Single point control will undo the economy

The determination of economic policies requires an open mind to listen to dissenting views.The Modi Government, on the other hand, is smothering all alternative views and wants to run the country as per its own understanding. While this provides a clear c

This year the World Bank has placed India at rank 100 in “Ease of Doing Business” against the rank of 130 last year. The jump of 30 ranks is exceptional and the Government must be heartily congratulated for the same. In this backdrop it is troubling that FDI inflows are actually declining. The seven months from April to October 2016 saw FDI inflows of USD 26 billion. These inflows declined to USD 22 billion in the subsequent 7 months from November 2016 to May 2017. It is clear that ease of doing business is improving but at the same time FDI inflows are declining. It appears to me that this is happening because some other policies of the Government are not conducive to economic growth.

The real challenge before the Government is to determine these other policies. The determination of economic policies requires an open mind to listen to dissenting views. The Modi Government, on the other hand, is smothering all alternative views and wants to run the country as per its own understanding. While this provides a clear cut policy direction, it also presents a danger. No check remains if the policy is incorrect. The present woes of the economy can be traced to the dismantling of the dissenting voices by the Government. Thus there is no check that can restrain the Government when it implements a disastrous policy like demonetization.

I give three examples of how the Government is dismantling dissent. The Massachusetts Institute of Technology says that North Korea was more prosperous than the South at the time of partition. However, autocracy in the north led to its decline and democracy in the south led to the latter’s success. Modi does not appear to recognize the positive contribution of opposition. His tenor is to smother the opposition. For example, no leader of opposition has been recognized in the present Lok Sabha. The technical requirement of minimum 55 seats could be modified to create positive vibes with the opposition. Similarly, the Brookings Institution attributes China’s success to inner party constraints on power. Mr Modi is moving in the opposite direction. All the powers have been concentrated in the PMO.

The second example is of the Reserve Bank of India. The Brookings Institution and the Wharton School underscore the importance of an independent Central Bank. The idea is that the Central Bank can firefight any detrimental monetary policies that may be followed by the Government. Modi, however, wants to control the Reserve Bank of India. He has formed a Monetary Policy Committee which has 3 members from the RBI and 3 members from the Government. Thus, independence of the RBI has been curtailed.

The third example is of the judiciary. The Norwegian School of Economics stresses the importance of the judiciary. An independent judiciary may appear to limit the Government’s ability to follow its policies. At the same time, it can prevent a wrong policy being implemented. Modi wanted to give the Government a key role in appointment of judges of the High Courts and the Supreme Courts. He passed the National Judicial Appointments Commission Act establishing a Commission to appoint the judges.

The Commission was to be appointed by the Government though with participation of the judiciary. The Act was struck down by the Supreme Court. I support the need for external scrutiny of judicial appointments. But this could be done through a committee of statutorily elected professionals such as the chairs of Medical Council of India, Bar Council of India, Institute of Chartered Accountants of India, etc. That would preserve the independence of the judiciary and also prevent Government control of the judiciary. Similarly, Modi has amended the National Green Tribunal Act and did away with the requirement that the Presiding Judge will be a retired judge of the Supreme Court. Now a bureaucrat favourable to the Government can be appointed at the Presiding Judge of NGT.

The fourth example is from the Government-business bonhomie. The World Economic Forum says that economic success comes from fostering a culture of cooperation between the people and the Government. Modi’s approach is opposite of this. He works with the assumption that the people are cheats and he seeks to whip them into operating honestly.

Demonetization was implemented with the assumption that people are keeping hoards of black money. Those holding white money in cash were also painted as cheats. I had gone to deposit cash of few lakh rupees which I had earlier withdrawn from the bank. A lady in the line commended snidely, “This money would not have come out were it not for demonetization.” The good system of GST has been turned into a disaster because the compliance systems are designed to breathe on the necks of the businesspersons as if everyone was evading taxes.

These examples show that Modi seeks to run the economy with a single point control of the PMO. This approach has benefits in that a policy gets implemented firmly. But it also has the danger that no checks remain if that policy happens to be wrong.

In this background, I beg to present my reading of the reasons why our growth rate is declining and why FDI is not coming despite improvement in ease of doing business as pointed out by the World Bank. The Government has embarked on a policy of controlling the fiscal deficit. The Government is mighty happy that tax receipts are buoyant due to the implementation of GST despite the growth rate declining. Actually this should be a cause of despair. The increased collection of taxes means that there is less purchasing power remaining in the hands of the people. Demonetization has added to the pain.

People no longer have confidence in the currency or the banks. They fear the Government may freeze the deposits made by them in the bank. Thus they are buying gold, the demand for which has doubled in this year. The nation’s income is going abroad in the purchase of gold. There is less demand in the market because of increase in taxes due to GST and increase in the purchase of gold due to demonetization. Alas! The government had dismantled all the voices of dissent. Hence there was no restraint and demonetization and GST were implemented and that has led to the decline of the economy. The root cause is that the Government has dismantled dissent and no check remains on wrong exercise of power by the Government.

The author was formerly Professor of Economics at IIM Bengaluru