 "2012 is not 1991: Why UPA's snake oil remedies won't work this time")
A precipitously falling GDP and deepening economic crisis. A prime minister whose reputation is in tatters. A party whose leaders are in hiding. A failing finance minister who now dreams of retiring to the lawns of Rashtrapati Bhawan. A senior ministerial team where each one is looking out only for himself, with the devil taking the hindmost.
This is a snapshot of the United Progressive Alliance (UPA) in its ninth year of power as of today. Perversely, the “progressive” alliance seems to have remedies that are largely “regressive” in nature.
It is said that every general is preparing for the last war, and this is exactly what UPA-2’s generals are doing.
[caption id=“attachment_329874” align=“alignleft” width=“380” caption=“Worried about economy. Image courtesy PIB”]
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Regression One: Prime Minister Manmohan Singh, according to DNA , is hoping Sonia Gandhi will pack off Pranab Mukherjee to the presidency so that he can run the finance ministry himself - with some help from C Rangarajan, and maybe his old friend Montek Singh Ahluwalia.
Says the newspaper, “Singh has been unhappy with Mukherjee’s performance and some of his ideas which are considered to be ‘archaic’….He believes Mukherjee has not been able to cope with the adverse impact of the global crisis on the Indian economy and has not managed the situation well.”
True, but what is the PM’s own solution? Go back to 1991, when he as finance minister rescued the economy from external bankruptcy with help from Rangarajan and Montek? This time Singh thinks he can do an encore with the same team. It’s like the Indian team calling Gavaskar and Kapil back after the team’s disastrous performance in England last year.
But 2012 is anyway not 1991, and Manmohan Singh is PM, not FM. In 1991, we had Narasimha Rao handling the political fallout; 2012 has Sonia and Rahul missing in action. What is common to both years is the “sense” of crisis, but that’s about it. The political and economic situations are dramatically different, and 2012’s challenges are completely new. The remedies also cannot be the same as in 1991. Moreover, PM Singh cannot regress to his old job as FM Singh. If he wants to, he should tell Sonia and he can go back to his old job. But even that will not solve the problem. This brings me to the bigger regression under UPA.
Regression Two: The real backward march under UPA-1 and 2 relates to feudalism. Today’s leaders of the Congress and its allies are simply feudal. They believe that they will be elected by throwing taxpayers’ money at voters. (NREGA, food subsidies, farm loan waivers, et al). The voter is assumed to be an unthinking moron, who will not respond to good ideas, but your crumbs and carrots.
The Congress is bankrupt of ideas, and so are its allies like the DMK. Their idea of leadership is the old mai-baap approach, where the Lord and Master flings an occasional purse of gold at the poor, and the latter are just supposed to swoon with gratitude and re-elect them.
The problem with this kind of trickery is that it may work in one election or two, but not forever. Despite the freebies, the DMK was wiped out in 2011. And despite all the money thrown at voters in 2014 (food security, higher food procurement prices), the electorate will probably do the same to the Congress and UPA. The only help it will receive is from an equally bankrupt BJP, which is busy shooting itself in the foot.
The point is this: the problems of India cannot be solved by regressing to past feudal attitudes. Or by pretending 2012 is 1991.
While only elections will deal with the feudalism of our politicians, the economic issues of today have to be addressed differently, and Manmohan Singh cannot really do that by presuming it is about reviving the 1991 magic. In any case, what has his bran’s trust of Montek and Rangarajan got right in the last two years? Inflation targets? Growth estimates?
Here are four reasons why 2012 is not 1991 and why Manmohan Singh will probably fail.
First, in 1991, only India was facing bankruptcy; today, the whole world is. In 1991, we still had the IMF and the US and rich foreign investors to kowtow to and beg for help - which we did. We got rescued by opening up our economy.
Today, the world is in a mess, facing not only debt overloads and declining growth, but also serious social discontent everywhere - from that temple of capitalism (Occupy Wall Street, etc) to Europe (where rage with austerity programmes is growing all over southern Europe), to the Arab world (Jasmine and other revolutions). India is also facing social dissent on an unprecedented scale - from Naxalism to Dalit and Muslim ferment and middle class voter angst over corruption.
The US economy is sliding again despite massive increases in money supply and government spending. Europe is about to implode. Japan is in coma. China is slowing down. As commodity prices fall, even the cash-rich commodity exporters will feel the heat.
Who is going to rescue whom in this world if India asks for help? A drowning man is not going to throw another drowning man a lifeline. They have to rescue themselves. We have to do things for ourselves and not to please anyone else. If we fix our internal economy, the world will beat a path to India. If we don’t, there is no magic bullet for our problems.
Second, the old economic remedies are simply not working. The primary economic debates of the 20th century are not over. Both Keynesian economics, and its polar opposites in the free-market philosophies of the Austrian school and supply side economics, appear unconvincing in the current climate of crisis. Even middle-of-the-road mixed economies (as in Scandinavia, where both the state and the private sector are given equal importance) do not seem to have any great solutions to offer.
The Keynesian remedy of flooding the US economy with cheap money and taxpayer bailouts (debt is now 100 percent of GDP) has brought only temporary respite. The opposite German remedy (of austerity and tax increases) for the eurozone’s problems is now running into a wall of public opposition, but even this solution must be wrong. You can’t ask countries to repay their huge debts by killing off their growth with externally induced austerity and drastic cost-cutting.
In India, we have always believed in excess state spending. Our government has spent money like water, and the Reserve Bank has tried to counter that with costly money policies, but our growth is heading straight south. Both the government and RBI have failed.
Third, most economic models the world over are sputtering. In the post-World War scenario, the one model which seemed to work was the Asian export-led growth economy accompanied by high levels of investment and low domestic consumption. It was first tried out by Japan, then the Asian Tigers, and then Asean, and then, finally, that Godzilla called China.
Over the last 20 years, the model has come under strain. It seemed to work for a while because the US was able to absorb the output of an exporter of the size of China, now the world’s second largest economy. But it needed steroids. It worked only because poorer China lent the richer US money to buy. A similar pattern was repeated in the eurozone, but here the relatively poor borrowed from the relatively rich.
Rich Germany, after locking the weaker economies of southern Europe into the eurozone, built an export-driven economy whose markets were the eurozone’s less competitive economies. The latter were happy to borrow from German banks to buy more German products. This is what the German success was mostly about.
When the music stopped playing after the Lehman crisis, the world could not pretend that a lopsided growth pattern-where exporters lend money to importers to keep the illusion of prosperity going-can endure. Borrowers have to repay some time. And that time has come. The US can repay in terms of debased dollars; the rest of Europe, and especially the poor PIIGS (Portugal, Italy, Ireland Greece and Spain), can repay Germany only by internal austerity. Or by exiting the euro and devaluing their currencies. Or they can default.
In India’s case, we have borrowed excessively both at home and abroad - our domestic debt is 67-68 percent of GDP (almost as much as in the bankrupt 1990s) and our current account deficit (the difference between what we earn abroad and what we spend) is around 4 percent of GDP (worse than in 1991). Our external debt now exceeds our forex reserves by a wide margin.
_Fourth, and this is specific to India, the political scenario in 2012 is radically different from 1991._Twenty-one years ago, Narasimha Rao still headed a national government, even though he was short of a majority. His political astuteness and the country’s sense of crisis helped Manmohan Singh, a bureaucrat, to work with other economists and technocrats to find a solution to the country’s problems.
Today, there is no national party left, except in name. The states are more powerful and the Congress’ allies are no pushovers. Getting any kind of policy implemented needs political clout - something Manmohan Singh does not have. Forget clout, he does not even have the goodwill anymore. So the idea of recreating the 1991 team makes sense only if Sonia and Rahul are going to play the role Narasimha Rao did in 1991 - then the PM can play bureaucrat-in-chief and his kitchen cabinet of Rangarajan and Montek can deliver.
But only upto a point. For the remedies in 2012 will have to be different from those of 1991. We need to reform in an atmosphere of lower political legitimacy.
The reforms we need relate to states as well as centre - which again call for strong political leadership, which is completely missing in the Congress.
These reforms include:
Quick implementation of the goods and services tax and a more radical direct taxes code.
Creation of a single agricultural market in India by abolishing all inter-state barriers to movement
A radical reshaping of the Centre-state fiscal relationship, with more resources and policy-making powers being shifted to the states
A more liberalised foreign direct investment regime in sectors like insurance, banking, telecom, media, aviation, and retailing, among other sectors
More flexible labour laws
Complete abolition and detoxification of inspector-raj and unnecessary regulation that only increases corruption
Transparent land acquisition, mining and environment laws - laws that won’t make land and other costs prohibitive even while safeguarding the interests of farmers and the poor.
A strong push to urbanisation, including large investments in public services, and especially public transport financed by higher taxation of private vehicles.
A strong disinvestment and privatisation programme to raise resources for investment in infrastructure and pay for subsidies to the poor.
There could be more, but the overriding philosophy must be to get the government off the backs of productive forces in the economy.
None of these things can be accomplished without a Centre-state compact to restructure federalism. Today’s economic woes need a stronger political input than in 1991. This is completely missing from the Sonia-Rahul-Manmohan scheme of things.
Trying to solve 2012’s problems with 1991’s approaches is sure to fail. The feudal, snake-oil remedies of the UPA will not just take us back to 1991, but to the proverbial stone age.