Modi takes a hard look at economy's potholes

As the newly-elected seventeenth Lok Sabha meets this week, the economy is surely weighing on the mind of Prime Minister Narendra Modi. There are problems, of course, some of them unstated, some overstated. But the very fact that there are problems is something that neither Mr Modi nor the Bharatiya Janata Party could afford to refer to during the election campaign. And fortunately for Mr Modi, even the Opposition parties did not bother to point to the potholes of the economy. It is for this reason that Mr Modi had to harp on the emotive issue of national security to romp home. And now that he is safely in the saddle, he cannot any more turn away from the economic problems staring him in the face. Addressing the Niti Aayog for the first time into his second term, Mr Modi said that the goal of making India a $5 trillion economy was achievable. He did not say as he was wont to say earlier that India will become a $5 trillion economy. And he emphasised that this could be done only if exports are stepped up, and that states have much to do in tapping the potential for exports. Mr Modi is doing what a good politician does. He is trying to tackle the economic hurdles quietly, while sticking to his characteristic rhetoric. There is, however, a change in the level of rhetoric. It is no longer bombastic.

On June 6, the Prime Minister, while reconstituting the Cabinet committees on economic affairs, on political affairs, on parliamentary affairs and on security, had constituted two additional committees. One was a committee on investment and growth and the other was on jobs and skill development. The setting up of these committees is a recognition of the issues — investment, growth, jobs, skill development. Despite the vaunted fact that India is the fastest growing economy in the last five years, which coincided with the first term of Mr Modi as Prime Minister, there is not much to feel exultant about investment and rate of growth, or the jobs created and the skills imparted. Private investment has been unsatisfactory, and growth rates did not seem to indicate that the economy was healthy. The generation of employment has been far less than what was needed. And directly related to this was the fact that the skill levels of the Indian workforce are quite lamentable.

Former chief economic adviser (CEA) in the ministry of finance Arvind Subramanian is his working paper at the Centre for International Development at Harvard University titled “India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms and Implicatons”, is equally lugubrious and provocative, and states the issues of investment and growth thus: “In the period 2015-17, India had posted average real GDP growth of 7.5 per cent, even as real investment growth averaged just 4.5 per cent, export volume growth two per cent, while the credit-GDP ratio fell by two percentage points. The (Economic) Survey (July 2017) then asked the following questions: in the period 1991-2015 how many emerging market economies had attained 7.5 per cent growth with India’s combination of investment, export and credit growth? The answer was zero. Indeed, countries with performance on those indicators similar to India had not even managed average real GDP growth of five per cent.”

There is much quibbling and jousting around Mr Subramanian’s paper. The Prime Minister’s Economic Advisory Council had issued a statement contesting the conclusions of the paper and promised a point-by-point rebuttal soon, and confined itself to say that GDP is a measure in nominal and not real terms. There are experts and apologists of the Modi administration who think that Mr Subramanian has just goofed up and he was not the first. Whatever may be the flaws of the Subramanian paper, which he did not claim to be conclusive, there is enough evidence to show that measurement of economic growth remains a genuine problem. Mr Subramanian pointed out that when oil prices plunged, the measurement allowed for price deflation in the input costs, but it did not apply the same deflation to the output value. And this inaccuracy marks up the growth rate. Of course, Mr Subramanian’s peroration about the need for accurate measurement does not add to the argument in any which way.

But the problems that Mr Subramanian’s paper refers to are much too real than even a politician like the Prime Minister finds it hard to ignore. The economic experts in the Modi establishment would be better advised to focus on the issues of lack of investment and modest real growth rate — Mr Subramanian did not deny that there was growth; he said that it was not “spectacular” but it was “solid” — and finds ways of boosting the economy. As the familiar description from Lewis Carrol’s Alice In Wonderland shows, that you run faster and faster to remain in the same place. It seems that India’s economic performance can be likened to the state described in Alice in Wonderland. The Prime Minister has realised that there is a harsh reality beyond the glow of growth figures.

The raucous chorus of Mr Modi’s cheerleaders should not come in the way of an honest debate has to take place as to how India’s economic change needs to be accelerated to meet the basic needs of the people in the country. There is need for a hard look at the economic presumptions of Team Modi, and this has to happen within Team Modi. It is only during the closing years of his first term that Mr Modi had set up the Prime Minister’s Economic Advisory Council. He needs honest inputs from the experts. Mr Modi has for too long believed that it is easy to find solutions to problems. He did not admit to himself until now that there are some hard problems and there are no easy solutions. The Prime Minister now seems to be recognising that there are Gordian Knots which cannot be cut easily. The important thing to do is to recognise that there is a problem.