Rebuilding the reform consensus

The Lost Decade by Puja Mehra | Courtesy:
India is among the world’s fastest growing economies. Yet, many economic challenges remain. Corporate investment and exports — twin engines that typically propel growth in most economies — are sputtering. The labour market is tepid. Jobs are scarce. Tax buoyancy has failed to materialise. Banks are undercapitalised. Increasingly, Non Banking Finance Companies (NBFCs) have started showing signs of stress. And the debt-fuelled consumption binge has come to an end.

How did we reach this “growth without story”? The question is both important and urgent. To paraphrase Nobel Laureate Paul Romer, once one starts thinking about these questions, it is difficult to think about anything else. Puja Mehra’s The Lost Decade chronicles the policy choices that provide a coherent explanation of some of these puzzles.

The first interesting thing about the book is its periodisation. There is a strong temptation to see economic outcomes solely through the lens of electoral politics.  The author admits that she was asked initially to write a book on the economic performance of the National Democratic Alliance (NDA) government, starting from the swearing-in of Narendra Modi in 2014. This temptation should be resisted. Given the institutional continuity in key ministries, economic cycle rarely coincides so neatly with the electoral cycle.

By taking a longer horizon like a decade as the unit of study, and by subdividing this decade into four sub-periods — which roughly coincide with the change of guard at the finance ministry — this book has captured the policy regime switches more cogently.

The periodisation pays off not only in explaining the growth dynamics, but also in the discussion of the policy-making process. A discussion of nearly every major policy decision in the last decade follows. Without being exhaustive, the list of topics discussed includes management of the global financial crisis and the taper tantrum, fiscal stimulus, food inflation, policy paralysis during United Progressive Alliance (UPA) regime, Goods and Services Tax (GST) and the inflation targeting monetary framework, twin balance sheet crisis and last but not the least, demonetisation.

In each case, the discussion is at once panoramic and detailed. Complex issues are elucidated. For example, the way issues surrounding GST are summarised is a treat to read. In any case, the book is a ready reckoner of sorts for students of contemporary economic history. 

1Development economists have an idea called path dependence. It explains how minor chance events end up having a disproportionately large impact on macro outcomes. For want of a nail, the kingdom is lost. Ms Mehra argues, convincingly in my view, that similar chance events — such as the bypass surgery of the then Prime Minister Manmohan Singh—had a large impact on the policy choices during the second UPA government. It affected the ongoing V-shaped economic recovery and ultimately proved to be the undoing of the UPA regime. This is a provocative and sharp hypothesis which future historians would like to revisit and debate.

Some observations go beyond the cut and dried world of economics textbooks. My favourite anecdote is about the erstwhile Planning Commission. When Prime Minister Narendra Modi decided to dismantle this relic of the planning era, he held a meeting with the chief ministers to discuss the role of the institution and the possible alternatives.

One would have assumed that much of the discussion would revolve around the relevance of planning in a liberalised economy. Chief ministers would discuss pros and cons of the institutions such as the Planning Commission and Finance Commission for distributing resources in a federal polity. No such luck. In reality, the most pressing complaint chief ministers made to the prime minister concerned the seating arrangement in Planning Commission meetings! Apparently, the seating arrangement had placed non-elected officials centre stage, which chief ministers, being elected representatives, thoroughly resented!

Ms Mehra notes: “When a big institution cracks, it doesn’t crack on its big failures. It cracks on bruised egos and status symbols.” An interesting, yet understudied insight. Perhaps the time is ripe for some behavioural economist to write a treatise on the role of such ego management devices in institution-building.

The Lost Decade tells a story that is riveting and worrisome in equal measures. It is well documented, analytical and interspersed with delightful nuggets. At the same time, the thrust of the book is that the economic reforms that steered the Indian economy towards the growth turnpike have run their course. As the author notes, “We need to rebuild the consensus for a steady stream of reforms.” Incrementalism is not sufficient and there is no time to lose.

One hopes this book not only generates debate about the issues it discusses but also leads to the ideation about future policies. Only then could a sequel to this book be written with a more hopeful title. Millions of young men and women entering the labour market each year deserve as much.

The reviewer is associate research fellow (economics) at Takshashila Institution. Views are personal.

The Lost Decade (2008-2018)
Puja Mehra
Penguin Random House, ₹599, 340 pages.

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