Errors of omission than commission

Amy Kazmin has a long-form article on the Modi government, ‘India: Narendra Modi hunts for more economic ‘firepower’’. The article could be behind a paywall.

On balance, it is not a terribly unreasonable article. That carefully guarded comment is deliberate.

The following is the comment I had left below her article in the pages of FT:

One correction: Arvind Subramanian is still India’s Chief Economic Advisor. He holds the position until August or September this year.

One of the biggest negatives – among many – of the previous government was that it brought down India’s potential growth rate by several notches – from around 8% to 8.5% in 2006-07 to between 6.0% and 6.5% by around 2013 when the IMF published its October World Economic Outlook.

This government’s actions have not brought down the potential GDP growth rate. If anything, they have enhanced them and it will show up over time. Surely, they could have done much more. But, their errors have mostly been of omission than commission. That is a big contrast to the previous government.

Yes, most would point to demonetisation as an error of commisison and a big one at that. Some have said that it is post-Independence India’s worst policy error. They have their reasons, perhaps but they need to spell out the criteria adopted, list all decisions that qualify to be judged against those criteria and show why demonetisation tops the list. The government could have avoided that measure, for sure. But, now it is too late to take that line. Indeed, on November 8, 2016, when it was announced, it was already too late to argue that it need not be done. Therefore, no matter what government’s goals and no matter how many times that they kept changing, one has to evaluate it on the basis of its net cost-benefits. The immediate question that pops up is one of horizon. What is the relevant time horizon to evaluate the decision especially when we know that economic decisions, in general, have long lags for their effects to be felt?

Take Bank Nationalisation done by Mrs. Indira Gandhi in 1969. In the first two decades, for the most part, it delivered on its financial inclusion goals. Take the next twenty five years. The ‘financial inclusion’ low-hanging fruits had been mostly plucked. Further, other agencies had come into existence to take up that job. What did government-owned banks do? They have run up non-performing loans every decade or so in the last three decades. The most egregious of them happened between 2006 and 2012, under the previous government when confidence about continued high economic growth combined with cronyism and corruption to ​cause​
many dubious loans to be made. India is still reaping the whirlwind.  So, what is the net score on bank nationalisation? It depends on your horizon. By 1990, it was positive. By 2018, it is negative.

My guess is that by 2025 or 2030, the score-card on demonetisation might look very different. Let me put it that way: the chances of that happening are at least as high as the chances of it being stuck with the label of the worst policy decision of this government or that of any government since 1947.

Yes, this government should have and could have acted to reform the government-owned banking system. The ‘bad assets’ crisis presented such an opportunity. This government has been slow to move. It tried many other peripheral measures – Bank Boards Bureau, Gyan Sangam, induction of some private sector talent (too few), etc. But, more far-reaching measures – even if it wanted to retain the government ownership of banks in most cases – were possible.  However, as I mentioned earlier, it is an error of omission than an error of commission.

When it comes to actual economic growth between April 2014 and March 2018, one should not forget that global economic growth has only been middling at best and trade protectionism had already begun, even before the administration changed in America in 2016. India’s inefficiently organised (too fragmented)  production system did not help it to capture market share opportunities created by a vacating China in some products, due to its high costs. The question is whether there is a political consensus in India in dealing with the romanticism of the small and micro enterprises? The answer is ‘NO’.

When it comes to economics, India’s problem is that there is only one party rule in India. All parties rule from the Left. There is no natural champion of free enterprise and economic choice among the current political leadership in the country. Notwithstanding that, this government has not brought down India’s potential GDP growth. It has probably enhanced it.

Therefore, despite the disppointment with the NDA government’s performance relative to the country’s requirements and the expectations created, it is a fair and reasonable bet, ​that ​ a coalition of Opposition parties led by or supported by the Congress Party will be considerably worse for the Indian economy. Actually, it might well be a disaster.

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