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Economy Jan 21, 2013

Manmohanomics is dead: PM has forgotten his economics

By R Jagannathan

Manmohan Singh the politician appears to have got the better of Manmohan Singh the economist at the Congress Chintan Shivir, where the PM got to play only a cameo role, the spotlight having been hogged by the heir-apparent-turned-apparent-heir.

Having made a right royal mess of the Indian economy over the last four years, the PM incredulously chose to offer a mea culpa only on inflation. "The only flaw in our record is inflation," The Indian Express quoted him as saying.

Only? It's like saying that we got everything right, but we are going down with Aids.

Surely, the economist in Manmohan Singh cannot accept this statement? Or has Neta Manmohanji trumped Dr Singh?

If inflation is the "only" flaw, why is the growth decelerating consistently? Why is the current account deficit (5.4 percent in July-September 2012) even worse than in 1991-92? Why has the economy simply stopped generating jobs (just 2 million jobs in 2004-09 compared to 92 million in 1999-2004)? Why is the fiscal deficit five times what it was just five years ago?

If inflation is the "only" flaw, why is industry reluctant to invest? Why is the country's external debt situation worse than ever before? Why is the NDA's legacy of low interest rates and rising growth, milked dry by UPA-1, now a distant memory? Why is the rupee hitting the skids? Why is the public sector in dire straits - from Air India to the oil companies to the PSU telecom companies? Despite a stock market revival, why is the government forced to ask the Life Insurance Corporation to buy its disinvestment offerings?

Manmohan Singh has been less than honest in his assessment of his government's mismanagement of the economy. AFP

The only answer is that Manmohan Singh has been less than honest in his assessment of his government's mismanagement of the economy.

The truth is, persistent inflation is the external symptom of several things going wrong in the underlying economy. It is not just one problem. The PM was happy to accept half the blame for inflation, blaming the other half on international crude prices. He said: "The rate of inflation during the UPA government's tenure over the past eight years has been more than what we wanted, but that is because of the increase in international crude oil prices during this period. Another reason for this inflation is that our government has significantly increased the minimum support prices for farmers' crops."

When he says inflation is more than "what we wanted," is he suggesting that price hikes are the result of what governments may want or what they do to deal with it? Like Moses, can he just command the waves of inflation to roll back without any additional action on his part?

Inflation is the net result of several policy failures, ranging from failures on the energy pricing front, failure to fix supply bottlenecks in key food items (especially milk, pulses and vegetables), excess spending on social schemes with little economic payback, failure of the export machine, roadblocks erected by the environment ministry and the courts to mining, huge corruption scandals that allowed state resources to be hijacked for personal ends, and many more things.

Above all, inflation is the result of failed political economy management where the executive has been subservient to political whim, where power has been divorced from responsibility. Spending policies till recently were decided by an unelected cabal in the National Advisory Council because Sonia Gandhi wanted her own political forum. This tied the hands of the executive led by Manmohan Singh. It is only in the last four months - after the exit of Mamata Banerjee, an impending economic collapse and a threatened rating downgrade - that party and executive have begun talking in one voice. They have now realised that they can either hang together or hang separately.

But inflation isn't the only point on which Manmohan Singh has been economical with the truth. He ended up painting the collapse of growth as some kind of achievement. He said: "Economic growth has gone down but it is not as bad as in other countries across the world. The growth rate during the six years of the previous regime of NDA was 5.8 percent, while the UPA's eight-year rule saw it increase to 8.2 percent per annum. We have also fared better in eliminating poverty and improving agricultural growth."

Two points need to be made here. First, the fact that India did not sink as fast as the rest of the developed world is hardly an achievement when the Indian economy is really substantially insulated from global trade winds - unlike China, which is joined at the hip with the American economy.

Second, the sharp reduction in poverty levels during UPA rule is largely the result of high growth. And if growth is decelerating, it means in future poverty levels will stop falling as fast. So what he claims as a success - reducing poverty - is now going to be a failure going ahead.

Manmohan Singh the politician is clearly a disaster, since he seems to have forgotten his economics.

One way to figure this out is by looking at today's Business Standard, which carries an interview with Planning Commission Deputy Chairman Montek Singh Ahluwalia, Manmohan Singh's alter ego. Ahluwalia makes it clear that there will be no growth revival without getting policies right.

Reading between the lines, the message coming from Ahluwalia is the exact opposite of Manmohan Singh's: there is no alternative to serious corrective action. He says without deregulating diesel pricing and raising energy prices, growth will fall further. If you want to subsidise food more under the Food Security Bill, you have to cut subsidies elsewhere. And if you want real growth, you have to privatise coal, among other things.

Ahluwalia said: "Our problem is that energy is generally underpriced. Diesel, cooking gas and kerosene are underpriced. Coal is also underpriced...We need a complete rethink on energy prices and align close to world prices...we cannot expect to get on a nine percent growth path if we don't align its energy prices with global prices."

This is an indirect indictment of UPA's consistent underestimation of its challenges on the policy front.

On coal privatisation, Ahluwalia said: "There is no economic logic in keeping the private sector out of coal if it is allowed in petroleum and natural gas...If we are importing coal at high prices, it is odd that we will not allow the private sector to mine Indian coal but will allow people to import from private parties in Indonesia and Australia. That doesn't make any sense."

Sure, it doesn't. The UPA's policy does not make sense.

If Montek is talking more sense than Manmohan on economic issues, one wonders if the two friends have decided that while Manmohan Singh will talk political, the latter will talk economics.

Till the twain meet in official policy, the Indian economy will remain mired in quicksand.

by R Jagannathan

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