Dr Singh's off-tune song

Before the 2014 general elections, Narendra Modi called then prime minister ‘Maun’mohan Singh. Manmohan Singh was the butt of ridicule for his silence on everything that was happening in the country — from corruption scandals (Commonwealth Games, Air India, allocation of telecom sp­ectrum, coal and iron, etc.) to policy paralysis and land grabs, to the mishandling of egregious cases like Nirbhaya. Mr Modi captured that prevalent mood effectively.

Well, it is now Mr Modi’s turn to be quiet. And Dr Singh has spoken, rather written, a piece in The Hindu, hitting hard at Mr Modi’s economic performance — nominal GDP growth at a 15-year low, household consumption at a four-decade low, unemployment at a 45-year high, bad loans of banks at an all-time high, growth in electricity generation at a 15-year low, and so on. While I have been a critic of the Modi government’s various schemes and policies, Dr Singh’s reasons for India’s economic condition and his policy prescriptions sound hypocritical. 

Dr Singh says mutual trust and self-confidence are the bedrock of social transactions, which, in turn, foster economic growth. Right now our social fabric of trust and confidence is torn. “Industrialists… live in fear of harassment by government authorities. Bankers are reluctant to make new loans, for fear of retribution. Entrepreneurs are hesitant to put up fresh projects … Technology start-ups … seem to live under a shadow of constant surveillance and deep suspicion”, while “policymakers are scared to speak the truth or engage in intellectually honest policy discussions”. Fear and distrust reduce economic transactions, which lead to an economic slowdown. 

Selection bias

This is a highly exaggerated picture, given what India went through under previous regimes, most notably under the Congress in 1991-96, when Dr Singh was finance minister, and again in 2004-14, when he was prime minister. Dr Singh’s arguments have two problems — he picks facts selectively (selection bias) and highlights recent events (recency bias). First, Indian citizens and businessmen have always been at the mercy of the state, which harasses us through its hundreds of different arms. The Modi government is not doing something different. At Moneylife we coined the term taxtortion in 2010. The draconian Companies Act was drawn up in 2013, under Dr Singh. Remember the retrospective amendments and general anti-avoidance rules of the Congress regime? Not a great example of trust and confidence.

Secondly, correlation is not causation. People won’t know, but surely Dr Singh does, that economic consequences come with a lag; so today’s conditions relate to actions taken years ago. We are paying the price today, not on­ly of the Modi’s regime follies but th­e misgovernance of the previous regime. The single biggest reason for the cu­rrent economic sluggishness is the failure to stop corrupt lending by public sector banks (PSBs) on a mind-nu­mbing scale, as reflected in over Rs 10 trillion of bad loans. 

I cannot imagine any bigger reason than this horrific loot that has sapped liquidity from the system, misallocated resources on a gigantic scale, and forced the government to raise more and more resources from the most productive section of the population — private businesses and households. And those responsible for this plunder by crony capitalists and bankers are successive finance ministers, the prime minister of the previous regime, and successive governors of the Reserve Bank of India (RBI). Not Mr Modi. In fact, by all accounts, Mr Modi is not letting defaulters off the hook. Under the Congress, they would have got more money from banks and kept control over their businesses through ubiquitous power brokers. Not under Mr Modi.

Policy prescription

Dr Singh thinks India can revive “private investment by inspiring trust and confidence in the economic participants in our society”. This is fallacious. Trust and confidence by themselves do not lead to economic growth; competition, transparency, and fair and simple rules of entry and exit do. I cannot think of one step Dr Singh’s government had taken to further this kind of regime. It is easy to forget that in the 1990s, when he was finance minister, India went through a securities scam, and households were looted by flimsy public issues (in an era of deregulated free pricing without adequate safeguards), and multiple other financial scams from plantation companies to leasing companies. The state was looted through corrupt lending by PSBs. Then there were colossal failures of governance in telecom licensing, Enron, and other private power projects. The consequence of such rampant financial buccaneering: Inflation hit double digits under an economist.

Because of such gross mismanagement, not “liberalisation”, for which Dr Singh gets credit, the economy went into a deep slump, from which it took six years to recover. A new law for bad loans had to be enacted, which also proved ineffective. In the 2004-14 period, mismanagement was played out on a larger scale, but got papered over because we benefited from an unprecedented global resource and liquidity boom caused by China. Instead of competition, we had more crony capitalism; instead of transparency, we had opaque processes; instead of fair and simple rules; we got more and more complicated ones. In fact, large-scale corruption and an air of despondency are the reason people voted out the Congress regime from power, as we squandered away a boom that comes once in a lifetime. Dr Singh’s criticism hides more the Congress’s failures than they expose the flaws of the current regime.

The writer is the editor of www.moneylife.in

Twitter: @Moneylifers