The truth about growth
Regardless of its relentless propaganda, the fact remains that the government has wasted a great opportunity to boost GDP growth
Successful propaganda has one rule: You don’t try to muddle your narrative. It is unwise to try and convince people that two contradictory “facts” are simultaneously true; it’s far easier to convince them of any one of those things, even if it is objectively untrue.
This is worth considering at present, given the government has gone into overdrive in its effort to convince the electorate that two contradictory ideas are true about India’s economic performance: First, that the Narendra Modi-led administration has been an outstanding performer on growth in gross domestic performance, or GDP; and second, that it has sought to clean up the system and make it more “transparent”, even if at the cost of GDP growth.
The immediate impetus for this, of course, is the release of a government-appointed committee’s estimate of the GDP back series for the 2000s, which, it argues, is comparable with the current (and heavily criticised) numbers. According to these numbers — which are, I suspect, still an underestimation of growth in the
2000s — both iterations of the United Progressive Alliance did far better in terms of GDP growth than has the Modi government. Twice, in fact, India touched double-digit growth when measured in terms of market prices.
This should come as a surprise to nobody. The Modi government’s performance on growth has been unexpectedly and astoundingly poor. This is a consequence of its own deeds of omission and commission. It has ignored the private investment crisis for too long; it has delayed essential reform of the banking sector; it has introduced an unnecessarily complex goods and services tax rather than the simple and growth-boosting system that was planned; and, of course, it undertook the demonetisation exercise, which is and will hopefully forever remain the silliest bit of self-inflicted policy harm in Indian economic history. As a result, Indian growth has been stuck around 7 per cent even as world trade and growth have revived, and although oil prices were benign for much of Narendra Modi’s term. The notion that India “beating” China in growth is an achievement is patently absurd. India has not improved its performance; China has slowed deliberately as a result of its stopstart attempt to rebalance its economy away from its original, fixed investment-led growth model. A better question would be by how much Indian growth has outpaced the world average; and by this standard, UPA-II does better than the Modi government — hardly a testament to current economic management.
Finance Minister Arun Jaitley, in one of his increasingly frequent blogs, has pointed to the fact that the IMF’s estimation of India’s macro-economic position is more positive now than in 2014. Others have also reminded us of the dangers of the summer of 2013, when India was considered one of the “fragile five” economies with problematically weak external accounts. Yet the truth is that little has changed structurally since then, as the depreciation of the rupee — possibly Asia’s worst-performing currency in the year to date — shows. India has more reserves as a proportion of imports than it did then, giving a sense of comfort to the external account. But that is, above all, a product of the fact that oil and other commodity prices have not scaled the heights that they did then, which had stressed the current account deficit to unmanageable levels. There continues to be no solution to India’s macro-economic sensitivity to global oil prices; that structural weakness is as strong today as it was in 2013 or indeed 1991. Indeed, today we see the current account deficit heading towards 2.8 or even 3 per cent of GDP without the excuse of unusually high oil prices.
The Modi government, in other words, cannot claim that it has stabilised macro-economic indicators without help from global conditions — while simultaneously insisting the UPA’s economic performance was entirely due to global conditions. Pick one argument and stick with it.
What of the claim that greater “transparency” has been introduced? This is true to an extent — tax collections can be more easily scrutinised, thanks to the digitisation of various databases and more natural resources are priced through market- or auction linked mechanisms than earlier. Yet the argument that this lays the groundwork for better, cleaner and higher GDP growth in the future is flawed. What is needed for an investment and growth boom is clear policy and legal consistency. This is not evident under the current administration. Tax administration reform has been postponed; the direct tax code has been abandoned; and fears of a babu-driven “raid raj” are rife. Tariffs and sectoral incentives are being used to prop up particular quarters of the economy — which give rise to justifiable fears about future policy U-turns. The non-performing asset problem has been partially addressed by the Insolvency and Bankruptcy Code, the Modi government’s one big structural reform — but the build-up of new and potential stressed assets, such as in the power and renewable sector, points again to a lack of follow-through on creating policy consistency.
Beyond all the nonsense that is being spouted in all directions about the comparative GDP numbers, the simple truth remains this: The Manmohan Singh government made major mistakes, but its legacy was judged unduly harshly on the basis of a couple of bad years, while the Modi government made major mistakes, and its performance is being judged unjustifiably favourably on the basis of vague hopes about the future. When Mr Modi came to power in 2014, he faced an extraordinarily benign combination of circumstances. Oil prices collapsed. He had a majority in the Lok Sabha, and considerable political capital with which to arm-twist the Rajya Sabha. Global growth was reviving, and China was slowing down, opening up opportunities for other developing countries. The West’s central banks had committed to a slow and predictable unwinding of easy money, as opposed to the panic of summer 2013. In the years following 2003, India took advantage of benign conditions to boost growth. In the years following 2014, we did not. We patted ourselves on the back for a business cycle uptick. That is the simple yardstick by which the GDP numbers should be judged — and it is not one that is favourable to the Modi government’s performance. No amount of muddled propaganda can change that fact.