Man who could have been king

Tags: Economy

As Manmohan Singh calls it a day, history may judge him differently than how he has been painted in the run-up to the ‘14 election. FC assesses Singh’s decade-long tenure

When economist-turn­ed-politician, outgoing pri­me minister Manmohan Singh, watches his successor Narendra Modi taking oath this evening, he could well reflect on his own role in India’s economic make­over.

Under fire for taking Congress down the road to an all-time low of 44 Lok Sabha seats in 2014, it is easy to forget that Singh turned India into a booming economy, pull­ing it back from the brink of a balance of payments and fiscal crisis in 1991.

What is of immediate memory is that he leaves office 10 years after being at the helm, presiding over an economy trapped in stagflation that may require some drastic action to kickstart.

Yet, it would be unjust to forget that Manmohan Singh’s government ach­i­­eved over 9 per cent growth on a sustained basis during UPA-I. This is unprecedented in India’s history.

Singh also promoted inclusive growth, with many social and economic indicators registering their best-ever performance during the 11th five-year plan of 2007-12.

Over 14 crore people were lifted out of poverty and the infrastructure sector clocked its largest ever investment worth $500 billion.

Agriculture too achi­eved its highest average growth of 3.6 per cent, with the country witnessing record foodgrain production of over 250 million tonnes during the past three-four years. Having said that, it would also not be wrong to suggest that the five years of UPA-II were by and large a wasted opportunity.

Barring the last 18 months, the government attempted no serious course correction and RBI failed to restore the much-needed macroeconomic stability. True, the government fast-tracked clearances of Rs 6.6 lakh crore worth of stalled projects to kickstart the economy, but obviously this was too little too late.

The self-made 82-year-old Singh, prime architect of the country’s economic reforms programme launched in 1991 under prime minister Narasimha Rao, appeared particularly tied down during his second tenure as the head of UPA, reconciled to the reality that there cannot be two centres of power – the PM and Sonia Gandhi.

Journalist and his former media adviser Sanjaya Baru has given enough indications in his book The Accidental PM, that the unbridled freedom he enjoyed under Rao to fix the economy was no longer available to him as PM, particularly during UPA-II with his then finance minister Pranab Mukherjee calling the shots on the economy. Singh was focused on external affairs, social and cultural issues.

Bureaucrats working in key economic ministries corroborate this version, saying they hardly met Singh to discuss issues concerning the economy. They would meet only Mukherjee, who headed practically all the empowered groups of ministers (EGoMs), which took the decisions. Subsequently, agriculture minister Sharad Pawar headed many EGoMs after Mukherjee became President of India in July 2012.

A recent IMF working paper on India’s macroeconomic performance authored by Muneesh Kapur and Rakesh Mohan clearly indicates that overshooting and the poor quality of fiscal stimulus after the 2008 global economic crisis was possibly the single-biggest reason for the current macroeconomic instability that virtually halved the GDP growth rate to 4.9 per cent in 2013-14 from a high of 9.3 per cent in 2007-08.

Summing up the Indian situation, the IMF working paper said that the current growth slowdown had occurred after nearly a decade of consistent high growth, including a sharp recovery from the 2009-10 crisis. High growth during the pre-global crisis period, especially 2003-08, was underpinned by continuing fiscal correction, which then had a number of positive spillovers.

The spillovers included increased savings, low inflation and anchored inflationary expectations, low nominal and real interest rates and a sharp increase in corporate profitability and investments.

The largely market-determined exchange rate system, in the context of a prudent approach to management and liberalisation of the capital account and sterilised interventions, and in an environment of progressive deregulation and liberalisation of the real economy, led to sustained increase in the exports of goods and services, which then kept the current account deficit at moderate levels, the paper said.

Singh as finance minister, when given a free hand and a political mandate by Narasimha Rao, did extremely well to fix the troubled economy, taking it to a new high of over seven per cent growth in the mid 1990s, analysts said.

With a hands-on PM focused on the economy, India also did well to achieve a record 9 plus per cent GDP growth during 2005-08 with low inflation, high savings and investments during UPA-I. In UPA-II beginning 2009, nothing seemed to have gone right, even though experts argue, with a rider, that part of the domestic slowdown was due to sluggish global recovery. But the extent of the slowdown and the deterioration in India’s economic activity suggest that domestic factors added to the headwinds from the global economy.

Though growth rebounded initially after the 2008 global crisis because of the large monetary and fiscal stimuli, it slowed down significantly due to high fiscal and current account deficits, poor investor confidence, policy paralysis and a reluctant bureaucracy apprehensive of being dragged into scams.

There is also a view among experts that high growth during UPA-I was a debt-led cyclical boom, supported by unprecedented capital inflows, coinciding with the exceptional growth phase in the world economy.

In 2006, the then RBI governor YV Reddy had warned about the possibility of an overheating economy, but others including many in the government at the time, did not agree. He was famously quoted as saying, “I cannot certainly see the god, but see the devil.” In other words, he may not have had the solutions, but he certainly saw the danger signals.

Subsequently, Reddy said at a book release function last year that India should not attempt double-digit growth like China, which was an exception. “One swallow does not mean summer,” Reddy said, emphasising no country in the world, including Japan, South Korea and Germany had achieved double-digit growth on a sustained basis for decade or two. With a different political system, China was an exception, he argued, and suggested that an ideal and sustainable growth for India was 8 per cent.

With the benefit of hindsight, Singh might have delivered from the growth point of view during UPA-I, but while doing so, he had sown the seeds for slowing the economy with high inflation, as structural reforms that had to be carried out during that period – like financial sector reforms, including banking and long-term corporate bonds market to fund infrastructure – did not happen.

Much-needed structural adjustments like subsidy reforms, agricultural development, dismantling the APMC Act to bring about unified market, tax reforms like DTC and GST, insurance and pension reforms for long-term financing and FDI liberalisation to the desirable extent have been long overdue. The original deadline for DTC and GST was April 1, 2010.

High minimum support price, leakages in the public distribution system, high petroleum and fertiliser subsidies, not expanding multibrand retail and high fiscal deficit, contributed to inflation. Massive corruption too fuelled inflation as costs of projects went up, reflecting in prices of the final output. When inflation breaches the comfort zone, it is almost certain that growth will slowdown, as monetary tightening will result in high interest rates.

The high growth during 2004-08 was driven by huge corporate investments. In the post-2008 crisis, there has been a sharp decline in domestic investment coupled with slowing foreign investments.

Policy impediments and uncertainties in government too contributed to slowing domestic investment. It is not that firms did not have money to invest; they are, in fact, sitting on lakhs of crores of rupees, but do not want to invest due to rigidities, environment issues and the like. Money has been sunk in several projects; 20,000 mw of thermal power plants are ready but have not started generating power for want of coal linkages. This has led to huge NPAs of banks, as there is need for higher provisioning and loans have got restructured.

Economist PM Singh, RBI governor and deputy chairman of planning commission cannot plead ignorance of the high cost of governance under his charge. The nuclear deal with the US was his crowning glory during UPA-I, when he also retained influence over economic policy through P Chidambaram and planning commission deputy chairman Montek Singh Ahluwalia.

In UPA-II, Singh toyed with the idea of appointing his principal economic adviser C Rangarajan as finance minister, but was thwarted by Sonia Gandhi.

Having yielded space to Mukherjee in North Block, Singh had little control over fiscal policy during the first three years of UPA-II when the economy went for a toss, even though it achieved reasonable growth. It certainly sowed the seeds of macroeconomic instability leading to slowing economy and high inflation.

In a globalised era, some of Mukherjee’s decisions like excessive fiscal stimulus and high consumption expenditure coupled with archaic tax policies, including the retrospective tax amendment, put the economy in reverse gear. The retrospective amendment and the proposed draconian GAAR were seen as measures to give unbridled powers to assessing officers, with the result that investor confidence in India tanked.

Meanwhile, the NREGA too distorted the rural economy and fuelled inflation. The government’s inability to deal with supplyside constraints to tackle inflation and non-clearance of projects pushed the economy to the brink of collapse.

Despite policy paralysis during part of UPA-II, compulsions of coalition politics, scams and corruption, it would be wrong to conclude that not all was well with the economy during the 10-year Manmohan regime. India leapfrogged to the forefront of the global committee of nations under his charge, as with the G20 grouping.


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