ratio which is the proportion of banks' reserves required to be held with the RBI; the SLR or the Statutory Liquidity Ratio which is the amount which a bank has to maintain in the form of cash, gold or approved securities; the repo rate which is the rate at which the RBI pumps in short-term liquidity into the system and the reverse repo rate which is the rate at which banks park their short-term excess liquidity with the RBI; and the PLR  or the Prime Lending Rate which is the reference interest rate used by banks.

It keeps fiddling with these rates, most of the time based on subjective assumptions. For instance, the CRR is meant to regulate the release of deployable funds into the system ostensibly for productive purposes, and sometimes the RBI also gives the estimated amount that would be released, but there has been no knowing whether the amount actually turned out to be correct and what productive purposes were served thereby.

It is in this peculiar and piquant setting that Narendra Modi and Arun Jaitley have to figure out what really will work as brakes to arrest the downward slide. It is good that Modi, unlike most politicians, has had the courage to warn the people of the unavoidable necessity for “stringent measures” to impose financial discipline in “the larger interest of the nation”, even if it means some "dent in the immense love that the country has given me."

In putting the country's economy back on the rails, it is best that Modi and Jaitley draw on grass-roots feedback and their own practical sense and native wisdom without allowing themselves to be sucked  into the quicksand of economic punditry. Let me illustrate.

Take inflation and the price front. There is one dimension of inflation that has invariably escaped attention. It is not amenable to monetary or fiscal correctives, but only to the application of all the political will that the government as a whole can muster. I refer to the overheating of the domestic demand not because too much money is chasing too few goods (which is the classic definition of inflation), but because too many have come by so much affluence within so short a time that they are only too willing to pay whatever price is demanded for whatever good or service, and thereby wittingly jacking up prices all round.

The government must boldly put on hold any recommendation of the Pay Commission for pay increase for the employees of the central and state governments and control, by legislation, if necessary, the astronomically soaring compensation packages in the private sector. They have all been living it up without being subjected to any stringent productivity criteria.

There is a lot of maudlin talk of the defence forces. The Arun Singh Committee went into the question whether the country is having the best in terms of quality and dependability in the field, and its report was supposed to suggest a number of measures for getting the maximum bang for the minimum buck and eliminating waste and mismanagement. It is yet to see the light of day. The government can entrust its implementation to an independent agency. It will be surprised at the amount of savings this will yield.

Likewise, the unjustified concessions, passes, subsidised prices of items bought in departmental canteens and the like to employees of different categories, and the unseemly perks to legislators, result in a drain of close to Rs 10,000 crores annually. The tax exemptions (euphemistically called "revenue forgone") to the rich, if done away with, can result in a saving of nearly Rs 5 lakh crore.

The cost over-run by delayed projects touches a whopping Rs 1 lakh crore. It has been computed that if only the power stations, ports and other existing infrastructural facilities function at the optimum level without affected by breakdowns, outages or bad work culture, that alone will raise the GDP by three percentage points.

In other words, there is no need for economic wizardry to tackle these concrete areas within the budgetary domain. If addressed in a sustained manner, by the prime minister himself convening monitoring committee meetings at regular intervals, they can release enough resources to restore the economic health of the body politic.

Image: Prime Minister Narendra Modi. Photograph: Adnan Abidi/Reuters.

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