Vijay Kumar Gaba: Manmohan Singh

Showing posts with label Manmohan Singh. Show all posts

Wednesday, October 18, 2023

Policy paralysis – UPA vs NDA-2

Continuing from yesterday…(see here)

In the enterprise world, new ideas or innovations are usually valued much higher than the ability to execute such ideas. I believe for a successful enterprise both ideation as well as execution are equally important. The question of execution would not arise if there is no idea to execute. Similarly, an idea, howsoever innovative and brilliant it is, would remain just a thought or piece of paper unless it is executed well. Nonetheless, since the idea is the starting point of any enterprise, the innovator deserves to get a relatively higher valuation.

Taking this further, in the realm of politics and governance, the two key components of good governance are:

(i) Conceiving, formulating, and instituting policies that would ensure inequitable, sustainable, and accelerated socio-economic development and growth.

(ii) Execution of instituted policies through a set of structured programs, efficient delivery modules, and effective & prompt review and corrective mechanisms.

I believe that the performance of any government must be evaluated on these two parameters.

As I mentioned yesterday (see here), I find that the previous UPA government under the leadership of Dr. Manmohan Singh scored excellently on the issue of conceiving, formulating, and instituting policies that would aid in achieving accelerated, sustainable, and equitable growth. A high rate of GDP growth, especially in light of the global financial crisis, and the challenges of running a government with the support of a large coalition comprising parties with divergent ideologies and agenda underlines the efficiency of execution. The policies not only helped the Indian economy navigate safely through the global financial crisis and a subsequent current account crisis; but also helped bring a record number of people out of poverty.

Now, if we were to assess the performance of the incumbent government under the leadership of Prime Minister Narendra Modi on these two parameters, I strongly believe that the current government has performed very well on the execution front. This government has definitely—

(i) Executed policies instituted by the preceding government like MNREGA, UIDAI, RTE, Food Security, DBT, financial inclusion, FDI in retail trade, infrastructure development etc. rather efficiently;

(ii) Devised good programs and delivery modules for the policies formulated during the last years of the UPA government like digitization payments, GST, Direct Tax Code, implementation of 14^th finance commission recommendations, etc.

(iii) Augmented many policies like Unique identity and digital payments brilliantly to exploit maximum benefits out of these policies.

This strong execution helped the Indian economy navigate through the Covid-19 pandemic and subsequent global slowdown very well. Despite all challenges, India remains the fastest-growing major economy in the world. The programs like Unified Payment Interface (UPI) have become extremely popular globally. Road network development is happening at an accelerated pace. Many large infrastructure projects that were stuck due to a variety of reasons are getting completed.

However, insofar as conceiving new ideas and policies is concerned the performance of the incumbent government is ordinary. In the past nine years hardly any new idea has been conceived and/or converted into policy and programs.

NITI Aayog – the Think Tank

One of the earliest policy decisions taken by Prime Minister Narendra Modi led government at the center was to disband the planning commission and constitute a new Commission to provide directional and policy inputs to the government.

The commission, named NITI Aayog, was formed through a resolution of the Union Cabinet on 1 January 2015. NITI Aayog is “the premier policy think tank of the Government of India, providing directional and policy inputs. Apart from designing long-term policies and programmes for the Government of India, NITI Aayog also provides relevant strategic and technical advice to the Centre, States, and Union Territories. NITI Aayog acts as the quintessential platform for the Government of India to bring States to act together in national interest and thereby foster cooperative federalism.”

A careful reading of the latest Annual Report (2022-23v) of the NITI Aayog suggests that the Aayog has focused more on the review and assessment function and less on thinking and policymaking function.

As per the report, the government has implemented only one noteworthy development policy namely Aspirational District Program (including Aspirational Block Program).

In the first five years of this program (2017-2022) “the programme has acted as a successful template of good and effective governance, Under this programme India’s 112 backward districts have shown remarkable progress across key sectors that matter to the people. The core strength of the programme is its focus on data driven governance that drives evidence-based policy interventions at the district-level. NITI Aayog monitors the 112 Aspirational districts on Key Performance Indicators (KPI) on a monthly basis. The KPIs are designed in a way that the input and process indicators are being evaluated so as to achieve desirable outputs and outcomes across major socio-economic themes such as health & nutrition, education, agriculture & water resources, financial inclusion & skill development, and basic infrastructure. The robust monitoring strategy has enabled the district administration to engage in cross-departmental reviews and thus drive convergence. The competition through the monthly release of delta ranks keeps the districts constantly motivated to improve the KPIs.”

The achievements under the National Monetization Pipeline programs and Production Linked Initiatives (which are restructured models of old policy initiatives) are below par.

Besides this, New Education Policy is under implementation and Integrated Health Policy is under consideration.

Mission LiFE – Lifestyle for Environment is mostly at the conception stage.

In my assessment, the incumbent government has in fact performed less than ordinary on the policymaking front, while scoring well on execution.

I shall be happy to receive views of the readers on this aspect.

Tuesday, October 17, 2023

Policy paralysis – UPA vs NDA

“Policy paralysis” of the preceding Dr Manmohan Singh led UPA government was one of the main planks of PM Modi’s election campaign in 2013-2014. The business community, middle classes, and poor, all were convinced that the UPA government suffers from a severe degree of inertia in policymaking and is therefore responsible for the poor growth of the Indian economy. It was alleged that large-scale and blatant corruption, nepotism (lack of meritocracy), and weak leadership are the primary reasons for the “policy paralysis” and poor execution.

The campaign against the incumbent government was so effective that it swayed the big industrialists and SMEs which directly benefited from the government’s developmental efforts; the poor who benefited tremendously from the transformative social initiatives; and the middle classes who were protected from any potential collateral damage from the global financial crisis and events in its aftermath, against the government.

In their disappointment with the then incumbent government, few consider allowing the government any concession for-

(i) The global financial crisis (GFC) of 2008-09 threatened to push the global economy into the worst condition since the great depression of the 1930s. The Indian economy still managed to grow over 7% during the five-year (FY10-FY14) period post-GFC, notwithstanding the challenging global conditions.

(ii) A high base effect. The Indian economy had its best phase during 2004-2011; growing over 8% CAGR. Despite such a high base effect and global slowdown, the Indian economy was still growing by over 7% in 2014.

(iii) The several major policy decisions taken by the UPA government, having a transformative impact on India’s socio-economic milieu. For example—

· Employment Guarantee (MNREGA) through enactment of Mahatma Gandhi National Rural Employment Guarantee Act, 2005.

· Food Security for 81 crore poor people through National Food Security Act, (NFSA) 2013

· Right to Education for all children between the age of 6-14 through The Right of Children to Free and Compulsory Education Act, 2009. (It is pertinent to note that through the 86^th amendment to the Constitution of India in 2002, Article 21A was inserted in the Indian constitution to make Education a fundamental Right.).

· Right to Information through enactment of the Right to Information Act 2005.

· Financial Inclusion- provision of banking facilities to all 73,000 habitations having a population of over 2,000 by FY12, using appropriate technologies.

· Unique Identity for all citizens (Aadhar) through the implementation of Aadhaar and Other Laws (Amendment) Act 2009. Unique Identification Authority of India (UIDAI), has been officially acknowledged as a legislative authority, since July 12, 2016, in accordance with the Aadhaar Act 2016.

· Digitization of payments through incorporation of National Payments Corporation of India (NPCI) was incorporated in 2008 as an umbrella organization for operating retail payments and settlement systems in India. NPCI facilitates transformative payment solutions like UPI, Bharat Bill Pay, FasTag, and Direct Benefit Transfers (DBT).

· FDI in retail trade.

· Civil Nuclear Deal with the US allowing India entry into elite clubs as a key strategic partner.

· Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 to facilitate faster execution of infrastructure projects and minimize litigation in the acquisition of land.

· Deregulation of transportation fuel prices and eliminating kerosene subsidies that had adversely impacted the fiscal balance of the central government for decades.

· Including reforms in tax sharing formula between states and center in scope of 14^th Finance Commission (set up in 2013 and recommendation accepted in February 2015) to improve state and center relationships and allow states more autonomy.

· UPA government also proposed a uniform Goods and Service Tax (GST) in 2007 and a Direct Tax Code later. However, these could not be implemented due to different views of the opposition ruled states.

Instead, some unsubstantiated allegations of mega corruption dominated the narrative and overwhelmed the voters’ sentiment.

It is pertinent to note that some hypothetical charges of corruption in the allocation of 2G spectrum and coal mines raised in CAG reports were blown out of proportion and eventually led to the cancellation of 122 telecom licenses in 2012 and 204 coal blocks in 2014 by the Supreme Court. Notably, in 2017 a special CBI court acquitted everyone accused in the 2G spectrum case stating that the prosecution had failed to prove any charge against any of the accused, made in its well-choreographed charge sheet. Nonetheless, the cancellation of licenses and coal blocks led to the bankruptcies of some entities, causing massive losses to their lenders.

In my view, therefore, it is particularly important to evaluate the performance of the incumbent government in relation to “policymaking”; because good policies have the potential to catapult the economy into a higher growth orbit. Execution of policies and programs indubitably helps in sustaining the momentum, but innovative policies are key to growth acceleration and socio-economic transformation.

...to continue tomorrow

Saturday, July 10, 2021

Three decades of reforms and still miles to go

Three decades ago, on 24th of July, 1991, when Pallath Joseph Kurien, Minister of State for Industry in Government of India, tabled the New Industrial Policy (NIP) in the Lok Sabha, not many would have realized how big was the moment in the socio-economic history of Independent India. After six years of preparation and facing political challenges, the new policy, which sought to end the Nehruvian Socialism in the country, finally saw the light of the day.

The process of economic reform was set in motion by Vishwanath Pratap Singh, the finance minister in the government of Rajiv Gandhi (1984-1987). It gained further impetus when Ajit Singh, the MIT educated, tech savvy industry minister of National Front’s government assumed the charge (1989-1990).

The original draft of NIP was prepared by Amar Nath Verma (then Industry Secretary) and Mohan Rakesh (then Chief Economic Advisor to Industry Minister Ajit Singh) in 1990. The proposal to radically reform the industrial policy of India were patronized first by Ajit Singh & Vishwanath Pratap Singh (1990), then by Yashwant Sinha & Chandrashekhar (1991) and finally by Manmohan Singh and Pamulaparthi Venkata Narasimha Rao (1991).

The NIP was followed by supporting reforms in the financial sector and fiscal policy. The committees set up in 1991 under the chairmanship of Raja Jesudoss Chelliah and Maidavolu Narasimham for Tax reforms and Financial Sector Reforms respectively. The recommendations made by these committees and several follow up committees like Narsimhan Commmittee 2.0, Shome Panel, Kelkar Task Force etc. have formed the basis of the economic and fiscal reforms in the country in past three decades.

Indubitably, we have travelled a long distance from 50% corporate tax rate to in 1990 to 25% in 2021. The journey in indirect taxation has been even more spectacular. From a multitude of classifications and tax slabs in 1980s, we have achieved minimum number of tax slabs and a single Goods and Services Tax (GST) in three decades.

Financial sector has also seen a metamorphosis in past three decades. Capital controls have been materially relaxed. A developed national trading & settlement system for financial instruments has been established. Foreign trade is materially deregulated. Financial inclusion has progressed materially with liberalization of banking, insurance and pension sectors. After initial hiccups, the Insolvency and Bankruptcy Code is now evolving fast.

The work of reforms though is still in progress and we have many more miles to cover. The reforms in two key sectors Agriculture and Industrial Labor have started by passing key legislations in 2020. The government has also outlined a clear policy on disinvestment of public sector enterprises. From the legacy process of reforms, The Direct Tax Code, The Indian Financial Code, Development of Retail Debt Market, Land Reforms, GST rates rationalization and coverage expansion, etc. are some of the areas where progress is still needed.

In recent years an entirely new economic development paradigm has emerged globally. Sustainability and Tech driven trade and commerce have emerged as the most dominant global socio-economic trends. India has the opportunity to adapt to these trends early by implementing a futuristic policy framework. The progress made so far appears patchy and reluctant. Comprehensive and constitutionally enforceable policies for sustainable development and digital commerce (including currencies) need to be evolved and implemented earnestly, at the earliest.

Backdrop of 1991 reforms

The reforms in 1991 were neither ushered voluntarily, nor enjoyed wider support. These were rather necessitated as the socio-economic milieu of the country had reached the brink of disaster. Four decades of pseudo-ness in post-independence policies had introduced numerous distortions in the society and economy.

The pseudo socialist model of development adopted post-independence in fact perpetuated the colonial feudal model. The private sector monopolies were protected through licensing controls & state patronage, and hugely inefficient public sector monopolies were created. Even implementation of Monopolies and Restrictive Trade Practices Act and Foreign Exchange Regulation Acts in 1972, were misused to perpetuate the dominance of already well-established industrial families.

The entire development paradigm was designed to focus on the weaknesses (risk capital and technology) of the country. The strengths of the country (food, art, culture, religion, languages, etc.) were undermined and allowed to dissipate easily. The effort of the government was on discouraging and regulating consumption, rather than increasing production and productivity. Industrial and scientific knowledge and technologies were mostly imported. The term “imported” became synonymous with quality and prestige and “local” became a derogatory reference. Even to date, many companies of old era proudly include “imported” or “foreign” technology in their promotion campaigns.

The backdrop of 1991 reforms was set by convergence of many social, political and economic factors.

Firstly, the country was witnessing unrest on many counts, most notably - Implementation of Mandal commission and Ram Mandir movement had become major socio-political issues.

The Congress leader Rajiv Gandhi had just been killed by Sri Lankan Tamil suicide bombers. Regional socialist parties had risen to capture power in the Congress strongholds UP and Bihar. Having permanently lost West Bengal and Tamil Nadu earlier, the Congress party’s popular support was shrinking to a few states in central and western India.

The collapse of USSR and Berlin wall meant realignment of global order. The non-aligned India, which was in fact closer to USSR, was left vulnerable on many counts, especially geopolitical support and crucial defense technologies.

In the post emergency era, the efforts of various governments to catapult India to higher growth rate through fiscal expansion had culminated in significant balance of payment crisis. The ten years of fiscal expansion did manage to break the vicious cycle of the Hindu rate of Growth (3-4%). Briefly a higher growth rate (7.6% average during 1988-1991) was also achieved; but it was not sustainable for obvious reasons. The gulf war and two years of severe droughts further aided to the economic woes.

The multitude of crisis pushed the policy makers to adopt a pro market approach. The Congress Supported minority government of Chandrashekhar sought IMF help and committed to a radical reform in fiscal policy and industrial policy. A roadmap was prepared for disinvestment of PSEs, fiscal reforms and implementation of NIP. However the government fell days before the finance minister Yashwant Sinha could present, what could have been the first dream budget of Independent India.

Impact of reforms

There is little argument over the fact that the economic and fiscal reforms initiated in 1991, India were inevitable. These reforms did help in bringing the Indian economy back from the brink of disaster; even though the adequacy and efficiency of reforms has remained a matter of intense debate ever since.

Three decades of reforms have resulted in many structural changes in Indian economy. The contribution of agriculture has reduced to about one sixth, while services now contribute more than half of the GDP. The structure of foreign trade has also changed in favor of manufactured goods and services. The balance of payment has remained robust. We have faced three global crises (2000, 2008, and 2020) without an iota of problem.

Financial markets have remained an example to the world. India has perhaps been the only major global financial market that neither shut down nor imposed any trade restrictions during 2000 and 2008 market crisis.

Positives

In my view, the 1991 reforms made three most important contributions to the Indian economy:

1. The process of reform dismantled the pseudo socialist mindset of the policy makers; unleashing the private enterprise which had remained constricted since independence. Consequently, the minority socialist government of United Front in 1996-1998 presented the second dream budget. Another minority government supported by socialists (NDA 1998-2004) divested numerous government monopolies like coal, ports, mobile telecom, roads, power, airports, etc. without much trouble. The response to global sanctions post 19998 nuclear test was not lower spending, but larger capex on building local capacities. The UPA-1 government supported by communists made a nuclear deal with USA and UPA-2 allowed foreign capital in retail trade. The final epithet of older policy regime was written by NDA-2 with dismantling of planning commission; permitting off the shelve banking licensing; and move to privatize two PSU Banks (NDA-3).

2. Shifting of policy focus on increasing production & productivity rather than constricting consumption. This allowed the Indian businesses and consumers to globalize; aspire more and achieve more. We could become part of global alliances and treaties without much resistance. We could set up large scale capacities in automobile, pharmaceutical, textile, space technology, civil aviation, ITeS, and housing etc. Private enterprise could attract significant capital from global investors.

3. The horizons of the entrepreneurs expanded materially. The post reform generation of entrepreneurs was not infected by the traditional constraints. The new generation could think about globally competitive scale. They were not constrained by traditional characteristics like complacency, frugality, austerity, contentment etc. Targtes were now being frequently expressed in “Billion dollars” terms rather thn millions. Dreams not only became larger but also started to get realized. Consequently, the Indian MNCs started to grow in diverse areas like metals, automobile, ITeS, pharmaceuticals, hospitality etc.

Not so positive

However, statistically speaking, the reforms have not been adequate in putting India firmly on the path to become a middle income economy.

The reforms implemented so far have no dramatic impact on growth. As per Macrotrends in the USD terms, India’s GDP grew from ~US$37bn in 1960 to ~US$321 in 1990, a CAGR of 7.46%. In the next 29 years (1991-2019) India’s GDP grew to ~2.89trn, a CAGR of 7.84%. Though, the per capital growth rate was little faster as population growth began to taper from late 1990s. The per capita GDP of India grew at a CAGR of 5.12% during 1961-1990. During 1991-2019 this rate has been 6.19%. (Avoided 2020 as it was an exceptional year).

The Gini coefficient that measures the inequality in income distribution, increased from ~35 in 1990 to ~48 in 2018, making India one of the worst countries in terms of inequality. This highlights that the growth has not be equitable.

On relative basis, the peer economies like China, South Korea, Thailand etc. have done better than India. Our share in global trade has only marginally increased to ~3%, while China more than tripled it share in global trade to over 17%.

Not making national education & youth policy an integral part of reforms has perhaps been a grave mistake. The growth in India has definitely failed in ensuring adequate employment generation. Despite significant reduction in agriculture’s share in national income, the percentage of population dependent on farm sector continues to remain in excess of 60%. We have miserably failed in exploiting the demographic dividend.

Though, the financial markets developed a global scale infrastructure, we have not been able to implement a robust system for early detection of frauds and scams. Consequently, the investors continue to lose significant amount of money due to frequent scams and frauds in banking system and financial markets.

Many recent steps taken by the government indicate that the policy makers are full cognizant of the inadequacies of Indian economy. The new education policy, schemes and incentives to promote local manufacturing and exports, farm sector reforms, etc. are important steps that shall help in overcoming these inadequacies in the decade of 2020s.

Tuesday, August 18, 2020

Preparing for chaos

The undeniable fact is that FY21 could see most pervasive contraction in global economy in post war era. The economic impact of novel coronavirus led lockdown is deep and wide, engulfing most economies, most sectors and most people. The impact may not be evenly spread as services sector have suffered more due to restrictions on mobility; and consequently the developed economies with larger share of services in their economy have also suffered more. The economies based on commodity exports have also suffered extensive damage due to lower demand and logistic challenges. The economies based on agriculture may be the least impacted as demand and supply chain for food have been least impacted due to pandemic.

If we consider the impact of pandemic from socio-economic distress view point, the poorest countries perhaps would end up suffering the most. Poor health infrastructure, cut in global development aid, sharp cut in remittances, fall in exports, etc have hit the poorest the most.

The economists world over are intensely debating whether the economic recession of FY21 would eventually evolve into a global economic depression, a phenomenon not experienced in post war era; or it will remain a deep recession.

It may be pertinent to note that -

"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades." In US, the official definition of US is decline in real GDP for two consecutive quarters.

The term depression has not been defined clearly in economics literature. In the common parlance the term is used to describe a period of prolonged and severe economic recession. As per famous economics writer Gregory Mankiw, "the most famous economic downturn in the U.S.’s (as well as the world’s) economic history was the Great Depression, often described as starting in 1929 and lasting at least through the 1930s and into the early 1940s, a period that actually includes two severe economic downturns. Using the NBER business cycle dates, the first downturn of the Great Depression started in August 1929 and lasted 43 months, until March 1933, far longer than any other twentieth century contraction. The economy then expanded for 21 months, from March 1933 until May 1937, before suffering another downturn: from May 1937 until June 1938, a period of 13 months, the economy again contracted."

Obviously, there may be no active expert in the world, who has firsthand experience of handling an economic depression. If the current downturn does evolve into a global depression, it may be as chaotic as it was in the 1930s, simply because it will be a new phenomenon for everyone.

In Indian context, FY21 would likely be the first year of negative GDP growth in past 40 years. In fact since independence, there have only been four instances of negative GDP growth in India - FY58 (-1.2%); FY66 (-3.7%); FY74 (-0.3%) and FY80 (-5.2%). Most experts who have any firsthand experience of handling a recession either as a policy maker, regulator, banker, bureaucrat or politician may have retired or expired. Very few like Dr. Manmohan Singh, who have firsthand experience of handling multiple economic recessions are presently available in the country. Their views, suggestion and advice must be taken seriously by the government of the day.

I am a total novice insofar as the macroeconomics principles are concerned. Nonetheless, I will be happy to share my thoughts on this issue in later posts; particularly as I see them impacting my investment strategy.