So Finance Minister Pranab Mukherjee has plans for “unpopular austerity” measures – unless, of course, he’s already rolled back his announcement in the way that he’s done with many a budget proposal.
Just that very word – austerity – has a 1970s feel to it: it immediately puts one in mind of Ambassador cars and black-and-white Doordarshan channel that beamed Krishi Darshan programmes at prime time. But then, Pranab-da is himself a relic of that long-ago time, when we had peak income tax rates of 97 percent. Even his most recent budget, which reeks of ‘the government knows best’ mindset, is a distant echo of the prevailing sarkari mindset of the times when he presented his first budget – in 1982.
But then, it isn’t just Pranab Mukherjee’s folly that haunts the economy today. Every syllable of his economic philosophy represents the dominant view of the UPA government, which envisions the state as the benevolent maai-baap that would put the legendary Karna to shame. Even when it has bust the bank and run completely out of money, it borrows – just to throw it away.
If the rupee is at an all-time low today, if the engine of the economy is sputtering, if stock markets are tanking, it is a resounding vote of no-confidence in the economic policies of this government as investors take their money and run. Sure, the most proximate reasons for today’s perfect storm may be the eurozone crisis, but beyond that, the vicious downward spiral in India is the result of this government’s fiscal profligacy and the return of the statist mindset at the heart of economic policymaking.
The influence of the mindset of the 1960s and 1970s in today’s vastly different world has enormous economic consequences. As economist Bibek Debroy notes (here), the period between the mid-1960s and the mid-1970s witnessed “the worst excesses of state intervention”. And the effect of that was felt not just felt in bad economic policy, but in regressive legislation, whose influence continues to haunt the Indian economy to this day.
“We are struggling to remove or repeal legislation introduced between mid-1960s and mid-1970s,” Debroy points out. “Economic policy is easier to change, law is more difficult.” And that benighted decade of bad economic policy and bad legislation effectively set India back by a couple of development decades, he reckons.
If Pranab-da were intellectually honest, he would acknowledge that this government’s welfarist policies, which have led it to live way beyond its means in recent years, are at the heart of the stagflation that confronts the economy today.
But his ‘remedy’, which focusses on unspecified ‘austerity’ measures could end up compounding the crisis if it leads to a shrinking of aggregate demand, as many analysts reckon it will.
The irony is that for much of the past year, the government has been strenuously exerting itself to cut back on non-Plan expenditure as part of an attempt to keep within its fiscal deficit target. (That’s despite the fact that the distinction between Plan and non-Plan expenditure is fallacious at best.)
Last year, for instance, Ministries were asked to observe discipline on fiscal transfers to states, state-run entities and autonomous bodies at the central, state and local level. The government also cut back on expenses for conferences and seminars and banned such events from being hosted in five-star venues. Yet, it ended up with a sharply higher fiscal deficit.
The reason why these measures didn’t work was that these amount to mere tinkering around the edges – with no effort to plug the gaping holes elsewhere. India’s deficits are a reflection of structural problems - of limitless subsidies, on doles that drive up wage inflation, but also on fuel for the urban rich. And since the government has done nothing about addressing the structural infirmities, the market is punishing it in the only way it knows. Yet, as this blogger notes, the pain hasn’t even begun to be felt widely. There’s more pain, much more pain, to come.
Bad economic policymaking is like bad karma: and just as you can change your karma with good deeds, good policies can reverse the downtrend. What’s harder to fix, however, is the legacy of a statist mindset. And on that count, the welfarist mindset of today that marks this government– which brooks no challenge to its worldview - will be felt for many, many years.
When the history of the Indian economy is written two decades from now, says Debroy, “we will look back at the 2004 to 2014 decade as one that was just as damaging as mid-1960s to mid-1970s, if not worse.”
Bad karma can be very cruel. The UPA government’s economic sins of today will haunt the Indian economy and its people for a long, long time.