Towards a seismic shift in economic thought and practice

In the year 2014 India witnessed a seismic shift in its politics. In a country where secularism was universally chanted as a holy incantation, the formerly despised Hindutva ideology – practised and propagated by the BJP – made exponential gains in popularity. Ever since then it has grown roots in almost every part of the country. Indeed, politics in India will never be the same again where mouthing secular shibboleths used to be the passport to political respectability. This seismic shift did not happen overnight or even in a year or two. The portents were always there. But thanks to the fall from grace of liberal-secular politicians the shift became inevitable. Yet, it was disruptive politics that provided the final push.

The term ‘disruptive politics’ has negative connotations. But it has therapeutic uses too. In India we have witnessed the phenomenon on a mass scale on two distinct occasions – separated by more than two decades. One was the JP Movement and the other was led by Anna Hazare. Both posed direct challenge not just to the vested interests entrenched in the system but to the system itself. The JP Movement gave birth to the Janata Experiment, which failed. However, the Anna Hazare led movement culminated in two political developments – birth of the Aam Aadmi Party and Narendra Modi’s spectacular rise. During both movements the Indian National Congress was in power at the Centre and corruption, law & order and unemployment had reached unmanageable proportions. Governance had become unresponsive, even oppressive, and the ruling elite were either unable or unwilling to take corrective action. Disruptive politics became the most natural response. We are lucky that it has been played out democratically and within the norms set by our constitution. Thus, during the 2014 general elections, Narendra Modi won by deploying his mesmerising oratory and masterfully disruptive political strategy of attacking the ruling party’s weak spots, viz., the corruption scandals and rising unemployment. His rock-star persona appealed to the youth. His promises of better times through better governance enraptured the common voter and had the middle classes eating out of his hand. No wonder he was catapulted to the seat of power in his very first attempt. In the process, he won for his party, as well as the NDA, an unprecedented majority in the Lok Sabha.

Now, should we expect a seismic shift in the economic thought and practice too? Up to now, things have not been spectacular, but portents are there. Like disruptive politics disruptive economics also has its uses. Today, things have already reached the stage where complete break from the past economic policies and practices would be eminently conducive to the Indian economy’s health. So far, PM Modi and FM Jaitley have studiously avoided going for disruptive economics, barring the demonetisation that could have had rather tragic consequences in any other economy. This did not happen in India, for which credit must go to the underlying dynamism and strength of our banking as well as government institutions. However, critics uncharitably point out that if India has been able to withstand the shock it is largely because of boundless fortitude of the common Indian that has not yet got over the tendency to treat the ruler as a divine being – the avatar of Vishnu (they argue that you will find prominent and not-so-prominent politicians depicted as gods and goddesses during election times and even otherwise). Otherwise, how does one rationalise the absence of serious protest despite the fact that, thanks to demonetisation, overall growth has slowed down and unemployment has been rising exponentially (economists confirm that private investment and gross capital formation have dipped)? Critics further point out that the poor have been hit so hard that many in urban areas have retreated to the countryside, thus forcing upward revision of allocation to MNREGA from 38500 crores to 48000 crores.

The above argument – whatever its truth – only underscores the need for a new approach to India’s economic problems which have, thus far, refused to go away. Let us take a look at some of these problems, the government’s response and the potential of going in for radically different solutions.

There is no evidence yet that the mess created in two vital segments of nation-building – health and education – is being cleaned up. The situation in rural areas is especially worrisome. Various preceding governments’ attempts at privatisation in these two sectors have resulted in spawning of a mercenary culture. Worse, the resources and skilled manpower, which should have been deployed in rural and semi-urban areas, have been diverted for the benefit of the privileged sections in urban areas. Obviously, there is a need for regulating private hospitals and educational institutions in such a manner that their services are made available to the marginalised sections throughout the country. The quality of education and health services provided by these private institutions need to be regularly audited and made universally affordable.

The Economic Survey points out that the growth rate of Gross Fixed Capital Formation has been steadily falling from 4.9% in 2014-15 to 3.9% in 2015-16 and (–)0.2% in 2016-17! Unsurprisingly, the GDP growth rate has taken a hit – the estimate of deceleration varies from 0.5% to over 1%. An economy that had once seen a double digit growth is now struggling to maintain even its current single-digit growth rate. Worse, the demonetisation-induced fall puts us back by a few years as we now have to make up for the lost momentum and then put the economy back on the fast track – something easier said than done.

Over 20% of the outstanding loans of a dozen state-owned banks have been declared nonperforming assets or NPAs (thanks to what are now described as Non-Performing Loans, which have reached the phenomenal 90 billion dollars mark, there is a tremendous burden on the economy). In fact, the percentage of NPAs to gross advances has shot up from 4.5% in 2014 to 9.1% in 2016, thus adversely affecting the total credit growth. Loans to small, medium and large firms actually shrank by 4.3% in the 12 months ending December 2016, hobbling the overall industrial growth. According to experts the budget provision of 10,000 crores for recapitalising public sector banks is inadequate, especially when 25000 crores were allocated for the purpose in the previous budget. There is a proposal for setting up the Public Sector Asset Rehabilitation Company for taking over and managing the NPAs. But it has yet to take a concrete shape. More pertinently, would the idea be radical and effective enough in practice or would it end up as another public sector institution muddling through one crisis after another? It is premature to conjecture at this stage, but the idea does have the potential for becoming a game-changer.

Despite various developmental schemes the government is nowhere near its stated target of generating two crore jobs annually. In fact the figure has never reached even the two lakh mark in any year. The government has earmarked 1.84 lakh crores for female skill development to generate employment while ensuring gender equalisation. But this is a long term project and limited in its scope. The Prime Minister’s oft repeated 'Rurbanisation Plan' has still to take off. It does have the potential for generating jobs as well as bringing villages at par with urban areas in terms of public services. There is a definite need for providing people in the countryside with ways and means for their economic uplift and empowerment. This is a major challenge facing the Modi government. Reactivation of industrial and tertiary sector growth is an obvious solution. But the government has not succumbed to the temptation of deficit financing. When compared to the increase of over 12% last financial year the total expenditure increase in this budget has been kept at below 7%. There is more than a fair chance that the fiscal deficit will be kept down to about 3.2%.

The Finance Minister has obviously avoided knee-jerk reactions. He has also refused to adopt a patchwork approach to what requires a long-term engagement. In order to generate demand, reduction in direct tax rates is a welcome step. Since rationalisation of indirect taxes would obviously strengthen this step’s efficacy, one looks forward to the promised rolling out of the Goods & Services Tax regime with optimism, as it intends to bring about a modicum of uniformity and stability in indirect taxes throughout the country, which should help in boosting demand and encourage production and supply of goods and services. There is a need to focus on micro, small and medium enterprises (MSMEs) which form the bedrock of employment generation in our economy. Through a well thought out taxation regime these enterprises can resume their role as job creators and producers of affordable goods and services. Although the 5% tax cut on corporate profits is a step in the right direction, stabilising the rate at around 18% compared to the present 25% should prove beneficial in the mid-term at least. The 5% reduction in personal income tax for the 2.5 lakh – 5 lakh income slab can at best be a recompense of sorts for the inflation rate and the demonetisation-induced discomfort. FM Jaitley had once talked of no income tax up to the Rs 5 lakh slab. He should revisit that idea for actual implementation. It may free more funds for spending and consequently boost consumer demand.

The government’s digitisation program is certainly a potential game-changer. The broadband connectivity through BharatNet for 1,50,000 gram panchayats and the DigiGaon initiative for providing tele-medicine and skilling through digital technology should help improve people’s quality of life. Digitisation has certainly captured the common man’s imagination. According to an estimate, the BHIM (Bharat Interface for Money) app has already been downloaded by over 12 million people. The government’s referral bonus scheme for users and cash back scheme for merchants should enable this app – along with the Aadhaar Pay system – to become a vital facilitator of the digital eco-system. Other steps in this direction include deploying of up to three million Aadhaar based point-of-sale devices by September 2017 and setting up of the Payments Regulatory Board under the RBI. Digitisation is also being deployed for political funding. The present system of political financing has become a font of corruption and black money. Therefore, cash donation to political parties has been limited to Rs. 2000/- and the higher amounts will have to be paid through cheques and digital instruments. However, the government should go a step ahead and ban cash donations completely. The resultant transparency in political funding will certainly help substantial eradication of corruption and black money. 

The Economic Survey’s suggestion of introducing Universal Basic Income is potentially the most radical step that could be the harbinger of a genuinely original reform, engendering a seismic shift in the country’s economic thought and practice. Though still in its incubatory stage, the UBI’s implementation could enable the government to get rid of wasteful expenditure and ineffective subsidies and provide a powerful social security net to the poor. The extant welfare programs, including MNREGA, are already obsolete – the doles regime has done little to provide lasting empowerment to the marginalised sections of the society. In fact these have largely served in embedding corruption and exploitation in the system. Similarly, subsidies, including for the PDS and gas & fertilizers, have proved to be vulnerable to misuse and corrupt practices. A well thought out UBI can replace all these and yet positively benefit millions of the deserving poor.

The question is: Will the Modi government be able to fashion such a program with adequate safeguards and filters? Nevertheless, the right-wing economic narrative has truly arrived on the national scene.

Exciting times ahead!