A radical reset for the Indian economy

Reset, thus, is not much of a reset as much as setting of the lines of sound policies for the govt to adopt, once the extravagant bits are edited out

He gets the history right, the analysis spot-on, the target just about right but insists on a plan of action to achieve it that is a gamble even bigger than demonetisation. 

Subramanian Swamy argues the Indian economy needs to grow close to 10 per cent per annum for at least a decade to make a dent on poverty, on unemployment and reach the league of middle -income economies. 

To achieve this massive growth rate, Mr Swamy offers a menu of options that will upend the Indian economic administration and much else, irrevocably. It will also push the economy on a somewhat mercantile trajectory with huge risks of failure. That is the title of his book; Reset: Regaining India’s Economic Legacy. 

Mr Swamy suggests doing away with income tax, moving to a fixed exchange rate of Rs 50 to a US dollar “and then gradually lowering the exchange rate for subsequent years”, and offering a rate of interest of 9 per cent for fixed deposits in banks to incentivise savings and push investment. Yet later on (page 166) he acknowledges that India is now committed to a floating exchange rate and argues for only intervention instead of pegging it to a fixed rate. It is unclear which one of the options one of India’s most famous economists would suggest the government should take.

It is also unclear how a state that will be made more or less bankrupt by eliminating personal income tax and financing a pegged exchange in an environment of hugely loose monetary and fiscal policy environment will be able to generate resources to finance the massive infrastructure support for building cities and in agriculture. He suggests keeping the Reserve Bank of India (RBI) printing presses open to keep financing this deficit, “setting aside concerns about the fiscal deficit ratio in the cold storage for the time being”. Why this will not lead to inflation is, again, not quite evident. 

Mr Swamy expects the bill to finance the impact of such a reset will be made good by exports which, in turn, will become competitive on the back of the manufacturing sector supplied with cheap capital gathering steam. While he contends, rightly, that the successive five-year plans often took no account of the weakness of the Indian economy by “squeezing agriculture through taxes, terms of trade…to raise funds for financing the industry”, his mantra also glosses over some of the festering weakness of the economy, such as an uncompetitive manufacturing sector that needs far more than cheaper capital and difficult centre-state relations that will make any such bartering away of tax revenues a non-starter. He describes his blueprint as “an alternative ideological thrust”, and like all ideologies makes light of any opposition to it. 

This is unfortunate because he makes several valid points in his analysis of the problems besetting the Indian economy. For instance, he maintains that there is a need to “cajole the stakeholders in the economy to get enthusiastic about economic activity and be incentivised for it”— the animal spirit problem. Mr Swamy is also spot on about the causes for the decline in household savings rate and the rise in rural indebtedness as also about demonetisation, which he terms as a monumental blunder. “It had a major negative effect on small businesses, workers and farmers, while leaving the rich virtually unaffected because of the class’ ability to rig the system”.
 

But then, from there he jumps from these to suggest, “The government will therefore have to stimulate the economy by monetary and fiscal measures. These will have to come from radical, out-of-the-box and rational risk-taking on intuitive thinking”.  One would instead suggest that in Budget 2020, the finance minister should settle on conservative measures for economic revival instead of walking on a risk taking path that Mr Swamy suggests. He does not countenance that his more sane advice for large-scale privatisation, reform of the financial sector and “synchronisation with the WTO”, which possibly mean keeping customs duty low are by themselves good enough  to take the growth rates quite high.  

As he rightly says in the Modi government’s two spells, “till date, deregulation measures have been confined to the central government and even here it has been piecemeal”. He also suggests land consolidation through market forces for agriculture. In fact, his list of reforms for this sector including wider adoption of land leasing, more public investment including in warehouses and formation of an agriculture advisory service are most unexceptionable. 

Reset, thus, is not much of a reset as much as setting of the lines of sound policies for the government to adopt, once the extravagant bits are edited out.  

Regaining India’s Economic Legacy

Author: Subramanian Swamy

Publisher: Rupa

Price: Rs 595

Pages: 189