Friday, 7 March 2014

The Lost Decade

The Model Code of Conduct has come into effect.   This effectively marks the end of UPA II.  This is a good time to reflect on the 10 years of the UPA government.  For India this could be a Lost Decade.  The term ‘Lost Decade’ was initially used in the context of the Japanese stagflation beginning the 90s.  In a broader sense ‘Lost Decade’ implies not only meager achievements but lost opportunities. At best a combination of both. These ten years, notwithstanding acts of terrorism and insurgencies in some parts of the country, largely remained free from any major war or debilitating natural catastrophe.  The UPA I had inherited 15 years of continuous economic reforms, a significantly higher growth threshold and India as a favoured global destination. It would have been reasonable to expect that building on these achievements would be reflected in continuing the growth momentum and a governance fabric which would strengthen our confidence. 

There have been modest achievements in strengthening social security systems by way of entitlement driven Welfarism. These include the MNREGA, Right to Education and Food Security. Ofcourse while India’s problems are unique.   No other country at this level of per-capita income has undertaken entitlement driven Welfarism of this new kind. Economic growth rates during the UPA-I was an average of 8.4% benefiting greatly from the foundations laid during the NDA regime. This notwithstanding the fact that a meager 2.7 million jobs were created during the five years of UPA-I compared to 60.7 million jobs in the preceding five years under NDA. However, the UPA II saw tapering off of growth to an average 6.2%,  (now sub 5%)severe macro-economic weaknesses with widening fiscal deficit and sagging investor confidence attributed significantly to internal  than exogenous factors.   Rekindling ‘Animal Spirits’, a familiar term in behavioral economics, covers a wide range of human action in which action is not wholly a rationally driven economic plan.  Alan Greenspan in his new book  “The Map and the Territory: Risk, Human Nature and the Future of Forecasting”  describes the propensities of fear and euphoria, risk aversion and time preference influencing savings as central to the psychological underpinnings of economic analysis. The growing lack of trust, a pervading milieu of financial malfeasance, a largely dysfunctional Parliament, overzealous courts and constitutionally mandated institutions treading grey areas in relation to their mandate has smothered any early rekindling of the Animal Spirit. Retrospective changes in tax laws and an aggressive tax department has  prompted foreign investors to even question whether we believe in the rule of law.  Entrepreneurs are caught  in disputes with regulatory and enforcements institutions with little inclination to pursue fresh investments.  India has ceased to be a favoured investment destination.   Entitlement driven welfarism and misalignment of wage rates with productivity has made gainful economic activity increasingly uncompetitive.  This is not a milieu in which industries globally seeking relocation would opt for India.  Ironically Indians increasingly seek investment opportunities elsewhere.
As this government signs off on a Lost Decade it leaves behind enormous challenges both psychological and real for its successor.  These would include the following:

First, restoring trust in the governance fabric.  This implies an orderly functioning of the Legislature, implementing long delayed judicial reforms and an executive which feels empowered to take bonafide decisions.

Second, to review many laws whose implementation remains flawed with dubious outcomes.  Given the populist nature of these measures it may be difficult to repeal them. A creative restructuring could enhance growth and restore our competitiveness.

Third, putting the house in order. Achieving fiscal targets by suppressing capital expenditure, postponing identifiable outgoes to subsequent periods, taking   credit for unlikely revenue buoyancy is not credible.   The recent Article IV consultations of the International Monitory Fund (IMF) highlights the flawed arithmetic or more charitably the “creative accounting engineering”.     Regrettably as John Maynard Keynes had said, “The boom, not the slump, is the right time for austerity at the Treasury.”   

Fourth,   restoring the health of financial institutions.  It is common knowledge that the suspect assets of banks are far deeper than the superficial numbers on Non Performing Assets.  Providing a meager Rs 11,200 crores in the recent budget is a gross understatement.  Far greater infusion of capital would be necessary or the banks encouraged to seek market borrowings.  This requires a legislative change which while initiated by the NDA Government remained incomplete.
Fifth, creating gainful employment opportunities to reverse the expectations of the Young.  This requires a genuine revival of the manufacturing sector which for the two years has shown zero growth rate.  A rethink on the regulatory framework particularly labour laws, creation of urban conglomerate, re-location of labour from agriculture to alternative occupation pattern is inescapable.  

Last but not the least reviving our self confidence is central to rekindling the Animal Spirit. Deep skepticism embedded in frustration has encouraged new experiments in Governance.  These could disrupt social compact and cohesion.    

There is expectation that the sagacity of the Indian people will provide a strong and stable government. More importantly a credible leadership which can replace the Lost Decade with a Decade of Rejuvenation. And as Martin Luther King had said, “A genuine leader is not a searcher for consensus but a molder of consensus”.