A little bit better off

The prime minister is not a man of few words. He routinely utters a thousand words or so whenever scientists invite him. He addresses them a few dozen times a year, mostly in winter when they get together for conferences. Admittedly, those speeches are not demanding. He never demands anything of government scientists, whose productivity is close to zero; he tells them, instead, that they are great guys doing a great job, and asks them to carry on pointlessly as they have for more than 50 years. As for others, captive schoolchildren get a 15-minute speech from the ramparts of Red Fort on Independence Day. That apart, the prime minister is not a very communicative man, despite his enormous verbal output.

But he was sufficiently provoked by the attacks of the Opposition in Parliament to speak twice in a month. His reply in the Upper House was brief and not very serious; the only interesting bits in it were quotations from Tacitus, the Roman historian of the 6th century, that he traded with Arun Jaitley. He laboriously read out the annual growth rates of gross domestic product from 1998-99 to 2012-13 to demonstrate that growth had been higher under his government than that of the Bharatiya Janata Party. This is the kind of uneducated point-scoring school kids indulge in. Growth is not an instantaneous function of who is in government. It is a process with leads and lags. The low growth rates under the BJP rule were partly due to a slowdown, which could be attributed to industrial overcapacity resulting from high rates of investment under previous Congress rule and Bimal Jalan’s mishandling of the East Asian crisis as governor of the Reserve Bank of India. Conversely, the high growth under the Congress had much to do with the fact that the BJP refused to protect industry; as a result, industry became internationally competitive, and experienced a spectacular boom in the initial years of Congress rule.

Speaking in the Lower House, the prime minister echoed the budget message of his finance minister: do not worry, the fall in growth, the yawning payments deficit, the rise in fiscal deficit, persistent inflation — they are all transient problems; we will wave a wand, and they will vanish into thin air. This mindless optimism, which he has learnt from his finance minister, beats all rational argument. It will convince those religious Congressmen who think that the world obeys their leaders without question. But the prime minister was not persuasive; he was just being a cheerleader.

He asserted that he and his colleagues were fully capable of raising the growth rate to 7 or 8 per cent. How will they do it? He said they would try to raise savings, stimulate private investment and reduce the growth of subsidies — not the subsidies themselves, but their rate of growth. He has not been reading the reports of his economic advisory council. They give a blow-by-blow account of how growth slowed down. As I said before, the boom began when the reduction of protection under BJP rule made industry internationally competitive. This happened just as the Congress took over; its first few years witnessed a spectacular industrial boom. It ended because the high investment rate led capacity to outgrow demand. There was excess supply, especially in the capital goods industry. That brought the boom to an end.

If this is how growth slowed down, his recipe of raising savings, stimulating private investment and slowing subsidy growth makes no sense. Even doing nothing would be better; eventually, the surplus capacity would be exhausted in some years, and investment would revive. If one wants growth to revive faster than it would do under laissez faire, one has to inject demand into the economy. The simplest way is for the government to run bigger deficits. But it ran up such huge deficits in the boom period that P. Chidambaram is feeling a bit shy about running even bigger deficits. That is why he made a show of bringing down the deficit.

The prime minister said that growth had come down all over the world, and implied that it would be improper if growth went up in India. That would, of course, not be very clever; presumably he meant that a slowdown abroad worsens our balance of payments, which in turn slows down growth. Growth has fallen by about 3 per cent a year in four years; it is unlikely that the worsening of the balance of payments can explain more than half a per cent of the slowdown.

He then compared growth rates of various variables in the National Democratic Alliance period and the United Progressive Alliance period: agricultural growth went up from 2.9 to 3.7 per cent per annum, growth of rural consumption per head from 0.8 to 3.4 per cent, growth of agricultural real wages from 1.1 to 6.8 per cent, annual decline in poverty ratio from 0.8 to 2 per cent, and industrial growth from 5.6 to 8 per cent. To repeat a point made earlier, the idea that growth rates respond instantaneously to a change in government is naïve. Agriculture-related growth rates are notoriously unstable because of monsoons; it is astonishing to find a trained economist drawing conclusions from point-to-point rates of change.

It would be tedious to repeat the further point-to-point comparisons the prime minister went on to make. He did not sit down and work out the calculations himself; they were fed to him by his economists, so this should not be taken to be a personal comment. But because their economics is so primitive, they have missed an opportunity of understanding what exactly has been happening. My own reading of the same figures as they read is that two decades of circa 6.5 per cent output growth when the labour force grew at circa 1.5 per cent led to labour shortage in low-wage, unskilled occupations such as agricultural work. That led to a rise in real rural — not just agricultural —wages. The rise in real wages did not raise or diversify food consumption because the government went on raising foodgrain prices; it spilt into paan bahar, packaged snacks, motorcycles and shoes. Perhaps for the first time since Independence, rapid growth has changed the quality of life of the majority of the people in the last two decades. But the government cannot even begin to understand it, because it is stuck in a primitive theory of economic growth.