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Economic slowdown: Dear Arun Shourie, Yashwant Sinha, why this kolaveri over Narendra Modi's policies?

There are uncanny parallels between Narayana Murthy vs. Vishal Sikka, and Yashwant Sinha vs. Arun Jaitley conflicts. In both cases, both appear like those who have long left their jobs but still hanker after them. When ignored, they retaliate by going public and in the process destroy whatever they had themselves created. Though in many ways, not all, Murthy is right, Sinha is almost completely wrong. One can be forgiven for thinking hell-hath-no-fury like a former finance minister or chief mentor scorned! (Or for that matter a distinguished economist and a future finance minister in his mind, scorned).

The article by Sinha, a distinguished former IAS colleague, has virtually no data or evidence to support it and is fortunately wrong on several counts, but unfortunately right on just a couple. So why indeed is this Kolaveri, Kolaveri di?

Arun Shourie - one of India’s most thoughtful economists, has harmed his own credibility by his personal attacks on Prime Minister Modi, reflecting frustration, not facts, for the data he has presented is only half-right. Perhaps if he had taken the Niti Ayog position rumored to have been offered to him in 2014, instead of what he desired then, he would attack with credible facts, not half-baked ones.

First, growth has indeed slowed from 2014-15 till today but to compare an annual growth figure of a preceding year, with a quarterly one of the current year, is bad logic. Even today, the World Bank, International Monetary Fund and others are estimating a 6.9-7 percent figure for 2017-18. Also, with regard to growth and inflation, we have better growth and much better inflation now than in the three years, preceding this government.

Critics are ignoring inflation control completely in which this government’s record is outstanding. Growth has fallen, but why the surprise? In part, low oil prices kept growth booming and it stopped when this windfall gain started disappearing. Consumption has recovered to pre-demonetization levels but investment continues its unending slow pace. Thus, to masquerade a classic year three slowdown as a ‘tailspin” especially when not backed by evidence is misleading, nay mischievous.

File image of Narendra Modi. PTI

File image of Narendra Modi. PTI

Second, during the last few quarters, India’s current account deficit (CAD) has quadrupled from 0.6 percent of the GDP to 2.4 percent due to significant increase in manufacturing imports. If domestic demand was dead, why would real imports growth accelerate, that too across sectors? Stronger imports alone would explain the 2.5-3 percent slowdown in growth, post-demonetization, accompanied by widening current account deficit (CAD). The Reserve Bank of India’s REER (Real Effective Exchange Rate) Index has India and its competitors, increased from 100 in 2004 to 120 now, which along with a sluggish world economy, doing business and export infrastructure bottlenecks affected exports. Finally, exports are picking up, and this too will change soon.

Third, Participatory notes or P-notes, a major means of concealing dubious income--something that Sinha tried as FM but failed, and was rolled back. This government has almost wiped out P-notes.  Applause? Our tax compliance ratio is lower than Rwanda, Uganda, Ethiopia and this government has been using analytics, strong enforcement action imaginatively, and has increased tax collection dramatically. Hats off to the honest tax officers and the leadership driving it. In August 2014, all of India had a million LED bulbs and today it is 25 crores and prices have come down by 90 percent!!

MNREGA, all about digging holes, cost India Rs.40,000 crores, while LEDs (light-emitting diode) will save India the same number by 2019.  Not an achievement? Foreign Direct Investments (FDI) that stood at $36 billion in 2013-14 is now at $60 billion. Still not convinced? Food grains production which stood at 252 million tons in 2014 is now at 276 million tons, despite two bad monsoons.

Fourth, under the eagle eye of this government, bad loans provisioning is happening by Reserve Bank of India (RBI), impaired assets are being recognized and ‘true’ numbers are emerging and this will impact growth. But these are hard reforms which were overdue and will indeed do good to the economy. Shouldn’t we celebrate this and the complete absence of corruption at the top, as much as we cursed high -evel corruption in the previous years OR REGIME?

When Shourie talks of bad loans shooting up from 8 percent to 17 percent of total outstanding between 2014 to 2017, he is not mentioning that for instance Vijay Mallya was “not” a bad loan in 2014 (even though Kingfisher was), but is one today! Likewise, there are many Mallyas in India who are now being truthfully recognized and provisioned for. Is this not to be applauded? Indeed, the government needs to act on this urgently and it will, with or without Shourie’s ilhaam or revelation.

All the liberal intellectuals who are screaming for a rate cut must first understand that it’s the RBI and not government which decides this. And if under the RBI Act, the government gave directions to RBI to do so (or on anything else), the very same gang will go to town and say, “this government is marauding autonomy of RBI, something that was not even witnessed during emergency days”! If they don’t truthfully recognize bad loans, or nudge RBI to do so, then the same Shourie will scream and say, “policy paralysis”! Dammed if you do, and dammed if you don’t.

To say that demonetization was a money laundering scheme without any facts or data to back it is a sign of frustration, for there is nothing to suggest that it was one. If he had said it was a blunt tool or was badly implemented or some other concrete criticism with evidence that would have been welcome but this is unbecoming of Shourie’s stature.

Fifth, the fall in Index of Industrial Production (IIP) is a potentially valid criticism but Shourie forgets that the index is dated and not well-founded for it doesn’t have most of the modern industries in it. The IIP falling reveals slowdown in that small, tiny, subsect of sample industries which it is based on and to make that sound as if Indian industry is collapsing is just frustration, not the facts.

Sixth, the significant benefits of formalizing an informal economy will take more years to reveal themselves, however, the idea of demonetization was to make the large unaccounted, informal economy to become formal. Indeed, this supply shock was supposed to displace the cash-based informal supply chains which will hopefully be replaced by formal new ones. This is the disruption which Narendra Modi sagaciously acknowledged in his 8 November address to the nation. Then, what’s all the hand-wringing about?

Where Sinha is right is in the inadequate focus on recapitalizing cleaning up of banks’ balance sheets. The government should find someone dynamic to re-imagine financial services, digitalize payments, and restart credit which taken together will revive private capital formation. However, on this there should be shared blame for the banking regulator also has a major role in solving the problems of the banking sector. For instance, the oft-touted idea of a ‘bad bank’ was reportedly not supported by RBI.

On stalled projects, he forgets it was the ‘banging heads in a room” in the Prime Minister’s Office which restarted the Dabhol project and saved crores from becoming bad loans, whereas in a similar instance the two distressed ultra-mega power projects in Gujarat brought on steam, was stalled again by the courts. Thus, re-starting stalled projects is easier said in an article than done on the ground.

Seventh, Sinha forgets that H C Gupta an honest IAS officer, was convicted by the courts, not the concerned political executive which took the decision and thus civil servants are scared to exercise discretion, even where they should. Why would any civil servant have the courage to privatize IDBI Bank or Air India, with a sword dangling on their neck which can fall on them from now till eternity, on any count, for any excuse, in the presence or absence of regime change and then the process to prove oneself innocent itself becomes the punishment?!

I challenge any corporate CEO or political leader to exercise discretion in a such an ecosystem, where procedures not outcomes, rules and not legitimate contract deviations, are what matter. Indeed, stalled projects should be seen through this lens.

Eighth, on Goods and Services Tax (GST), indeed, any large project of creating one tax for the nation will have a period of transition and glitches. Didn’t Aadhaar have implementation issues? Didn’t Obama Care have them? What did the headlines, including Shourie himself say before GST was implemented? That this government isn’t for bold reforms such as GST and when implemented, in arguably in a less than ideal form which only reflects the political compromises of the huge tapestry called India, then why this Kolaveri di?

Would India be better off without a less-than-ideal GST or with it? Now when it is done, you say suicide is also bold.  Shourie should understand suicide is not bold, but is escapism and this government is not an escapist.

Shourie taught us that you can’t save the country on a “part-time basis” and now when we have a prime minister who is doing full-time hard reforms by taking many tough decisions, why is there this hand-wringing? Sinha and Shourie forget that you can’t cure cancer that is savaging a body over many years, with band aid. It requires brutal surgery and this government alone has shown the courage of conviction and imagination to even attempt it. Yes, there will be pain. And then there will be huge gain too.


(The writer is an IAS officer. Views are personal. He tweets @srivatsakrishna)





Updated Date: Oct 06, 2017 14:06 PM

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