Budget 2020: Collapse on many fronts, economy is but one indicator

Consider a road well paved, a vehicle driving down at a speed that is the slowest it has had in recent times. The occupants enter into a discussion on how they could drive faster to reach a town called “five trillion dollars” in a given time frame.

They push the driver, break a few signals and try to stay cheerful. But all around them, the road is now filled with protestors, angry and united in their view that the car is headed in the wrong direction, while some others try to push it forward. How fast can this car run?

In the current times, the biggest problem with unpacking the economic situation is that economic levers are seen in isolation, as if this is a game of smart moves, clever ideas or some otherworldly thinking. It is true that the economy is badly managed but the bigger truth is that it is the politics that determines the economics. As Joan Robinson (1903-1983), the “grand dame of economics” wrote in the Journal of Economic Literature way back in 1977:

“Politics involve ideology. There is no such thing as a purely economic problem that can be settled by purely economic logic; political interest and political prejudice are involved in every discussion of actual questions.”

In India, under the current regime, the actual questions are sometimes coloured as much by prejudice as they are by blind devotion to the idea that PR can solve real problems, or that events can give a push to a car that has now nearly stalled. The numbers on the dashboard are of course looking bad. Consider some of them:

GDP growth is down to 4.5 per cent year-on-year in the second quarter of 2019-20, extending a sequential deceleration to the sixth consecutive quarter.

This weak growth number itself is oiled by a rise in government expenditure, the so-called Government Final Consumption Expenditure (GFCE), which is (at constant prices)

estimated at Rs.16.65 lakh crore in 2019-20, as against Rs.15.06 lakh crore in 2018-19. Excluding GFCE, GDP growth would have been at 3.1 per cent, a number that is a reminder of the horrors of the Hindu rate of growth reminiscent of the pre-liberalisation days.

The quarter also saw a sharp slowdown in Gross Fixed Capital Formation (GFCF), showing that investments are shying away and that a revival may continue to depend on government spending.

For 2019-20, the GDP growth number has been scaled down by the RBI from its earlier projection of 6.1 per cent to 5 per cent in the December monetary policy statement.

Many believe it will be difficult to even reach 5 per cent. Consider the decline year after year: GDP for 2018-19 was 6.8 per cent, down from 7.2 per cent in 2017-18, 8.2 per cent in 2016-17, 8 per cent in 2015-16 and 7.4 per cent in 2014-15.

Now, inflation has spiked. The all-India CPI inflation rate (Rural & Urban, or “Combined”) came in at 7.35 per cent for December 2019, racing up from 5.54 in November 2019 and the year-ago number of 2.11 per cent, prompting some to argue that we may be heading for stagflation – the combined bad effects of low GDP growth, weak jobs growth and high inflation.

An analysis of the inflation numbers tells us that the spike comes from food inflation due to rising prices of vegetables and pulses. The CPI-Combined number is above the Monetary Policy Committee’s (MPC) mandated target of keeping inflation at an average of four per cent, with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.

Inflation is a tax on the weakest. Controlling this spike will limit the maneuverability of the RBI to boost consumption through interest rate instruments.

The numbers in their aggregate are only indicators of many smaller drivers going wrong. This gives the picture of a government that appears to have wasted its huge mandate. Instead of building a consensus on structural reforms, improving governance and boosting confidence so that the genuine “animal spirits” of businesses are unleashed in a thriving eco-system, this government has violated trust, used strong arm tactics and tried to scare the people into submission.

That two State Assemblies have passed resolutions against the implementation of the Citizenship Amendment Act is as much an indicator of the decline as is the GDP number.

Recently, senior business leader Rahul Bajaj spoke in the presence of Home Minister Amit Shah, Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal about an “air of intolerance”; that people were scared of speaking against the government. In his response, the Home Minister was defensive but also appeared to want to listen.

In Shah’s words, “If you say there is such an environment, we need to work to improve…” That looked like a reasonable remark from a government wanting to respond to the mood. But it was what happened after the speeches ended that told us a lot more about the complainant, his complaint and those it was directed against. According to one account, none of the dignitaries stayed back for dinner.

Worse, most of the business icons left, too, and just about one or two of the known names, including a woman business leader, stayed back, and in that sense stood by Rahul Bajaj. In the way the evening unfolded, Rahul Bajaj probably proved the point he was making: “If we criticise, we are not sure you’ll appreciate it.”

This is so of not just business leaders but also of a wide range of professionals, including economists, institutional leaders, educators, regulators and all manner of bureaucrats through which the government functions. The result is, inevitably, a collapse on many fronts, of which the economy is but one indicator.

(The writer is a journalist and a faculty member at SPJIMR. Views are personal) (Syndicate: The Billion Press) (e-mail: editor@thebillionpress.org)

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