Monday, December 5, 2011

Manmohan Needs to Get his Economics Right/The Sunday Standard/Dec. 04, 2011

Manmohan Needs to Get His Economics Right, Pranab His Politics

While politicians make promises, economists make predictions. For the former, promises are meant to be forgotten. Economists change their predictions and blame others for getting it wrong. For the past few months, our economist-turned-politician Prime Minister has been changing his economic forecasts too often and getting it wrong most of the time. On the other hand, our politician-turned-economist Finance Minister Pranab Mukherjee is conveniently forgetting his promises to reverse the inflationary trend and tame the rising fiscal deficit. Both have little in common. But they never give up and continue to build castles in sand.

After sticking to their rosy India growth story for the past few months, reality seems to have dawned suddenly. Last week, Pranabda admitted there is something rotten in the state of Indian economy. His most painful confession was that India’s GDP wouldn’t grow beyond 7.5 per cent, as against his earlier prediction of 9 per cent. Only a few months ago, both the Prime Minister and the finance minister have been telling the nation that the country is poised for massive growth, in spite of global recession. During the last Budget Session of the Lok Sabha, the Prime Minister announced to the thumping of the tables by the treasury benches, that India would achieve at least 9 per cent growth. Later on, during his recent visit to Kolkata, he stuck to his prediction. “Since we have already achieved about 8.2 per cent in the 11th plan period, it may seem that a transition to 9 per cent growth is not difficult,” Manmohan said during his speech at the golden jubilee of the Indian Institute of Management, Calcutta. Now we are hearing a different tune. Addressing a meeting last week in New Delhi, Mukherjee said, “We can not expect we can reach a high growth rate of 9 per cent overnight. We will to live with relatively moderate growth rate this year, and next year we may try to improve it higher.” He went on to caution that “in the short and the medium-term, we will have to emphasise on the strategy of domestic demand-driven growth”.

For the first time, the fact that Indian economy was being driven by external demand became official. As the rest of the world heads towards economic disaster, the weak foundations of our domestic economic policies stand exposed. In a country like India, where public borrowing accounts for over 70 per cent of the GDP—the highest among BRIC countries—expecting domestic demand to ignite economic recovery is highly unwise. Pranab has conveniently forgotten that his Government’s reform menu has proved conventional economic theory wrong. Contrary to accepted models of development, a developing and predominantly rural economy like India is highly dependent on services for generating every second rupee of its income. Over 55 per cent of India’s GDP comes from the services sector, which provides only 34 per cent employment. On the other hand, every second job is still provided by the traditional agriculture sector that accounts for only 14 per cent of the GDP.

Frankly, all the economic reforms so far are meant to give income, power and glamour to those who know how to use a mouse, drive high-end automobiles or fly in chartered aircraft. For the past two decades, mouse-driven growth has created tiny islands of prosperity surrounded by a massive sea of poverty and unemployment. The Government’s fiscal and the monetary policies are aimed at making the rich richer and the poor, poorer. With ostentatious upper middle class demand peaking, it is only the rise of the poor and the middle class that can save the sinking manufacturing sector. No amount of social funding like MGNREGA or writing off farmers’ loans can generate a permanent demand for goods and services. Government schemes should lead to creating permanent, productive assets and not convert a healthy workforce into beggars heavily dependent on Government doles. An ideal combination of good economics and better politics would mean pruning the size of a bloated bureaucracy and political establishment, dismantling the pro-corporate official mindset and launching massive labour-intensive development projects. If the Government’s only mandate is to facilitate highly lucrative nuclear energy commerce and FDI in retail trade in India, the economy is bound to take a plunge in the long run. If only the leadership had spent half the time in resolving intra-state issues on infrastructure development than what it has spent on managing the agitating poor in Koondakulam, the economy would have grown by that mythical number of 9 per cent. The time has come for the economist Prime Minister to revert to practical economics, and a political Finance Minister to prudent politics. Forgotten promises and wrong predictions only spell disaster in the long run.

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