The Hyped Up Expectations Will Hurt Us All

There is significant hype in the media propelled by anchors and “bhakt” economists on the upcoming budget. In fact one such economist from across our shores actually writes that the massive election mandate will transform India into an Asian Tiger thereby implying a 10 per cent GDP growth p.a. for the next ten years!

Whilst we all live in hope, a dose of realism is necessary even at the cost of being branded a pessimist – or worse. To be an Asian Tiger we need to be globally competitive, and as long as we remain grossly uncompetitive on the fundamental economic inputs of  land, labour and capital, such hopes cannot translate into reality. Prime Minister Modi withdrew the sensitive land reforms legislation thrice in 2015-16 and, even though the NDA will have majority in the Rajya Sabha by 1920-21, I do not envisage any meaningful reforms in both the highly politically sensitive issues of land and labour (including land acquisition and exit policy). The Rajya Sabha majority will be used for far more politically popular, and electorally rewarding legislations including those on Kashmir, NRC, the uniform civil code, etc. which will cement the ultimate vision of a strong Hindu Rashtra. All important issues for India, but without being potentially unpopular like the hard economic reforms on land and labour.

Such hype tends to totally overlook the experience of other emerging economies (like Brazil, South Africa, etc.)  who are caught in the “middle income trap” which the World Bank defines as per capita income stuck between $1000 to $10,000 per annum. India’s per capita income is roughly at $3,000 per annum. It has significant advantages over many countries whose growth out of this trap is hampered by resource- driven, capital-intensive models of economic development, through which it can migrate to high growth, based on high productivity and innovation. But this will need investments in infrastructure and in reforming the education system, which encourages creativity and scientific and technological innovation which in turn lends itself back to viable commercial exploitation.

Are we anywhere close to this paradigm in reformist thinking? And do we have resources allocated for such activities as a sustained programme?

The highly populist interim budget presented before the elections has now placed us in a fiscal bind with the fiscal slippage almost certainly drifting towards the four per cent range by the year end. This does not include the impact of following  the slippery path of  the UPA which the BJP has chosen for itself:  namely resorting to large off  balance sheet funding (as in PSUs like FCI and NHAI) and financial engineering (bailout of sick institutions through the LIC and ONGC  inter-PSU amalgamation disguised as divestment ) to window dress financial statements. Whilst some fiscal slippage in times of serious economic downturn would be necessary, it is the utilisation which remains the key. Capital formation and education would obviously be productive; however, thus far significant amounts have been channelised towards revenue expenditure on subsidies, salaries, interest payments, etc.

For example, the farm sector subsidies in the interim budget is in perpetuity and will cost the nation Rs 7,50,000 crores of subsidy over the next ten years. Would this not have been more judiciously spent if, instead of planning for a permanent dole, fundamental and comprehensive reforms in the agricultural sector were outlined? The Finance Minister can still retrieve the situation by pushing fundamental reforms in agri trade, logistics chain including aggregation of produce and storage, dismantling the outdated mandi system, etc. Immediate income support has now become necessary as these sort of core reforms have been ignored on the altar of populism over the last many years.

The competing demands of  the economy are many: infrastructure, skill development, education, health and now safety nets for  various sections of society. The roadmap to fiscal priorities is, therefore, a must which needs intelligent tradeoffs as not all will be achievable or sustainable. This blueprint with substantive reforms to fundamentally seek solutions to our core growing fiscal problems has been missing from past budgets and I hope this one will be different. Apart from buying some time, applying band aids has been the mantra and these have limited utility in cases of sustained haemorrhage!

Due to the fiscal constraints we find ourselves in, owing to the expectedly lower revenues, a large dependence for resources will now depend on the outcome of  the RBI’s capital transfer mechanism currently being deliberated by the Bimal Jalan Committee. This by itself  indicates the level of  the crisis in the economic system where we desperately need accelerated access to reserves built over the years; not to mention the impending NBFC-led dislocation in the credit markets post the ILFS crisis. Indications are that we are almost certainly headed towards a regime of simultaneously loosening monetary and fiscal policy. The last time this experiment was conducted in 2009 post the global crisis, it had resulted in a disaster due to our inherent vulnerability to external shocks (the dollar strengthened from Rs 48 to Rs 65):   it was Raghuram Rajan who stemmed the outflow and the lack of confidence in India post his appointment in 2013 as the RBI Governor by a sustained series of fundamental innovations and hard steps to discipline the system  and for which he had to pay the price!

The new Finance Minister is an able, determined administrator of high integrity but not an economist: given the gravity of our situation, and the global backdrop,  I would have thought the Prime Minister would have done justice by appointing a hard core professional for this ministry  as he did for External Affairs or as Narasimha Rao had done with Manmohan Singh in 1991.  The more fundamental question, though, remains: why do renowned professionals leave for “personal reasons” without completing their terms? Urjit Patel, Viral Acharya, Arvind Panagariya, Arvind Subramaniam, to name a few. Whilst the trolls can be ignored for venting their venom, this is a serious issue which impacts our national credibility of  being a liberal democracy on the path of economic consistency. In this ominous situation, the FM would have significantly benefited from the diversity of opinion of world-class professionals as it would have certainly provided her with well-debated, and innovative, solution choices for the larger good of the nation at this critical juncture.

The stark reality, though, is that the BJP is increasingly becoming a left of centre party  indistinguishable from the Congress on economic policy  notwithstanding it’s talk of privatisation, minimum government, maximum governance, etc.

And, as this election has proven, the voter has given primacy to Hindu nationalism, welfarism and incremental reforms over hard economic issues. Hence, the painful path of  big bang, core economic reforms seems unlikely, and politically unnecessary. We will continue to grow at the steady trot our demography dictates – but becoming an Asian Tiger over the next five years is highly unlikely, though I would be the happiest to be proven wrong. The markets though will continue to party – and worry about the hangover later!  

Prabal Basu Roy

Guest Author A Sloan Fellow from the London Business School, Director and Advisor to Chairmen of corporate boards, the author has formerly been a Group CFO in various companies.