India's worst economic crisis since 1991, combined with Modi's 'illiberal' polity: FT

Rahul Bajaj

In a sharply-worded commentary titled “India is facing twin economic and political crises”, the top British daily “Financial Times” has noted that while India’s growth slowdown has been dramatic, its politics is taking “an aggressively illiberal turn”. The author, Martin Wolf, chief economics commentator, who was in India last week, says, powerful people in the industry agreed with this state of affairs “if only privately”, because of the prevailing atmosphere of fear.

Writing in the world’s one of the most influential financial papers, Wolf notes, compared to the 1970s, when the author visited India for the first time, India was “impressively democratic – with the exception of the period known as the Emergency imposed by then prime minister Indira Gandhi between 1975 and 1977”, even though “its economy grew too slowly.”
Pointing out that following the “balance of payments crisis of 1991, India introduced radical reforms”, which led the economy, over the next two decades, becoming “faster-growing”, even as the political system remaining “robustly democratic”, Wolf notes, currently not only has growth “slowed”, “India’s politics is also now moving towards an aggressively illiberal form of majoritarianism.” 

Quoting a paper by co-authoried by Arvind Subramanian, India’s former chief economic adviser, Wolf says, while his conclusion was that the overestimate of growth between 2011 and 2016 “averaged about 2.5 percentage points annually, which would lower average growth to somewhere around 4.5 per cent”, things have turned “worse.”

According to him, “The economy has been slowing even more dramatically in the recent past, even on the official statistics. These show that growth of gross domestic product slowed to just 4.5 per cent, year on year, in the third quarter of last year. Growth may now turn around. But the slowdown has been dramatic, comparable even to what happened in the crisis of the early 1990s.”
Giving reasons, Wolf says, “First, unsustainable expansion of exports and credit-fuelled domestic investment exaggerated India’s pre-crisis growth rate. Second, despite the post-crisis emergence of severe balance-sheet-problems in financial and non-financial corporate sectors, government spending, falling oil prices and buoyant lending from non-bank financial companies sustained growth. 

“Finally”, states Wolf, “Credit from these last institutions collapsed in 2019. Consumption then joined other sources of demand – notably investment and exports – in weakening sharply.”
The commentator regrets, “The government’s response seems to be to deny the evidence of a slowdown”, adding, “A discussion at the ministry of finance last week suggested that the reaction is the sort of managerialism” -- which include steps like “protectionism, higher government investment, lending targets for banks and direct assistance to exports.”

Pointing out that “it is impossible to believe such actions will resolve the deep weaknesses behind recent growth failures”, Wolf says, “Good economic policy is hard. As the Indian economy becomes more complex and advanced it has become even harder. It requires reliable data, world-class expertise, independent advice and open debate.”  

“Instead”, he underlines, “The best advisers have mostly gone and policymaking has, by all account, been concentrated within the prime minister’s office. Everybody else is expected to show loyalty, above all. Rahul Bajaj, a well-known Indian businessman, has even accused the government of ‘creating an environment of fear’.”

Insisting that “India’s future that growth” should be “raised back above 7 per cent”, and this growth should be “be both employment-generating and environmentally friendly”, Wolf believes, “This is a huge challenge. It will demand cleaning up the bad debt, raising savings and investment, improving international competitiveness, in a more difficult external environment, and bringing about reforms in agriculture, education, energy and a host of other important areas.”
Noting that the current government has “the mandate it needs to revitalise the economy and so opportunities for better lives for all”, and the mandate is “also due to Prime Minister Narendra Modi’s indubitable political talents”, Wolf laments, “But knowing how to use such a mandate is no less vital than being able to win it.”
According to him, “One alternative to the hard road of making good economic policy is making dramatic gestures, such as demonetisation, or botched reforms, such as the introduction of a far-too-complex goods and services tax.” 

World says, the Modi government is, instead, providing an “easier alternative” by relying on identity politics”,adding, “That seems to be the current choice. The crackdown in Kashmir, the explicit discrimination against Muslims in the new Citizenship Amendment Act, the proposed national register of citizens, in a country with notoriously bad documentation, and the apparent intention to deport Muslims who cannot prove their right to stay, do together suggest a transformation of the Indian polity.”
He continues, “So, too, is the free use of labels like ‘traitor’ for those who disagree and ‘sedition’ about those who protest. It is quite clear, surely, that the transformation of India into another ‘illiberal democracy’ is long-intended”, adding, “Little wonder US president Donald Trump admires Modi. They play the same game, but Modi’s majority gives him more cards.”