Sunday, June 24, 2012

Defending Pranab Mukherjee as Finance Minister….

As he plans to move to Rashtrapati Bhavan, Pranab Mukherjee is facing criticism that he performed poorly as FM. In his three years as Finance Minister, Pranab Mukherjee has seen good and bad times. While it is true that the economy has headed southwards in the last year, it grew smartly in his first two years. So how much of the criticism is fair?

Much of the reason for this debate is the performance of the economy in the last financial year. From 7.7% annual growth in GDP in the 1st quarter of FY12 (Apr-June 2011), the growth rate fell continuously every quarter to a disturbing 5.3% in the 4th quarter (Jan-Mar 2012). The 4th quarter growth numbers were the lowest in the last nine years. There is a general sense of gloom in the country and the worry is that the worst is yet to come. Lack of decision making, unimaginative tax policies, inability to carry allies along and a vindictive and personalized attack on select corporates seem to be building a case against Pranab. It almosts appears as if Pranab is running away from a sinking ship. But in an intelligent debate, how much criticism can be really piled up on Pranab’s doorsteps?

To start with, let’s look at the growth numbers during Pranab’s 3 years as FM (he took over in Feb 2009….the last quarter of FY09). In that quarter, the economy had grown at 6.3% - hit as it was by the Lehman crisis. Prior to this quarter, the growth had been very ordinary for at least two more quarters at 5.8% in Q4 and 6.1% in Q3 of FY08. So when Pranab took over as FM, the country had seen three poor quarters of between 5.8 – 6.3% growth rates.

Since he took over, the growth improved, partly no doubt because of a global revival. To his credit, Pranab was responsible for launching a liberal fiscal policy – raising government spending to revive the economy much the same way that other large economies were doing so. While India’s numbers were hardly comparable to the US’s ($2 trillion Quantitative Easing-1) and China’s stimulus ($750 billion +), they were substantial enough to lift the economy. Excise duties were cut to boost industrial activity. Dollar inflows were encouraged and the monetary policy was significantly eased. Not surprising then that the economy responded handsomely. It grew by 8.6%, 7.3% and 9.4% in the remaining three quarters of FY10. Pranab was delivering; the Indian economy was back to its dream 9% levels.

The good run continued in FY11, even though it tamped down a bit, again in response to a slowing global environment. The European crisis had already begun to impact global growth. Greece was already a bother. The Indian economy still managed to grow at 9.3%, 8.9%, 8.3% and 7.8% in FY11 – not a mean feat considering the slack global sentiment. Yes, the growth rates were reducing quarter after quarter, but what the heck – the absolute numbers were strong enough.

It’s only in FY12 that the GDP growth started sputtering, giving rise to the criticism againt Pranab. But how much of this is really attributable to him? In other words, would a different FM have managed better results? What is it that Pranab didn’t do well enough? These are questions that need to be analyzed before concluding whether Pranab messed up or not.

In this context, an article in The Economic Times on June 21st by Professor TT Ram Mohan of IIM Ahmedabad (S&P, India Inc Overdoing Gloom - By ignoring objective constraints on growth, many commentators are whipping up futile negativity) is worth reading. The point that the Professor makes is that while India’s growth rates have fallen, so also have those of China (less than 7%), Brazil (2-3%) and Russia (some 4% or so). He also makes the point that the balance of payments crisis has been vastly exaggerated. India’s external debt is a small part of its overall debt; even that has been falling as a % of GDP over the years. If one were to look at these numbers objectively, it is difficult to blame Pranab.

What about the other charges against Pranab? Let’s take one at a time:

There have been no reforms at all. The reforms in the Banking, Insurance and Pension sectors have been hanging fire for long. The GST has also missed its date several times. Ditto the DTC. But an honest assessment of this charge would indicate that the blame cannot be placed on Pranab’s doorsteps, nor in fact on the UPA’s. The fact is that the UPA has one recalcitrant ally – Mamata – and a strident opposition that often forgets its own principles and opposes for the sake of opposing. Critics often dare the government to take bold steps and stick its neck out and not worry about the consequences. But surely, this would be foolhardy. Sanity must prevail at all times. Sacrificing a government makes no sense at all. Early elections (or even elections in 2014) are hardly likely to throw up a stable and strong government. One needs to be practical. No government and no finance minister can be held responsible for this state of affairs.

The other charge against Pranab is that the inflation has been running haywire for more than two years now. The data is correct, but a closer observation will reveal that this inflation – unlike the usual ones – is in fact benign inflation. This inflation is not hurting the poor; in fact this inflation is a result of more money in the hands of the poor. The high inflation is arising from programs like NREGA and the rapidly rising MSPs (minimum support prices) for agricultural products. Indeed, this is a point of departure between the UPA and the NDA. The UPA’s core constituency is the rural poor, and so it keeps increasing MSPs every year. The NDA on the other hand hardly increased MSPs during its six year rule. The farmers are having it better under the UPA rule; the urban middle-class had it better during the NDA period. The urban middleclass also may complain today, but the fact is that their incomes have risen faster than inflation. The high inflation reflects the distribution of wealth taking place in the country. This is bound to hurt the more affluent sections – the more vocal ones – but the poor are in fact getting better.

What about fiscal deficit? Now the fiscal deficit is just an intermediate data point. The impact of the fiscal deficit is high inflation and consequently high interest rates. There is no doubt that Pranab Mukherjee should have done more on managing the fiscal deficit better. Cutting wasteful subsidies is a must. Increasing diesel and power prices would be a good starting point. But just look at how the opposition reacts to price increases of even petrol – the one fuel that doesn’t touch the bulk of the poor. There are protests organized even by parties that like the Congress are pro-poor (the Left, the TMC)….they should ideally be supporting petrol price increases (while demanding that diesel price not be increased). But politics has reached such a point that opposition to any move is a given. Pranab should have realized this and been bolder. In the long run, the only smart way to reduce subsidies is to direct them better. And in this, Nandan Nilekani’s UID program is going to play an important role. Give it a few years and the subsidies will come down.

Some facetious arguments have been used recently to dent Pranab’s record. One such is that the growth rate achieved during UPA-1 was because of the good work done by the NDA. This is rubbish. The NDA’s six years saw GDP growth go below the rate hit in the period before it came to power. The second such facetious argument is that the UPA-1 saw high growth rates because of global conditions. That liquidity was so high that foreign capital was bound to come to India. All developing countries grew rapidly in this period of time. This is indeed true; but then why should the slow-down not be attributed to global factors?

This is not to say that Pranab did everything correctly. I do feel that he could have done better. Given his astute political skills, he should have been able to work more closely with the opposition. He should have been able to push his party to rebuff Mamata. Pranab should also have managed the RBI better. Agreed the RBI is an independent authority, but surely there are enough formal and informal consultations that happen between the Ministry of Finance and the RBI. Had the RBI not increased interest rates so much, the GDP growth rate – especially the drop in industrial production – would not have been this steep. RBI has been irresponsible – read Surjit Bhalla’s articles in The Indian Express against the RBI’s actions. Pranab was perhaps also wrong in bringing in the retrospective tax. Many countries in the world have done the same thing, but given the timing, and given India’s need to access global capital, this move could have been avoided. Somehow, an impression was created that Pranab had been miffed by the SC order against his ministry; and this led him to take vindictive action.

The real truth is that Pranab Mukherjee also had his downsides. Who doesn’t? But it is true that he delivered high growth rates in two of his three years. This is the best anyone could be expected given the global conditions and given the political instability in the country. Overall, I think its unfair to blame Pranab…..

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