By Avinash Behl / INN Bureau
No matter how hard Palaniappan Chidambaram tries, the UPA will not be able to revive the India story before the next election. Two days ago, the government announced a slew of “reforms” – easing of FDI norms for multi-brand retail, 100 percent FDI in telecom, a new railway tariff authority, etc – but all it got by way of reward from the markets was a sharp kick in the butt. The markets continued to head south, and the rupee breached Rs 61 to the dollar once again. Both could head further down.
But Chidambaram should not take this personally. It has nothing to do with the herculean efforts he is making to revive the animal spirits of the economy. If, so far, the only animal whose spirits have been aroused is the bear, he should know why it is so: no matter what he does, the economy will take its own time reviving. A supertanker cannot make a u-turn as fast as a dinghy. The gloom to boom cycle can take three years.
The reason is simple. Just as the cure for over-consumption is a lean diet for some time or even a fast, the cure for living on economic steroids for nearly a decade under the UPA is slower growth.
Slow growth is good for us as it enables the economy to find its natural rhythm. The UPA government has been a disaster – especially over the last five years – because it believes that the cure for all problems is more money. Oil prices rising? Print more money to pay for subsidies. Farm debts high? Write them off with more printed money. Corporate debts high? Write them off with public sector bank money and then use printed money to recapitalise tottering banks.
No jobs in the economy? Not to worry. Government will provide work through NREGA. Poverty and malnutrition? Hang on. Food Security Bill coming up. Business not investing? Homes not selling? Will pressure the RBI to ease money, never mind that consumer inflation is still high and savings rates are falling. Rupee on crash course? Open the taps to foreign hot money flows. Rupee still crashing, rush to Washington for more dollars. More dollars means more rupees printed.
In every situation, the UPA government’s stock answer has been to print more money, cheaper money.
Unfortunately, the answer to binge drinking and a hangover is not more drinks on the house, but a cold shower and some good sleep. The Indian economy needs the cold shower of serious reforms and better sleep conditions – i.e. an economic slowdown – to recover good health and vigour. Putting it back on steroids is not the answer. Seeking short-term foreign money fixes is not the answer to capital outflows because it can only compound the problem as the country’s debt balloons again past $400 billion – as against foreign exchange reserves of $280 billion.
The reason why the Congress-led UPA thinks money is the answer to every problem is delusion. The UPA came to power just when global growth was soaring and, wrongly, came to believe that its redistributive policies were the reason for the high growth.
In fact, the high-growth phase of UPA-1 was largely an aberration, which had nothing to do with its redistributive policies. It would have happened no matter who was in power. Manmohan Singh or Prakash Karat would have achieved more or less the same 8-9 percent growth under those bullish conditions.
To understand why, let’s look at the entire period from 1991 to now, and how various governments have performed in terms of GDP growth.
In Manmohan Singh’s first stewardship of the economy – when he was finance minister from 1991 to 1996 and had ushered in big-bang economic reforms under the leadership of Narasimha Rao – the average GDP growth rate was just 5.24 percent. Reforms clearly did not lead to spectacular growth immediately, for in the previous five-year period (1986-91), the economy grew at the same 5 percent average. Before reforms 5 percent; after reforms 5.24 percent. What’s the difference?
However, this is the point: reforms deliver after a lag. In the next government – Deve Gowda’s and IK Gujral’s – the average growth rate was 6.15 percent. In short, growth accelerated in the next period by 1 percent. It was the result of Manmohan Singh’s reforms.
In the six-year NDA period, average growth between 1998-2004 was 6 percent. So what’s the difference between the Gowda period and Vajpayee period? Very little.
However, we know that in the NDA period, there were many reforms. The Golden Quadrilateral infrastructure project was launched. Many state companies were privatised – Maruti, VSNL, IPCL IBP, Balco, Air India’s hotels subsidiary. The Electricity Act was redone to allow consumers to choose their suppliers and state electricity boards were allowed to clean up their debts. The government also legislated the Fiscal Responsibility and Budget Management Act. In contrast to the current external account deficit, the UPA actually inherited a current account surplus in 2004.
As the benefits from these reforms flowed, after a lag, in the UPA-1 regime, Manmohan Singh and P Chidambaram began to think that 9-10 percent growth was their birthright, reform or no reform. The last nine years of the UPA can be broken up into two clear segments – in the first half (2004-2008) we had 8.85 percent super growth; in the next five years, we had a 7 percent average. Add the current year’s likely growth of 5-5.5 percent, and the average growth for the seven-year period will be more like 6.5-6.6 percent.
Not too different from the NDA period. And it’s the result of no reforms during UPA-1 and UPA-2 till late last year.
The real difference between Gowda, Vajpayee and the latter half of Manmohan Singh’s regime is very little – and the growth rate has been between 6-7 percent.
It is only the 2004-08 period that stood out with its 8.85 percent performance. Does this prove that UPA did better than the other governments, including its own second half performance from 2008-2013?
Unlikely. The conclusion I would draw is that the real growth rate the Indian economy is capable of achieving with its current state of political consensus is 5-7 percent, with 6-6.5 percent being the normal rate of growth without too much reform. The 8 and 9 percent rates achieved during 2003-08, or even 2004-08, were outliers and can largely be attributed to global factors. When the world is booming, India booms.
One reason for the higher growth in 2004-08 is that the UPA had not begun wasting money on political schemes such as NREGA or farm loan waivers or such things. If the UPA had begun these activities in 2004 instead of 2008, the growth figure could have fallen to 7-8 percent even faster – well before UPA-2.
Can we do much better? Sure. But for this we need reform, reform, reform.
We need three kinds of reform: the first reform is in energy pricing. From oil to gas, energy prices are being subsidised, and till this is fixed, we are going to keep slowing down. A growing economy needs more energy, and you won’t get more energy without freeing pricing.
Next, we need to allow the markets to regulate land and labour pricing. Labour laws need to be eased because if you cannot fire labour, nobody will hire them. As for land prices, they are firmly in the grip of politicians. In cities, for example, a simple way to reduce land prices is to allow more FSI (floor space index), but politicians who hold benami land won’t allow that since it will reduce their benami wealth.
The last reform relates to allowing a free market in farm produce – once again, the government interferes too much with agricultural products, from procurement to fixing minimum prices, to restricting free movement of foodgrain.
Once these three reforms are done, India can aspire for 7-8 percent as our normal rate of growth. Higher rates depend on a more favourable global environment – which is not happening anytime soon.
Let’s remember: the 1991 reforms raised our growth average from 3-4 percent to 5 percent; later reforms raised this to 5-6 percent. Without any reform by the UPA, we will go back to – or, rather, remain at – this level over the next two years.
In 2012-13 we had 5 percent growth; the IMF says this year we should have 5.6 percent – and this could be an optimistic case scenario. But not impossible, since election-time spending could boost growth once again by printing money and implementing the Food Bill and Direct Cash Transfers.
However, if growth picks up this year by pumping the economy with election-eve steroids, it only means storing trouble for the future. The next government will have a right royal fiscal mess on its hands – and the real possibility of a further deceleration.
And let’s not forget, any major fiscal slippage this year could tank the rupee further – which is worse news for import costs, from oil to gas, and growth.
An artificial revival this year means postponement of the pain, and starker choices for the next government. This is why I believe India Inc needs to batten down the hatches and wait for the current round of reforms to start delivering. But delivery dates will be post-2014, or even 2015. For now, growth will continue to remain anaemic, election or no election. And it’s good to accept this, stoically, for it allows the economy to adjust to the new realities.
So, relax. It’s going to be a long, slow comeback ride. This does not mean Chidambaram must slacken on reforms. He mustn’t. But the rewards will come after he has gone.
