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GDP nosedives to 6-year low: Economy needs rooted policy wonks, not supercops with harsh approach to macroeconomics

Madhavan Narayanan

Speaking at a literature festival last weekend in Delhi, historian and writer William Dalrymple, who has just authored a book on East India Company, said one of the earliest Indian words to enter the English language was 'loot'€"evidently linked to the manner in which buccaneer traders took away treasures from the subcontinent.

That word has figured prominently over the past decade in India, when Prime Minister Narendra Modi's BJP won power with his supporters accusing the Congress and its UPA alliance of aiding the 'loot' of the country as they joined a campaign against corruption. The problem, however, is that latter-day corruption is not the same thing as old-world loot. When those who believe in the visually evocative loot narrative crackdown on what they believe to be wrong, their actions can have unintended consequences, such as a severe economic slowdown that has weakened India's growth story.

As the GDP data last week showed India's quarterly growth slowing to 4.5 percent, its lowest level in 26 quarters, there is much concern over a demand crunch in the economy. We have reasons to believe that a lot of it may have something to do with a supercop approach to the economy. Sadly, it does not tally with modern macroeconomics.

To understand this, let us invoke the Kohinoor diamond, part of the legendary Mughal-era Peacock Throne. Kohinoor is now part of the British Crown Jewels, and its estimated value is put at $1 billion. Now, let us suppose that a new government coming to power in the UK after general elections this month in the wake of its Brexit mess says India can choose between two things: one, an apology from Britain for the Jallianwala Bagh massacre of 1919 and a return of the Kohinoor and the other under which UK would build a world-class airport in Mumbai free of cost.

It is a tricky choice. There are no easy answers. But contemplating on such a situation helps us understand economic choices. We can take that apology, auction that diamond and build an airport. Or, if the cost of building a magnificent airport is $2 billion, the government can pick up 50 percent of the tab. But the key point is that an airport can have spin-offs in the form of upgrading the financial capital and creating tens of thousands of productive jobs. If the government instead stores the diamond and wallows in a headline-grabbing apology, the opportunity cost to the economy, defined as "the loss of other alternatives when one alternative is chosen" is huge.

That is exactly what has happened with India's economy.

The NDA government's acts, be it the controversial demonetisation of high-value currency notes in 2016 or the introduction of the Insolvency and Bankruptcy Code (IBC), have displayed a fetish for a supercop mentality or an obsession with seeing itself as a torch-bearer for a market economy. Either way, alternatives have been lost.

The demonetisation resulted in precious loss of productivity and jobs going waste. In return, there was no gain in terms of tax recovery or unearthing of black money that could have built infrastructure projects or led to higher spending on farming or social sectors.

Similarly, the government is patting itself on the back for the IBC to fix the problem of loan defaults or bankruptcies in the Indian economy. Some say the resolution of bankruptcies in India can now be faster than that of the US -- but they forget that India is not an advanced economy with low unemployment but a developing one of a billion-plus people in which about 400,000 people enter the workforce every month. A loss of growth is a huge opportunity cost for such an economy.

As one report chronicling the IBC's chequered track record put it succinctly, "the story of the past three years has been one of many legal battles€" corporate defaulter versus creditors; between competing bidders; financial creditors versus operational creditors; and defaulter versus bidders." I have already described the IBC as a case of judicial bureaucratisation. That is like adding a sledgehammer blow to red tape!

Strange as it might seem, this is in an economy priding itself as one improving its ease of doing business ranking. It is true that IBC would improve some aspects of banking, but choking loan growth and creating uncertainties related to labyrinthine laws is hardly what the doctor ordered for an economy claiming to hit the $5-trillion mark in five years. We can quibble on whether that needs an annual nominal growth rate of 10 or 12 or 14 per cent, but it is difficult to imagine starting on a fresh slate when there is a lot of backlog to clear.

Last but not least, the government has been obsessing over keeping the fiscal deficit under control, unmindful of the fact that the flip side of the equation is a demand crunch that hurts nearly all sections of the economy. Ironically, even that dubious laurel is under doubt. Last week's data showed the country has already crossed the annual fiscal deficit target with five months of the fiscal year yet to be counted.

In hindsight, it appears that the government's supercop approach with a holier-than-thou attitude has overlooked some basic realities of the India. The country's black and white economies are intertwined in a manner in which untangling them would require patience and precision, not a Wild West-style shootout. Similarly, given that public sector banks dominate the lending regime, giving them capital in small doses only holds up credit growth, even as a bureaucratic approach to fixing bad apples such as an IL&FS or DHFL leads to ever-new bylanes in which uncertainties lurk. Investors and markets typically hate uncertainties.

Does that mean there should be no fight against corruption? Clearly not. What is needed is a nuanced approach in which the government needs to understand that in terms of politics, demographics and history, India is not a textbook case of market economics. More important, we need policy-makers who understand this, not supercops who tend to have a law-and-order approach to macroeconomic management.

(The writer is a senior journalist and commentator. He tweets as @madversity)

Also See: Q2 GDP at 4.5%: With record-low nominal growth at 6.1%, economy is slipping to deeper pain; forget the $5-trillion target

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