Economy since 2009: Fact and Fiction?

While many contemporary economists seem to have lost interest in economic history altogether, those born before 1980 have turned most unbecomingly partisan

Two sad things have happened to Indian economics in the past 20 years. It’s hard to say where the fault lies.

One is that far too many economists seem to have lost interest in economic history altogether. And even within the confines of their obsession with data, they have become victims of bond market myopia. The other is that while those born after 1980 have remained largely apolitical, many of those born earlier have turned most unbecomingly partisan. A subset of them comprises those who have held high policy positions. Their views are therefore taken seriously.

Modern economics, however, is about data, and not what you think of it. This basic truth has been largely ignored since 2014 by several respectable economists. Nothing brought this out more clearly than the speech of the finance minister in the Rajya Sabha on March 24. I happened to watch it by chance on YouTube.

The content of the speech reminded me of the type of analysis contained in that classic work on the Indian economy by Ian Little and Vijay Joshi, published in 1994. Nothing since has come anywhere close to it. It was a World Bank Project, later published by OUP. It is a cold recitation of the numbers, occasionally leavened by some commentary. The effect is to settle doubts and controversies both.

We need something like that for 1992-2022. The RBI is the best institution to attempt it.

What the FM said

In her speech referred to above, the minister reverted to just such a recitation of facts to show that, contrary to what many economists would like us to believe, economic and various socio-economic indicators have actually improved quite significantly under this government.

The speech has been largely ignored.

She started off by reminding everyone that when the Narendra Modi government came to power, it inherited an economy that was considered one of ‘Fragile Five’ — not an epithet anyone can be proud of. Soon, though, India came to be known as one of the fastest-growing major economies in the world.

Then she pointed out that the 2008 financial crisis was not anywhere close to the magnitude of the current Covid crisis. Yet, the United Progressive Alliance (UPA) government left office with the economy in a mess, the banking sector on the verge of a non-performing asset (NPA) disaster, double-digit inflation, and the so-called Taper Tantrum. In contrast, she said, the current handling of this crisis had brought India out of a recession faster than anyone anticipated.

But here’s that dry list of data I was talking about. It’s very revealing.

Gross domestic product (GDP) growth in the five-year period of 2014-19 stood at 7.5 per cent on average, compared with 6.7 per cent in the previous five years. Gross value added (GVA) manufacturing growth was 8.6 per cent versus 6.4 per cent over the same period. Inflation, another key metric that hits where it hurts stood at an average of 4.8 per cent in the 2014-19 period, compared with an astronomical 10.3 per cent in the 2009-14 period. And so on.

This is not to say that the economy now does not have various necessary nuts and bolts missing. It does. Far too many of them. There are far too many people still in agriculture, they are paying next to no tax, and the sector is accounting for an ever-decreasing proportion of GDP.

The services sector, in contrast, is being fed with barely a trickle of people with the required training. It may well be another opportunity missed. As for manufacturing it is beginning to show the kind of life it needs, but that ship has largely sailed anyway. We can’t catch up with China, which has a 35-year head-start.

That said, my point is that there is an urgent need to restore some perspective. It is all very fashionable to go on criticising the government on its economic performance. But this criticism is not always on the basis of facts and it flies in the face of data, something economists just cannot afford to do. Twitter: @tca_tca