Denial, fear and crackdown: India takes the easy way out
• Prime Minister Narendra Modi has the mandate to revitalise the economy but is avoiding the hard task of making good policy
India is undergoing another transformation. The India I first visited, in the 1970s, was impressively democratic — with the exception of the period known as the Emergency imposed by then prime minister Indira Gandhi between 1975 and 1977. But its economy was growing too slowly.
After the balance of payments crisis of 1991, India introduced radical reforms. Over the next two decades its economy became fastergrowing, while the political system remained robustly democratic. After the global financial crisis, however, growth slowed. India’s politics is also now moving towards an aggressively illiberal form of majoritarianism. These twin changes are not for the better.
Arvind Subramanian, a former chief economic adviser, has co-authored a paper on the postcrisis slowdown. It notes that every important indicator — investment, credit, profits, tax revenue, industrial output, exports and imports — has weakened sharply since the financial crisis.
Yet overall economic growth has supposedly risen. This contradiction persuaded him to challenge the reliability of official estimates. His conclusion was that the overestimate of growth between 2011 and 2016 averaged about 2.5 percentage points annually, which would lower average growth to somewhere around 4.5%. If true, this has been really poor.
Alas, there is worse. The economy has been slowing even more dramatically in the recent past, even on the official statistics. These show GDP growth slowed to just 4.5%, year on year, in the third quarter of 2019. Growth may now turn around. But the slowdown has been dramatic, comparable even to what happened in the crisis of the early 1990s.
So what explains the weak growth after 2008 and the sharper slowdown in the recent past? First, unsustainable expansion of exports and creditfuelled domestic investment exaggerated India’s precrisis growth rate. Second, despite the postcrisis emergence of severe balance-sheet problems in financial and nonfinancial corporate sectors, government spending, falling oil prices and buoyant lending from nonbank financial firms sustained growth. Finally, credit from these collapsed in 2019.
Consumption then joined other sources of demand — notably investment and exports — in weakening sharply.
Today, argues Subramanian, a vicious spiral is at work: high interest rates, weak economic growth and poor profitability are worsening debt burdens and so aggravating the problems of financial and nonfinancial corporations.
The government’s response seems to be to deny the evidence of a slowdown.
A discussion at the ministry of finance last week suggested the sort of managerialism I remember from my work on India for the World Bank in the 1970s: protectionism, higher government investment, lending targets for banks and direct assistance to exports. It is impossible to believe that such actions will resolve the deep weaknesses behind recent growth failures.
Good economic policy is hard. As the Indian economy grew more complex and advanced it has become even harder. It requires reliable data, world-class expertise, independent advice and open debate.
Instead, the best advisers have mostly gone and policymaking is, by all accounts, concentrated within the prime minister’s office. Everybody else is expected to show loyalty, above all. Rahul Bajaj, a wellknown Indian businessman, has even accused the government of “creating an environment of fear”. In the short time I was there last week, I found many agree with him, if only privately.
It is essential for the country’s future that growth be raised back above 7% and that this growth be both employment-generating and environmentally friendly.
This is a huge challenge. It will demand cleaning up the bad debt, raising savings and investment, improving international competitiveness, in a more difficult external environment, and bringing about reforms in agriculture, education, energy and a host of other important areas.
The current government does at least have the mandate it needs to revitalise the economy and so opportunities for better lives for all. That mandate is also due to Prime Minister Narendra Modi’s indubitable political talents. But knowing how to use such a mandate is no less vital than being able to win it.
One alternative to the hard road of making good economic policy is making dramatic gestures, such as demonetisation, or botched reforms, such as the introduction of a far-too-complex goods and services tax.
An even easier alternative is reliance on identity politics.
That seems to be the current choice. The crackdown in Kashmir, the explicit discrimination against Muslims in the new Citizenship Amendment Act, the proposed national register of citizens, in a country with notoriously bad documentation, and the apparent intention to deport Muslims who cannot prove their right to stay, do together suggest a transformation of the Indian polity.
So, too, is the free use of labels such as “traitor” for those who disagree and “sedition” about those who protest. It is quite clear, surely, that the transformation of India into another “illiberal democracy” is long-intended. Little wonder US President Donald Trump admires Modi. They play the same game, but Modi’s majority gives him more cards.
India has now come to a watershed. Its powerful government can either focus its efforts on reinvigorating the economy or it can proceed with a transformation of an imperfect liberal democracy into something very different. It is easy to understand the appeal of this dangerous project. But we must hope that Modi will listen, even now, to the better angels of his nature. /©