Is the Indian economy on Autopilot?

Pulapre Balakrishnan in The Hindu

The Modi government had inherited an economy with quite rapidly accelerating growth and steadily declining inflation. It has barely managed to maintain this scenario


As the Narendra Modi government inches towards its halfway mark, its economic philosophy stands revealed. This appears to consist of aiming at some ideal institutional architecture while leaving economic forces to play out on their own. The criterion of macroeconomic stability, defined mainly by inflation kept within a range, completes the picture. Underpinning such an approach is the premise that the potential of the economy, reflecting the chosen acts of private agents, not only cannot be improved upon by the government but its realisation could actually be stymied by intervention. This is a well-known position in the canon of Anglo-American economics tending towards the view that market outcomes are the best. The maxim ‘minimum government is maximum governance’ could legitimately claim to be its progeny.


Life in the slow lane

How, it may be asked, has this philosophy served the economy? We could start with growth. Since May 2014, growth has accelerated but at a much slower rate than that it already had commenced upon in 2013-14. India today is the world’s fastest growing economy but this we owe to the fact that China has slowed more than India has. India has not exactly surged to number one position. But more importantly, the government has not so far been able to achieve the substantial quickening of the economy that Mr. Modi had promised at election time. The government has on occasion extolled its record in maintaining macroeconomic stability. This is indeed correct. Inflation has declined but this only reflects a downward trend that had started in 2013-14. The government would also no doubt like to take credit for sticking to the pre-announced fiscal consolidation path. The fiscal deficit has steadily declined since May 2014. The Finance Minister’s public statements suggest that he treats this as a significant achievement of his government. Actually, it typifies the search for the ideal architecture without sufficient concern for outcomes. The truth is that this government had inherited an economy with quite rapidly accelerating growth and steadily declining inflation. It has barely managed to maintain this scenario. The promised resurgence has not materialised.

It is with respect to investment that the government’s record is uninspiring. Far from having been able to instil confidence among private investors, the government has been unable to stem a decline in capital formation — as a share of output — in progress for at least half a decade. On its part the government takes recourse to the figures on foreign direct investment (FDI) to signal the effectiveness of its policies. Data from the Department of Industrial Policy and Promotion show that in the year just passed, the economy attracted increased FDI up to 29 per cent in dollar terms. While this is impressive, and to be welcomed, it is important to have a sense of what it amounts to. In the year 2014-15, FDI amounted to a mere 4 per cent of total capital formation in India. So, while FDI is to be encouraged, its ability to make a significant contribution to growth is limited. On the other hand, over 75 per cent of capital formation is undertaken by the domestic private sector. Any significant change in the investment scenario would depend upon the actions of this segment.


Sticking to fiscal consolidation

Right now private investment is very likely being restrained by the weak balance sheet of firms. The flip side of this is the high level of non-performing assets (NPAs) of the public commercial banks. Forcing these banks to lend would be poor policy. But it is not clear whether everything that can be done to lower the lending rate is being done. After all, consumer price index (CPI) inflation, the Reserve Bank of India’s (RBI) preferred inflation index, is trending downward and there is a case for lowering lending rates. But the RBI has now been put into the straitjacket of inflation targeting and can no longer respond to considerations of output. This leaves fiscal policy as the only instrument with the government.

The government, however, is reluctant to use it to increase aggregate demand for fear of deviating from its fiscal consolidation path. It is of course possible to step up public investment by trimming subsidies. Here the National Democratic Alliance government’s approach is cravenly political, and no different from that of its predecessor, the United Progressive Alliance. It is reluctant to be seen as cutting subsidies even when it is clear that a rupee-for-rupee swap in certain subsidies for public capital formation is likely to be beneficial for both growth and welfare. The fertilizer subsidy presents the most obvious instance. It has done little to stem the rise in food prices while continuing to take up precious fiscal space. There is a strong case for reviewing its continuation, at least in the present form. Well-designed empirical research alone can settle the matter of its desirability, and one hopes the government will provide this in time for its third annual Budget.


Looking for inspiration


An object of this government’s admiration has been revealed to us in the choice of speaker for the first NITI Aayog Lecture on Transforming India. It chose Tharman Shanmugaratnam, the Deputy Prime Minister of Singapore who was earlier its Finance Minister for close to a decade. A trained economist with considerable international exposure, Mr. Shanmugaratnam typifies the Singapore model, which recognises the value of high human capital in its leadership, something that India has not seen since the time of Jawaharlal Nehru. Prime Minister Modi is right to have invited this global leader to participate in a brainstorming on how to transform India, thus drawing much-needed attention to the achievements of Singapore. Though its cultural policies may not be to everyone’s taste, the economic transformation that this tiny state has so quickly wrought is most impressive indeed. There is an astounding presence there of public capital in the form of infrastructure, the most egregious of which is public housing which hosts over 80 per cent of the population. Along with its approach to political freedoms, Singapore’s record is closer to that of socialist planning rather than free-market capitalism. Its government has not hesitated to intervene in the economy but its interventions have been made with a finesse that has yielded substantial returns. It is ironic that a government that had so ceremoniously replaced the Planning Commission must simultaneously seek clues from the history of a country transformed by economic planning.

There is one specific area in which our own government may learn from the Singapore experience. The government there had instituted a provident fund to which all workers and employees have had to contribute. These contributions ensured a rise in the saving rate which in turn was a source of funding for public investment. In the muddled discourse on fiscal policy in India today, the reigning argument appears to be that a fixed private saving rate sets the limit for the attainable fiscal deficit. This overlooks the possibility of raising the private saving rate, which is precisely what the Singapore government had done early in its history, enabling it to achieve a scale of public capital formation that truly distinguishes it from India. All indications are that the present government of India is striving to replicate Singapore’s institutional architecture, as in laws governing business, rather than the transformative role of public investment that turned a fishing village into a global destination for FDI. What other conclusion can be drawn from the fact that in the Budget for 2016-17 the increase in the allocation for capital expenditure amounted to a mere 2.3 per cent, with inflation running at around 4 per cent per annum?


Bleak agricultural landscape

A sector that is unlikely to be well served by the philosophy than an economy left to its own devices will achieve its potential is agriculture. Three of the past five years in India have been years of poor agricultural performance, reflected in persistent food price inflation. We are very likely witnessing creeping climate change with direct consequences for production. The advisory from most funds in the financial sector is that the economic outlook this year will depend upon the monsoon. It is surprising that the imperative of drought-proofing an increasingly vulnerable Indian agriculture hardly figures in the public discourse on the economy when it is of no less importance than rolling out the Goods and Services Tax. Nothing short of a transformation akin to the Green Revolution can achieve this, and the States would have to be on board. The present government has had little to say on the matter so far. By disbanding the Planning Commission, the Centre has lost a long-standing conduit to the States whose planning boards did have at least a titular connection to the former.

India ranks ninth in crony-capitalism index

PTI in Times of India

India is ranked ninth in crony-capitalism with crony sector wealth accounting for 3.4 per cent of the gross domestic product (GDP), according to a new study by The Economist.

In India, the non-crony sector wealth amounts to 8.3 per cent of the GDP, as per the latest crony-capitalism index.

In 2014 rankings too, India stood at the ninth place.

Using data from a list of the world's billionaires and their worth published by Forbes, each individual is labelled as crony or not based on the source of their wealth.

Germany is cleanest, where just a sliver of the country's billionaires derive their wealth from crony sectors.

Russia fares worst in the index, wealth from the country's crony sectors amounts to 18 per cent of its GDP, it said.

Russia tops the list followed by Malaysia, the Philippines and Singapore.

"Thanks to tumbling energy and commodity prices politically connected tycoons have been feeling the squeeze in recent years," the study said.

Among the 22 economies in the index, crony wealth has fallen by USD 116 billion since 2014.

"But as things stand, if commodity prices rebound, crony capitalists wealth is sure to rise again," it added.

The past 20 years have been a golden age for crony capitalists--tycoons active in industries where chumminess with government is part of the game.

Their combined fortunes have dropped 16 per cent since 2014, according to The Economist updated crony-capitalism index.

"One reason is the commodity crash. Another is a backlash from the middle class," it said.

Worldwide, the worth of billionaires in crony industries soared by 385 per cent between 2004 and 2014 to USD 2 trillion, it added.

To fight Britain’s privatisation dogma, Labour should look to the US military, Singapore, Taiwan...

State-owned enterprises can be successful, as some unlikely global examples prove

• 
• • Ha-Joon Chang
  • The Guardian, Thursday 31 July 2014 18.23 BST

A Honeywell computer under the control of Michael Caine In the 1967 film Billion Dollar Brain. It was used to connect to the Arpanet – developed by the US military as a precursor of the internet.. Photograph: Snap/Rex Features

Since Margaret Thatcher came to power in 1979 the UK has led the world in privatisation. The Conservative government sold off state-owned enterprises throughout the 1980s and the 1990s – electricity, oil, gas, rail, airline, airports, telecommunications, water, steel, coal, you name it. In the worldwide fever for selling off state assets that gripped those decades, the rest of the world looked up to Britain as the guiding example.

Privatisation was halted under Labour. However, the belief in the superiority of the private sector was such that, when it brought the rail infrastructure back under state control in 2002 following a series of rail disasters, Labour made sure it did not take the form of re-nationalisation – at least in legal terms. Network Rail, the owner and operator of the rail infrastructure, was set up as a private company, although on a not-for-profit basis and without shareholders.

When the coalition came to power in 2010, it resumed the privatisation drive with gusto. It privatised Royal Mail – the “crown jewels” that even Thatcher balked at selling. However, in recent months the tide has started to turn, albeit slowly.

Even while planning to sell off almost every remaining state-owned enterprise, from plasma supply to helicopter search and rescue, the coalition has had to make an embarrassing climbdown over its plan to privatise student loans. More importantly, in the past few months the Royal Mail sell-off has been fiercely criticised. Moya Greene, its chief executive, has questioned the viability of its universal service obligation. Abandoning this would mean that customers who live in less accessible or sparsely populated – and thus less profitable – areas wouldn’t get their letters delivered, or would have to pay more for them: the end of the postal service as we know it.

In the meantime, the Labour party has made the lack of competition and the suspected collusion in the privatised energy industry a key issue in its promise to “fix broken markets”, and has caught voters’ attention by announcing its intention to partially reverse rail privatisation. Although its fear of being branded anti-business has prevented it from proposing outright renationalisation of the railways – despite the support for such a move from most of the electorate – it has declared that if it wins the 2015 general election it will “reverse the presumption against the public sector”, and let state operators bid for rail franchises.

However, if it is really to overturn the privatisation dogma, Labour should do more than reverse the presumption against the public sector: it should tell people that the public sector is often more efficient than the private sector.

Even while there are many examples of inefficient state enterprises from all over the world, including the UK, there have been many successful such businesses throughout the history of capitalism. In the early days of their industrialisation, 19th-century Germany and Japan set up state-run “model factories” in order to kickstart new industries such as steel and shipbuilding, which the private sector considered too risky to invest in. For half a century after the second world war, several European countries used state businesses to develop technologically advanced industries: France is the best-known example, with household names like Thomson (now Thales), Alcatel, Renault and Saint-Gobain. Austria, Finland and Norway also had technologically dynamic state-run enterprises.

The most dramatic example, however, is Singapore. The country is usually known for its free trade policy and welcoming attitude towards foreign investments, but it has the most heavily state-owned economy, except for some oil states. State-owned enterprises produce 22% of Singapore’s national output, operating in a whole range of industries – not just the “usual suspects” of airline, telecommunications and electricity, but also semiconductors, engineering and shipping; and its housing and development board supplies 85% of the country’s homes. Taiwan, another east Asian “miracle” economy, also has a very large state-run sector, accounting for 16% of national output.

Posco, the state-owned steel company in my native South Korea, was initially set up against World Bank advice but is now one of the biggest steel companies in the world. (It was privatised in 2001, but for political reasons rather than poor performance.) In Brazil, Embraer – the third largest civilian aircraft manufacturer in the world – was initially developed under state control; and the country’s state-owned oil company, Petrobras, is the world leader in deep-sea drilling.

Arguably the most successful state enterprise in human history, however, is the United States military, which has almost single-handedly established the modern information economy. The development of the computer was initially funded by the US army; the country’s navy financed the research that created the semiconductor; and the US Defense Advanced Research Projects Agency developed the Arpanet, the precursor of the internet.

When people realise that the history of capitalism is full of highly successful state enterprises, the rush for ever more privatisation can be halted. If the Labour party puts forward this case, it will not only gain popularity in the run-up to next year’s general election – it would also be doing something of lasting benefit for Britain.

Pigeonholing protesters as anti capitalist will only allow those who are against reform to avoid the issue

• 
• • Ha-Joon Chang
  • guardian.co.uk, Tuesday 15 November 2011 21.00 GMT
  • larger | smaller

In Singapore 'a staggering 22% of national output is produced by state-owned enterprises'. Photograph: Luis Enrique Ascui/Reuters

The Occupy London movement is marking its first month this week. It is routinely described as anti-capitalist, but this label is highly misleading. As I found out when I gave a lecture at its Tent City University last weekend, many of its participants are not against capitalism. They just want it better regulated so that it benefits the greatest possible majority.

But even accepting that the label accurately describes some participants in the movement, what does being anti-capitalist actually mean?

Many Americans, for example, consider countries like France and Sweden to be socialist or anti-capitalist – yet, were their 19th-century ancestors able to time-travel to today, they would almost certainly have called today's US socialist. They would have been shocked to find that their beloved country had decided to punish industry and enterprise with a progressive income tax. To their horror, they would also see that children had been deprived of the freedom to work and adults "the liberty of working as long as [they] wished", as the US supreme court put it in 1905 when ruling unconstitutional a New York state act limiting the working hours of bakers to 10 hours a day. What is capitalist, and thus anti-capitalist, it seems, depends on who you are.

Many institutions that most of us regard as the foundation stones of capitalism were not introduced until the mid-19th century, because they had been seen as undermining capitalism. Adam Smith opposed limited liability companies and Herbert Spencer objected to the central bank, both on the grounds that these institutions dulled market incentives by putting upper limits to investment risk. The same argument was made against the bankruptcy law.

Since the mid-19th century, many measures that were widely regarded as anti-capitalist when first introduced – such as the progressive income tax, the welfare state, child labour regulation and the eight-hour day – have become integral parts of capitalism today.

Capitalism has also evolved in very different ways across countries. They may all be capitalist in that they are predominantly run on the basis of private property and profit motives, but beyond that they are organised very differently.

In Japan interlocking share ownership among friendly enterprises, which once accounted for over 50% of all listed shares and still accounts for around 30%, makes hostile takeover very difficult. This has enabled Japanese companies to invest with a much longer time horizon than their British or American counterparts.
Japanese companies provide lifetime employment for their core workers (accounting for about a third of the workforce), thereby creating strong worker loyalty. They also give the workers a relatively large say in the management of the production process, thus tapping their creative powers. There are heavy regulations in the agricultural and retail sectors against large firms, which complement the weak welfare state by preserving small shops and farms.

German capitalism is as different from the American or British version as Japanese capitalism, but in other ways. Like Japan, Germany gives a relatively big input to workers in the running of a company, but in a collectivist way through the co-determination system, in which worker representation on the supervisory board allows them to have a say in key corporate matters (such as plant closure and takeovers), rather than giving a greater stake in the company to workers as individuals, as in the Japanese system.

Thus, while Japanese companies are protected from hostile takeovers by friendly companies (through interlocking shareholding), German companies are protected by their workers (through co-determination).
Even supposedly similar varieties of capitalism, for example Swedish and German, have important differences. German workers are represented through the co-determination system and through industry-level trade unions, while Swedish workers are represented by a centralised trade union (the Swedish Trade Union Confederation), which engages in centralised wage bargaining with the centralised employers' association (the Confederation of Swedish Enterprise).

Unlike in Germany, where concentrated corporate ownership has been deliberately destroyed, Sweden has arguably the most concentrated corporate ownership in the world. One family – the Wallenbergs – possesses controlling stakes (usually defined as over 20% of voting shares) in most of the key companies in the Swedish economy, including ABB, Ericsson, Electrolux, Saab, SEB and SKF. Some estimate that the Wallenberg companies produce a third of Swedish national output. Despite this, Sweden has built one of the most egalitarian societies in the world because of its large, and largely effective, welfare state.

And then there are hybrids that defy definition: China, with its large socialist legacy, is an obvious case, but Singapore is another, even more interesting, example. Singapore is usually touted as the model student of free-market capitalism, given its free-trade policy and welcoming attitude towards multinational companies. Yet in other ways it is a very socialist country. All land is owned by the government, 85% of housing is supplied by the government-owned housing corporation, and a staggering 22% of national output is produced by state-owned enterprises. (The international average is around 10%.) Would you say that Singapore is capitalist or socialist?

When it is so diverse, criticising capitalism is not very meaningful. What you have to change to improve the Swedish or the Japanese capitalist systems is very different from what you should do for the British one.
In Britain, as already physically identified by the Occupy movement, it is clear the key reforms should be made in the City of London. The fact that the Occupy movement does not have an agreed list of reforms should not be used as an excuse not to engage with it. I'm told there is an economics committee working on it and, more importantly, there are already many financial reform proposals floating around, often supported by very "establishment" figures like Adair Turner, the Financial Services Authority chairman, George Soros, the Open Society Foundations chairman, and Andy Haldane, the Bank of England's executive director for financial stability.

By labelling the Occupy movement "anti-capitalist", those who do not want reforms have been able to avoid the real debate. This has to stop. It is time we use the Occupy movement as the catalyst for a serious debate on alternative institutional arrangements that will make British (or for that matter, any other) capitalism better for the majority of people.