India’s Sickest Economy In 40 Years Faces ‘Incompetent’ Cure
As India veers off course, one thing is painfully clear: Narendra Modi’s government has broken the economic equivalent of the Hippocratic oath.
This compact dating back to ancient Greece tests holds that a doctor do no additional harm to a patient. For our purposes here, the victim is Asia’s third-biggest economy. The doctors are the policymakers overseeing India’s deepening trauma.
If you think it’s a reach to connect these two worlds, I’ll let Palaniappan Chidambaram do it for me—and wow is he ever.
Chidambaram, 74, is a senior parliament member in the opposition Congress Party who served as finance minister for much of the decade from 2004 to 2014. In other words, he’s a practitioner who’s been in the trenches and gotten economic blood on his hands.
It’s startling, then, to hear Chidambaram warning India is being attended to by “very incompetent” officials who risk making its ailment even worse—perhaps even putting it in the intensive-care unit. “The economy is not in ICU, but it’s waiting to be pushed into the ICU. It is being kept outside and looked after by incompetent doctors.”
In medical care, as in economics, timing is everything. And Chidambaram’s broadside on Monday comes just as Prime Minister Modi’s government defends its just-unveiled national 2020-2021 budget, one detailed by Finance Minister Nirmala Sitharaman.
Chidambaram’s ire is also aimed at a central bank that was in steady hands when his party left office. Then, it was Raghuram Rajan holding the reins at the Reserve Bank of India. A former top International Monetary Fund official with a University of Chicago pedigree, Rajan is exactly the kind of doctor you want on-call during a health scare.
Yet Modi’s team showed Rajan the door in 2016, irked that the governor wasn’t more liberal in doling out monetary medicine.
Nor is Arvind Subramanian on call these days, Chidambaram lamented. The former chief economic advisor left in June 2018 and has since become a Modinomics critic. Last year, Subramanian made headlines for alleging Indian growth actually averaged closer to 4.5% in recent years than the official 7%.
Modi’s surrogates fanned out to slam Subramanian’s claims that New Delhi’s calculations were skewed by a “deep puzzle” of data on the manufacturing sector. But other economists also discerned inconsistencies in the relationship of top-line growth to shifts in exports, interest rates, corporate profits, credit financing and perhaps even consumption. Economists at Goldman Sachs and Nomura Holdings have been honing their own measures to gauge zigs and zags in India’s economy.
It follows, then, that the roughly 5% pace at which India is operating should be taken with a sizable grain of salt. The same goes for the argument that in inflation-adjusted terms, India’s current growth is the worst since 1978. And, by Chidambaram’s compass, getting even worse thanks to bad government treatment plans.
If anything, India needs to grow better, not just faster. It must distribute the benefits of economic growth. Sadly, Modi’s 2020-2021 budget does almost zero in this regard. At a moment when India desperately needs to invest more in education and human capital, reduce chronic bureaucracy and foster innovation, New Delhi is championing the equivalent of trickle-down growth.
The budget Modi’s team detailed proposed tax cuts for individuals and increased fiscal deficits. It offered few concrete steps to fix a financial sector in disarray or create good-paying jobs. Modi’s ambitious infrastructure plans are all well and good. But achieving his “Make in India” vision requires liberalizing industry and increasing productivity to raise wages across the nation.
Hence Chidambaram charges the government is “living in denial” as trade-war headwinds intensify. “The only way to revive demand is to put money in the hands of people and not in the hands of corporates,” Chidambaram said. He told India Today TV that he grades Modi’s budget between between 0 and 1.
Unemployment, for example, is at 45-year highs, while official gross domestic product figures are at 11-year lows. Why, oh why, would Modi’s team think now is the time to cut by 12% funding for programs aimed at helping lower-income Indians find gainful employment? Economist Priyanka Kishore of Oxford Economics speaks for many when she concludes Modi’s budget is “far from being a game-changer.”
All this may surprise those who thought Modi would indeed be an economic game-changer. That hope was predicated on his 14 years running Gujarat, a period of relative economic outperformance by the western state.
True, India’s corruption ranking by Transparency International improved since 2015. Its standing in the World Bank’s ease-of-doing-business grades also improved. What hasn’t, though, are the barriers that keep rapid growth from trickling down from the elites to hundreds of millions of India’s struggling to progress up the economic latter.
Modi remains too focused on the overall. One preoccupation: getting growth back above 7%. Another: joining the ranks of Group of Seven economies as soon as possible. That means raising annual output toward $10 trillion (from about $2.9 trillion now). To what end, though, if India isn’t moving upmarket innovation-wise in sync with its rising share of global GDP?
There are still four years to get Modinomics back on track. But it’s not going to happen with budgets like this. Or without a better team of doctors to revive an economy trying to avoid the ICU.