What the Modi government should do to revive the economy
Famous economist Anatole Kaletsky predicted in 2010 that a new economy was emerging, and that it would neither be market fundamentalist nor know-all governmentalist. This was the time when the world was grappling with the remnants of the 2008 recession. He also predicted that three phases of economic development had passed and the fourth had just begun.
"Early nineteenth century to 1930, it was an era of free market economy and governments were not allowed to disturb the business. Then the Great Depression and communist experiment in Soviet Union changed the mind set in western world and the new idea germinated that market can't be left on its own and state has to assume more responsibility, it has to be the welfare state," he wrote.
That was the New Deal theory, the Roosevelt approach to fighting the economic crisis. The state suddenly became the Big Brother, a know-all brother. But the oil crisis of the 70s again forced thinkers and policy makers to re-experiment with the original market logic. Ronald Reagan and Margret Thatcher became the new messiahs of the new economic idiom. The state once again lost its prominence to market. The classical laissez-faire reappeared in a new form. Unlike the second phase of economic development, now the state was 'demonised', regulation was ridiculed and market was let loose. It was argued that like the separation of state and church, separation of state and economy was also needed for comprehensive, risk-free economic growth. But the 2008 recession again underlined the fickleness of this argument and forced thinkers and policy makers to find a new way forward.
The present crisis seems to be more vigorous and seemingly more threatening, as a new idea has not taken any shape. It is more intimidating for us Indians because for the first time in global history, India is a serious stakeholder and a lot of economic revival also depends upon us. But due to the government's confrontationalist attitude the economic revival does not seem to be happening. Prime Minister Narendra Modi was elected with great fanfare. He was seen as the man who would bring a great turnaround and a new lease of life to the Indian economy, which was sluggish in the last years of Manmohan Singh's term. But, unfortunately, that does not seem to have happened.
The Sensex, seen as a barometer of economic health of the country, is falling very fast. When Mr. Modi was sworn in as PM, it was hovering over 27,000; it is now stuck below 24,000 which is a sad signature for the Finance Minister. The rupee is about to touch 70 against the dollar. It's getting weaker every day. The Hindu reports - "The performance of eight core sectors in November was worrying, with their output shrinking 1.3 per cent, the worst in a decade. Manufacturing, after steadily inching up over the past years, also fell 4.4 per cent in November." The Hindu also reports- "After surging 9.8 per cent in October last year, the index of industrial production fell by 3.2 per cent in November, it's worst performance since 2011." The Economic Times writes: "Though India is expected to grow at 7 to 7.5 per cent this year, the growth in corporate India has been hit by heavy debt, a highly stressed banking sector, and poor rural demand due to the two successive monsoon failures."
India is fortunate that global oil prices have dramatically declined. When Mr. Modi took over, it was $133/barrel and now it is less than $30/barrel. This has helped fight the inflation and keep the foreign reserve in check. But the new volatility in the market due to the Chinese crisis, which has recorded the worst economic performance in the last 25 years, has created fresh panic. This Chinese crisis has caused so much havoc that January this year has been one of the worst in decades. According to Bank of America Merrill Lynch, "Some $7.8 trillion was wiped off the value of the global stocks in three weeks of January." American economists are already predicting that the "the possibility of world's largest economy entering recession in the coming year has risen to 20 per cent from 15 per cent." Which is a dangerous signal for global market.
But the Indian government does not seem to be confident to tide over the crisis. Despite being the first majority government since 1985, the Modi government could not usher in the reform measures in the initial months. It committed a blunder by assuming that the majority in the Lower House would help it sail through the legislative hurdles. Had the government been more conciliatory, its approach less arrogant, by now the GST, the measure reform that is thought to be a new trigger point, would have seen the light of day. But now it's lost in the legislative logjam. The BJP's massive loss in Delhi and Bihar has weakened the Prime Minister. The Opposition has now tasted blood and it does not want to let the Modi government relax and gain any moment of comfort.
When the market is not picking up on its own, then state has to intervene. It has to create an atmosphere in which captains of the industry feel confident and make certain bold moves. That would need institutional support and legislative backing. But a government in its present swagger does not seem to realise this truth. For a new economic model to emerge, a close partnership between the state and the market is essential. Gone are the days when both the entities worked in opposite directions. India also has to realise that we are not a perfect democracy and are still an evolving economy, unlike western nations. So the task before us is even more difficult. To tide over the economy, the Indian state has to be more polite, it has to carry along all the stakeholders of the society, all the democratic institutions have to play an important role, and a very serious effort has to be made to make the Opposition realise that it is an important element in economic revivalism. The government has failed in this endeavour so far.
To the Indian policy makers, I would like to quote Kaletsky again: "Capitalism 4.0 will recognise that governments and markets make mistakes not only because politicians are corrupt, bankers greedy, businessmen incompetent and voters stupid but also because the world is too complex and unpredictable for any decision-making mechanism to be consistently right, so pragmatism must be the watchword in public policy." Mr. Modi, you need to be more pragmatic and you have to realise that an old instrument would not work in the new world.