The Congress interpretation of the causes for its 2004 victory was just the beginning of misjudgments that have since piled on. Take, for instance, the one unreformed activity that controls the livelihood of over half the population, agriculture. Its fundamental structural problem is what I have called income deficit syndrome in these pages (The Sisyphean Challenge of Indian Agriculture, April 17, 2008). Problems of abysmally low productivity, wasteful, antiquated and fatigue-intensive marketing and, above all, absence of alternative occupations, need to be tackled head-on. The required package comprises technological inputs, including judicious and carefully monitored use of genetically modified planting material, investment in farm assets, basic - not fancy - rural infrastructure for storage and movement, and de-bottlenecking procedures.
Instead, the policy mavens have adopted a single-point solution: ever-increasing support prices, killing the initiative for risk-reducing diversification. Punjab already shows the disastrous consequences of what has become monoculture, but the government wants to replicate it in the East! Having thus boosted inflation, the government displays an extraordinary reluctance to export the stored grain procured at such expense or use it to balance cyclical price trends. It is as if it prefers the grain to rot.
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The government's failure to understand the market mechanism, especially for perishables has made it throw up its hands and walk right into a mess. Most fresh-produce markets have functioned until recently as near textbook examples of perfect competition, benefiting consumers and producers alike. Those structures are now on the verge of collapse. The canny trade has sensed that the government has abandoned any role except the mantra of foreign direct investment (FDI). That pie-in-the-sky solution is unaffordable with dubious benefits for both farmers and consumers is vigorously pursued at the expense of more practical here-and-now approaches. The trade has correctly read the absence of any movement at all a year later on FDI. It has now effectively evolved into loosely connected price-fixing oligopolistic cartels around major market centres. That has led to the total disconnect between wholesale and retail prices witnessed currently. What had begun recently as inflation by stealth is now, open, aggressive price-fixing.
The government had nine years to build a labour-intensive rural-based mass manufacturing base. That would have addressed the burning question of creating non-farm employment, without which there is no hope. Skill upgradation and incentives to investment would have been the first steps. We heard instead repeated incantation of the right to education and hosannas to population dividend as drivers of growth. Professor Lant Pritchett of Harvard University has repeatedly documented that this has turned out millions with zero skills.
India's incremental growth of the last decade resembles a fragile needle resting atop a vast, low flat base. Our learned rulers have not quite grasped that the best way to protect the needle is to build a pyramid around it, that is, grow manufacturing. China has long realised this and made itself the world's low-cost factory.
Such a strategy also has a collateral benefit. Since the trade gap more than doubled from 17 per cent to 37 per cent in the United Progressive Alliance regime, balance to it should have been a priority concern. The only viable approach is a two-edged one of improving export competitiveness and rationalising imports. That would have meant intense nurturing of a mass manufacturing base and judicious use of imports - the biggest being petroleum crude and products. We basked in the glory of surging top-end exports of information technology and BPO services and deferred indefinitely the question of scarcity pricing of energy to ensure its efficient use, even as the trade deficit grew and investor reluctance converted it into an unmanageable current account deficit. It is now perhaps too late in the day for such basic remedies.
As the economy went into a tailspin, the Congress leadership equated pockets of hunger with mass deprivation of grain-based calories and embarked on an enormously expensive programme of providing over 50 million tonne of subsidised grain to 800 million Indians. It brushed aside concerns of costs and managing a programme of this size and told us that this is the grandest such scheme in the world. And less than a day after the measure was pushed through the Lok Sabha, the finance minister said cutting expenditure was the only way of controlling deficits without any sign of irony.
That is where we are: the good doctors treating our economy do not realise that when faced with chronic and systemic disorders, a wise physician knows that the treatment to restore health or improving incomes and purchasing power takes time, effort and patience. Sedatives and opiates such as doles are palliatives at best.
This is not just happenstance. Our policymakers, we are repeatedly assured, are among the best in the world. John Mueller, an American political scientist, observed perceptively in 2008 that "India's top economists for a generation supported policies of regulation and central control that failed abysmally - leading one of them to lament recently, 'India's misfortune was to have brilliant economists.'"
"There are none so blind as who will not see," goes an old proverb. It originates from a Jeremiad, "Hear now this, O foolish people, and without understanding; which have eyes, and see not; which have ears, and hear not." There can be no fitter lament for these trying times.
Some curious developments at the end of August: The prime minister, the finance minister, the oil minister all discovered their mojos to deal with the crisis: import contraction, boosting exports through competitiveness, oil conservation, among other things, the very actions they either forgot or chose to neglect when the time was right, as highlighted by these columns.
How do we describe those who discover virtues of fire prevention and extinguishers after the house is up in flames?
The author taught at the Indian Institute of Management, Ahmedabad, and helped set up the Institute of Rural Management, Anand. This concludes the three-part series