Growth Interrupted: The Visible Hand
Historically, political expediency is dressed in alibis till an implosion when necessity is presented as a virtuous proposition.The practice of staring at a problem and its solution simultaneously has left the economy adrift.
By Shankkar Aiyar | Published: 07th June 2020 04:00 AM |
There is a good reason why policies which promise change are defined as Next Gen reforms in India. History shows, frequently, political expediency is dressed in alibis till an implosion and a crisis — when necessity is presented as a virtuous proposition.
This column has previously characterised next generation reforms as Sinha-to-Sinha reforms. Yashwant Sinha first mooted opening up the insurance sector for foreign direct investment up to 49 per cent in 1998. The idea came to be only in 2015, and the Bill was piloted by his son Jayant Sinha.
This week, the government announced ‘One Nation, One Market’ for the agriculture sector and, thereby, recognised the right of farmers, India’s largest private sector employers, to contract at will to produce and to sell like any other entrepreneur. To make this possible, it had to push ordinances — to amend the Essential Commodities Act and surgically bypass agriculture produce markets, the grazing grounds of political entrepreneurship.
The change was promised in this government’s first Budget in 2014. The need for reforms was manifest in agrarian distress — This column had highlighted the need for reforms — for Amul II, a national grid for perishables, and farmer access to forward and backward linkages. Yet policy laboured through the labyrinth of politics.
Necessity arrived as historic and bold reforms in 2020. The big hurdle apparently was the resistance of state governments — that though didn’t deter single market declaration in 2016 when the National Agriculture Market was set up, when 12 states were said to be on board. Fact is in July 2014, state governments agreed on 35 recommendations including ESA and APMC reforms in the Report of the Committee of State Ministers. The states reneged on committed reforms and the BJP, in power in 20 states at one time, couldn’t reform its own regimes.
The need for the ordinance illustrates the centrality of crises for policy change. Adam Smith propounded the construct of economic growth propelled by invisible hands. In India, growth is interrupted by the visible hand — the coalition of bureaucracy and politics. The virtues of gradualism and incrementalism frequently expounded upon serve as a ready refuge for sustaining vested interests.
This week, global rating agency Moody’s downgraded India to Baa3 — just a notch above speculative or junk grade. How India got to this place is eloquently illustrated by the rationale of Moody’s ratings of November 2017, of November 2019 and of June 2020, and is instructive for understanding the role of the visible hand.
In November 2017, Moody’s upgraded India from Baa3 to Baa2 and changed the outlook from stable to positive. Moody’s though observed that, “Much remains to be done. Challenges with implementation of the GST, ongoing weakness of private sector investment, slow progress with resolution of banking sector asset quality issues, and lack of progress with land and labour reforms at the national level highlight still material government effectiveness issues.” Moody’s expected “at least some of these issues will be addressed”.
The leap of faith rating landed short and the expectation unravelled as India’s growth plunged. In November 2019, Moody’s changed its India outlook to negative. Moody’s elaborated that the action “reflects increasing risks that economic growth will remain materially lower than in the past, partly reflecting lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses than Moody’s had previously estimated”.
On the ground demand and consumption declined as capillaries of credit shrank, the NBFCs and banks were haemorrhaging, thanks to the unattended consequences of a liquidity problem which was morphing into a solvency crisis and aggravating the trend in retrenchment of investment intentions in the private sector.
The pandemic may have been the last straw that broke the back of the economy, but it was already suffering from morbidity. Indeed, in its rationale Moody’s says the action “was not driven by the impact of the pandemic. Rather, the pandemic amplifies vulnerabilities in India’s credit profile that were present and building prior to the shock”.
Ominously, it sees “a prolonged period of slower growth”. The agency observes that the circumstance, level of debt and “persistent stress” in the financial system, challenge policy-making. The pervasive practice of staring at a problem and its solution simultaneously, aka procrastination, has left the economy adrift.
What must be done is known. At the crux is the need for systemic restructure — the government is present in sectors which it must exit and missing in segments it must be present. The Centre does what is best done by the states. This calls for decentralisation of authority and accountability. States need to up their game — modernise land and labour laws, craft clusters for rural and urban growth. Technology is the key to efficiency.
Why issues do not get resolved is also known. Change is detained by creative inertia. History of previous crises is a harbinger of hope. The enduring guide-rule of transformative change in India is that things must get worse for them to get better. Crisis is a feel-good factor for it compels change.
Shankkar Aiyar, political economy analyst, is author of ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’ which is releasing in May, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’; and ‘Accidental India’. You can email him at firstname.lastname@example.org and follow him on Twitter @ShankkarAiyar. His previous columns can be found here. This column was first published here