Deconstructing economic policy

Economics of India - How to Fool All People For All Time by Madan Sabnavis

Economics of India: How to Fool All People For All Times

Madan Sabnavis

Atlantic Publishers and Distributors 

286 pages; Rs 795

Let’s rewind the clock. In the last few years of the United Progressive Alliance (UPA) government, the phrase “policy paralysis” dominated the economic discourse.

A series of corruption scandals had brought the government to a standstill. With the fear of being hauled up by the “3 Cs” — the Central Bureau of Investigation, the Central Vigilance Commission and the Comptroller and Auditor General — bureaucrats found it more convenient to simply stop taking decisions. As a consequence, growth tanked. Projects were stalled and investment activity fell off a cliff.

Now, fast forward to present times.

Three years into the National Democratic Alliance regime and, by all accounts, decision-making is on the fast track with the prime minister intervening to kick-start the investment cycle. Yet, investment activity is not showing signs of perking up.

This begs the question: Is government action a necessary and sufficient condition for growth?

It’s questions like these that Madan Sabnavis, chief economist of CARE Ratings, attempts to explore in his new book Economics of India — How to Fool All People For All Time.

The book is essentially a compilation of 36 lucidly written essays, which have been bracketed under 11 broad headings. The essays, a few pages each, deal with a gamut of issues ranging from fiscal and monetary policy, the manufacturing conundrum, agriculture and the economists’ perennial favourite — subsidies. 

Typically, books of such nature tend to reflect the ideological leanings of the author. But Mr Sabnavis desists from taking an ideological position. The result is a book that is certainly layered but also tends to lack a clear position. 

Take for example his view on the food security debate. This is a debate on which both sides make valid arguments. There are no easy answers.
 

Mr Sabnavis argues that food security is needed in a country where poverty levels are high. And though there has been much debate over its cost implications for the government’s fiscal deficit, the author contends that “while there can be debates on the calculation made here [in the book], the point is that the number is not too high to cause controversy.” 

Coming from someone working in a capitalist set-up, one that is often worried about fiscal profligacy, this view is surprising. Perhaps his socialist impulses (his brother affectionately calls him a pseudo-socialist) overpowered his capitalist instincts. 

A few sections of the book have been devoted to macro-economic policy management – fiscal and monetary policy. This is where it excels. Given his day job as the chief economist of CARE Ratings, it’s not hard to fathom why.

On issues such as the ideal fiscal deficit number, Mr Sabnavis does not appear to believe that the target of 3 per cent that the government has adopted should be sacrosanct. 

As he argues, “When an economy is in a downturn like ours was in FY13 and FY14, sticking to the path of FRBM (Fiscal Responsibility and Budget Management) Act made sense to the multilateral agencies and rating companies but came in the way of our own growth.”

It is a pity that the author chose not to elaborate on such issues in greater detail. 

On the relationship between currency and exports, contrary to the common perception, Mr Sabnavis argues that the relationship between the two is not as straight forward as is believed. A weaker currency may not necessarily lead to stronger export growth, he says.

His explanation for this rests on a combination of factors. First, it is possible that periods when the rupee declines in value against the dollar coincide with declines in other competing nations’ currencies, thereby negating the effect of a weaker rupee on exports. Second, it is also possible that India’s overreliance on petro exports skews the relationship, as it is relatively price insensitive.

On the contentious issue of foreign direct investment in retail, Mr Sabnavis argues that contrary to all its cheerleaders, it is not a panacea for our farming ills.
 

“We should not and cannot expect such investors to take care of issues which the government has not been able to do for the last seven decades or so. While creating cold storages and efficient transport and packaging facilities will lower wastage and improve delivery standards such investment is here for commercial and not philanthropic reasons,” he writes.

The book is littered with other useful nuggets of information, such as the fact that most public sector banks have reduced their dependence on unionised labour force over the years so that there is a shift to the officer cadre which is involved in banking operations. Another one highlighted the fact that the actual statutory liquidity ratio (SLR) holdings by banks are much higher than those mandated by regulation by 300-400 basis points. This implies that, contrary to what is often said, SLR regulation may not have been a burden for the system as a whole.

Books of this nature understandably focus on a plethora of issues. This may be helpful to the uninitiated. Had some of the issues been explored in greater detail, however, the book would have found a wider audience.