View: Instead of piecemeal announcements, GoI needs a mid- to long-term approach
Sitharaman now makes piecemeal announcements in response to bad news about the economy.
One of the puzzling things about PM Narendra Modi is that he has proved to be a master strategist on the domestic political and international relations fronts, but continues to make incremental tweaks on the economic front.
After reducing the government’s first annual budget speech into a largely political speech, Modi is now getting various ministers, led by finance minister Nirmala Sitharaman, to make piecemeal announcements week after week in response to some bad news or the other about the economy. This is particularly odd given that the PM has, in fact, set a medium-term goal of increasing the country’s national income to $5 trillion. Such ambition requires a medium-to long-term approach to economic policy.
A beleaguered Sitharaman tries with visible sincerity to give the impression that her weekly television appearance with yet another set of policy announcements follows a preplanned strategy of economic growth promotion. However, on each occasion the good news appears as if it is a response to some bad news.
Even if the government had been contemplating the ‘big bang’ tax and market-oriented economic liberalisation measures announced last Friday, they seemed to be a response to news about a steep increase in capital outflows, with outward remittance of foreign exchange increasing from $1.325 billion in 2014-15 to $13.787 in 2018-19. In April-July 2019, it was already $5.871 billion.
Most policy announcements made over the past three weeks by the finance minister have been welcomed as necessary steps in the right direction. Many of these ideas have been around for some time. The question remains, however, as to why none of these major measures formed a part of the July 2019 budget? The argument that the government had little time to prepare the July budget, after the elections of May, would be okay to satisfy loyal twitterati, but would not convince anyone who understands how policy is made.
Senior officials formulating policy in the ministry of finance and the Prime Minister’s Office (PMO) could easily have kept a strategy ready for the government while politicians were busy electioneering. Sitharaman is clever enough to have understood very quickly why she would be announcing policies already thought through. It does not take more than a couple of weeks to, in fact, draft a full budget speech once the policy measures and the fiscal numbers are in place.
By choosing to ignore the bad news about the economy at that time, and pretending that India was well on its way to becoming a $5 trillion economy, the government was fooling no one but itself. Denying an economic slowdown in the run-up to the Lok Sabha elections was perfectly understandable. No political party would want to be on the defensive in an election. Prime Minister Modi successfully diverted attention away from the economy to national security issues and won a handsome victory.
But as PM, he ought to have known that the economy needed urgent attention. And the July budget was the opportunity that should not have been bypassed.
Looking back over the past couple of months, one gets the impression that in July, this government’s economic policymakers were living in a world far removed from the one they have now entered. The only factor influencing policy that has changed in these three months, with more convincing data available on an economic slowdown, has been the attitude to deficit financing.
In July, the government made much of adhering to fiscal discipline responding to the pressure of opinion from financial institutions and analysts. The growing concern about growth slowdown has encouraged even a diehard fiscal conservative like former Reserve Bank of India (RBI) governor C Rangarajan, perhaps the wisest voice today on macro-economic policy, to give his imprimatur, in a recent column, to increase public spending, albeit in capital expenditure.
It remains to be seen whether the higher deficit will stimulate demand and new investment, or will get absorbed by badly run firms.
In arguing in favour of a more strategic approach to macro-economic policy, rather than piecemeal, knee-jerk tactical interventions, even if these are helpful, I am not making much of a muchness. Effective economic policymaking is not just about the content of policy as it is also about timing and articulation.
How investors and consumers respond to these policy initiatives will depend in part on whether they view them as hurried acts of desperation of an anxious government, or as the beginning of a new approach in the march towards the goal of a $5 trillion economy.
The writer is distinguished fellow, Institute for Defence Studies & Analysis (IDSA), New Delhi