By now, most of us know what went wrong with the Indian economy. In 1991, Narasimha Rao and Manmohan Singh abolished the licence-quota-permit raj and ‘unleashed the entrepreneurial genius of Indian people’ (you can insert an alternative cliché at this point, should you wish to). The economy grew, we became rich, and all went well till about four years ago. That was when the UPA fell victim to ‘policy paralysis’ (no, this cliché will have to stay) and destroyed the Indian economy. So we became poor (or not so rich) again and it was all because of the scams and the ridiculous welfare schemes that idiotic bodies like the National Advisory Council foisted on us. Now, fortunately, ‘business-friendly’ (here you can choose your own phrase) Narendra Modi is here. And soon we will be rich again.
The best thing about Restart, Mihir Sharma’s new book on the Indian economy, is that it rips that narrative apart. It was never that simple, Sharma says. And it is going to be even harder to get out of the mess India is in unless we rethink our policies and attitudes. (The book is subtitled "The Last Chance For The Indian Economy".)
In Sharma’s compelling and convincing retelling, the 1991 reforms were never the great success we believe they were. His thesis is complicated but, at the risk of oversimplifying or caricaturing it, this is roughly what he says: the 1991 reforms were incomplete because the "Prime Minister who launched the reforms never had an overarching idea of what he intended to do, or where he intended to go. He just wanted to address a temporary problem, fight a blazing fire". (India was effectively bankrupt.) "When the fire was out, he stopped caring."
So, says Sharma, India devalued the rupee, liberalised imports and made it easier to set up a factory or a business. But the devaluation had the effect of driving manufacturers who needed imports out of business without significantly increasing manufacturing exports. And when people did set up new companies, they were hit by high land costs, poor infrastructure, and ancient labour laws. In the process, the reforms resulted in "the destruction of the existing Indian manufacturing structure and a failure to build a new one". And while farming in India is rarely profitable, the government created an artificial profitability though high procurement prices and subsidised fertilisers.
Then finance minister Manmohan Singh as he leaves for parliament with the budget on 24 July 1991 (SN Sinha /HT Photo)
So why then did we think of ourselves as global successes? Well, because of three sectors: finance, telecom and IT. But these were sectors that developed "around the government’s inaction". As Pramod Mahajan said at the start of the century, Indians won "in IT and beauty contests, the two areas that the government has stayed out of ".
Where did Manmohan Singh and UPA II go wrong? It wasn’t because of welfare spending. Most of that happened in UPA I, and the economy performed well then. Besides if you look at the big numbers, then you get some context. The NREGA scheme got a budget allocation of Rs 33,000 crores in the budget for 2013-14. That sounds like a lot till Sharma points out that it was just six per cent of the fiscal deficit for that year. "You might object to it for perfectly valid reasons," he says. "But you can’t blame it for emptying the treasury."
So what was the problem? Well, basically, growth slowed because the private sector stopped investing. In 2008, investment was 34 per cent of GDP. But by 2011-12, it dropped sharply to 30%. Nobody was willing to invest in "an environment that had become poisonous". In UPA I, the total value of investment projects announced each year was between 10 to 14% of GDP. By 2013, in UPA II, it had dropped to 1%. That’s right. One per cent!
The private sector stopped investing because the much-vaunted private-public partnerships failed to take off. Projects got stalled. The promised infrastructure was never delivered. Political agitations stalled implementation. The environment ministry used its veto powers arbitrarily. (Jairam Ramesh comes off as a Moriarty figure in the book.)
The problem wasn’t policy paralysis. It was a paralysis of execution.
So how do we get out of this mess? You’ll have to read the book to find out but the prescriptions follow from the diagnosis. Sharma wants us to start to reform all over again and to look for solutions that change attitudes not just interest rates. In particular, the existing structure of state-supported Indian industry, with its cozy ties to regimes and friendly nationalised banks, must be reformed. Sharma gives examples and though the most attention will be paid to the chapters on the Ambani brothers and to his evisceration of Vijay Mallya ("Mallya declared his business ‘recession-proof ’. True. But not Mallya-proof "), there are also some startling takedowns of the Jindals, Ranbaxy, and the IPL.
The hatchet jobs are so devastating (Vinod Rai "represents India in Long-Distance Headline-Hunting at the Olympics") that they may divert attention from the serious intent of this book. And I fear that because Sharma writes so easily and so well, making complex concepts sound simple, some Indians will not give this book the attention it deserves. We expect our economists to be well-meaning but boring. Sharma is wicked but thoughtful — and never boring.
If you do care about the mess we are in and want to go beyond the clichés, then this is the book for you.