Bad, badder…


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IN the past three years, India’s political economy has regressed from bad to badder. Are we waiting for baddest?

In Seminar’s January 2012 issue (# 629), Jahangir Aziz and I had contributed a piece called ‘Annus Horribilis’ where we had written: ‘Two and a half years have passed and the UPA-2 government has largely disappointed on almost every policy front. Apart from some partial reform(s)… the government has had little to show for itself. What we see is a tragic potpourri of an honest but tired prime minister who is unable to lead his cabinet colleagues… of one nasty bit of corruption after another tumbling out of the woodwork; of reforms coming to a grinding halt in an atmosphere that is utterly devoid of positive, bipartisan law-making; and a pervasive sense of a government that, having lost its ability to govern and deliver, is just marking time.’

Chart A: India’s Real GDP Growth

Two years since, the jury will almost certainly deliver a more damning verdict. The economy has continued to slide, without Lehman Brothers and the global financial crisis as convenient whipping boys. Investments have come to a halt. Infrastructure is creaking. There is a perennial threat of inflation. Karl Marx, resting in London’s Highgate cemetery, will be finally delighted to see his dreams come true – where, for all intents and purpose, the central government seems to have withered away.


Let me start with some economics before moving on to wider issues. Chart A plots real GDP growth over the last 13 quarters, starting from April-June 2010.

It is a progressively distressing story. In April-June 2010, despite the global financial crisis, India had recovered smartly to deliver a growth of 9.3%. It wasn’t a flash in the pan, because the earlier quarter had seen a growth of 9.4%. By April-June 2011, growth had fallen to 7.5%, which in all fairness was still respectable given the global context. By April-June 2012, it had reduced to 5.4%. As if that was not enough, it fell further to 4.4% in April-June 2013. Even if one were to look at the slide from April-June 2011, the story is sad enough – a drop in the growth rate of 3.1 percentage points per annum in a space of two years and three months. To put it in context, this decline in growth has choked off opportunities for employment and has possibly prevented the nation from lifting a twelfth to tenth of its poor above the poverty line.

Table 1 gives the growth rates across different economic activities, and shows the deterioration in growth across almost all major sectors.


The slip has been particularly sharp in manufacturing with growth dropping by a huge 8.6 percentage points, from 7.4% in April-June 2011 to -1.2% in April-June 2013. Construction has also taken a big hit, from double-digits four years ago to 7% in April-June 2012 and then to 2.8% a year later. So, too, has trade, hotels, transport and communications – falling from 9.6% in April-June 2011 to 3.9% in April-June 2013.


Sector-wise Growth Over Nine Quarters

Rate of Growth (%)

Apr-Jun 2011

Jul-Sep 2011

Oct-Dec 2011c

Jan-Mar 2012

Apr-Jun 2012

Jul-Sep 2012

Oct-Dec 2012

Jan-Mar 2013

Apr-Jun 2013

Agriculture, Forestry and Fishing










Mining and Quarrying




















Electricity, Gas and Water Supply




















Trade, Hotels, Transport and Communications










Finance, Insurance, Real Estate and Business Services










Community, Social and Personal Services










GDP at factor cost










Note: Growth compared to same quarter of the previous year. Source: For this table and Chart A, Govt. of India (GOI), Central Statistical Organisation (CSO), National Account Statistics.

Shorn of sophistry, economic growth is a simple enough concept. It occurs when people – be they individuals, small businesses or corporations – succeed in producing and selling more goods and services than before. If they continue doing so at an increasing rate, period after period, growth rises. If the increase is less than earlier the growth rate falls, while remaining positive. And if they produce and sell less compared to before, growth turns negative.

Two factors facilitate growth. The first is the state of demand, which has much to do with the income of consumers and whether their view of the future is optimistic enough to encourage more spending than before. Some sectors in India have clearly witnessed lack of sufficient demand – the notable examples being housing and real estate with its knock-on effect on construction, tourism, hotels and transportation and manufacturing. The other factor is investment in creating capacities that can produce tomorrow’s output. This, too, depends upon what entrepreneurs expect of the future or John Maynard Keynes’ ‘animal spirits’, as well as the availability and cost of investable funds. On both these scores growth in India has taken a hit.


The share of investment – tracked by the ratio of gross fixed capital formation (GFCF) to GDP – has declined quite sharply. In April-June 2011 it stood at 35.7%. By April-June 2013 it had fallen to 32.6%. Not only has the ratio come down, but also the actual numbers: in real terms GFCF in April-June 2012 was 2.2% less than what it was a year earlier; and in April-June 2013 it fell by another 1.2%. Moreover, cost of funds have risen in account of higher long-term interest rates as well as the sharp depreciation of the rupee, which has made borrowing in foreign currency more expensive than before.

The fall in investments is more than just impersonal data culled from the Central Statistical Organization, the Annual Survey of Industries or the Planning Commission. It is very real. I serve on the boards of some large, listed manufacturing companies. Each has pulled back from earlier investment plans, and as I write, none has any significant investment proposal on the anvil. Similarly, banks and financial institutions have found all infrastructure exposure drying up. Indeed, many have gone sour and are being kept away from becoming non-performing loans by creative rollovers and restructuring.

This is a serious issue. Even if there is an uptick in demand in the near future, or if entrepreneurs feel less pessimistic than today, it will still take another eighteen to twenty-four months for investments to be approved, financed and for additional capacities to come to bear. In other words, except in sectors where there is sufficient excess capacity, one shouldn’t expect a quick rise in GDP growth. The fall in real investments over the last couple of years has made it a needlessly long haul.


Add to this dreadful potion the threat of inflation. Onions are hitting the headlines yet again. At present, a kilogram of onions is being sold at over Rs 100, or more. The Times of India reported that on 7 November 2013, the police arrested a 39-year-old man called Manoj Awale for stealing seven quintals of onions from the Navi Mumbai wholesale market. Recently released after eight years in prison on a murder charge, Awale considered onion heists safer and more lucrative. As the price of onions skyrocketed, he stole gunny bags of onions from the wholesale market and sold them directly to retail vendors on the service road.


It is more than just the price of onions. Prices of many primary products have risen sharply. In June 2013, the wholesale price index (WPI) of primary products was 8.8% higher than a year earlier. In July, this was up to 9.7%; then to 11.7% in August; and was at 13.5% in September 2013. The WPI inflation for fuel and power has been in double-digits for the last three months: 11.4% in July 2013; 11.3% in August; followed by 10.1% in September 2013. Thankfully, the WPI inflation for manufactures has remained muted, mostly on account in inadequate demand. Even so, the overall WPI inflation has started creeping up – from a reasonably acceptable 5.2% in June 2013 to the borderline case of 6.5% in September 2013, with chances of it going up further.

Chart B plots the WPI inflation data. It was close to zero when the UPA-2 government came into being. Not now, by a long shot. Expectedly, consumer price inflation is higher still at 9.8% for September 2013.

Chart B: Wholesale Price Inflation

If India had low growth with inflation at 5% or less, one could have rightly expected the Reserve Bank of India (RBI) to reduce interest rates and allow affordable bank credit to flow to the productive sectors of the economy. Not so in a situation of 9.8% consumer price inflation. Thus, the new governor Raghuram Rajan, the most academically accomplished leader of the RBI, has raised the repo rate twice, by 0.25% on each occasion, taking this reference rate to 7.75%. Those wishing to raise funds from banks have to pay a term lending rate of around 12% if they are highly credit worthy, and more like 15% for most others. In a backdrop of falling GDP growth, these rates are too high to justify investment risks.


As a central banker, Rajan has every right to be cautious. Although finance minister P. Chidambaram has repeatedly promised to maintain his fiscal deficit target of 4.8% of GDP, it will be a very difficult ask. Direct tax revenues are down. So, too, are excise duty collections. This shortfall is not being compensated by a rise in customs revenue on account of the rupee’s depreciation.

That’s not all. With crude oil price ruling at over US$ 100 per barrel and consequently higher price of naphtha, the fertilizer subsidy on account of urea has burgeoned to mammoth proportions. It is unlikely that this subsidy will be contained at the budget estimate of Rs 36,500 crore. Like his predecessor, Chidambaram has dealt with it in a way that it totally unfair to the fertilizer manufacturers – by delaying their payments for quarters on end, thus destroying their balance sheets to protect his budget.

But that’s not all. The recently promulgated National Food Security Act, 2013, will inevitably increase the food subsidy bill. Even if Chidambaram is adroitly tight-fisted on this count, his boss in the Indian National Congress will need to be gratified. Thus, it is fair to expect that the food subsidy bill in 2013-14 will exceed the targeted amount of Rs 90,000 crore by an additional Rs 15,000 crore or thereabout.


Chidambaram’s response has been, and will continue to be, cutting as much of plan expenditure as possible – since he can hardly be expected to reduce key non-plan items such as interest payment, subsidies, wages and salaries and the like. In part, it won’t matter much because a sizeable element of the so-called plan expenditure can be postponed to the next year without creating too many ripples on the growth rate. However, despite this obvious strategy of having his finance officers in most ministries not signing off on demand for funds, Chidambaram will be hard pressed to hold onto the fiscal deficit target of 4.8% of GDP. Even if he does so with several sleights of hand, his government will still be spending a huge amount in excess of what it is supposed to collect – Rs 542,499 crore, which is more than 60% of the net tax receipts that he expects the central government to garner.

Rajan knows this full well, and is rightly worried about what this large deficit overhang might do to inflation. This may be why we may continue to see RBI’s reluctance to easing interest rates in the next six to nine months.

To summarize, therefore, the economy is in a mess. Growth rates have steadily dropped over the last thirteen quarters. Investments have choked off. Facing more non-performing loans, banks and financial institutions are loath to lend to any except those with gilt-edged balance sheets. Both wholesale and consumer price inflation are on the rise. Although the current account deficit has reduced in the course of the year, it remains worryingly high. And an anxious RBI has reacted by raising interest rates. It can’t get much worse.

This is not to claim that growth will not pick up. It may, but in a sclerotic manner. The levers that can generate a sustained uptick are no longer there, as they were in May 2009 when the UPA led by the Congress had sizeably increased its seats in the Lok Sabha – when the world was awaiting the next phase of growth and reforms. In four years, the UPA-2 government has comprehensively and embarrassingly lost the plot.


Democratic nations based upon Anglo-Saxon constitutional principles prescribe well defined separation of powers between the legislature, the executive and the judiciary. Almost always, it is difficult not to cross the line because all three arms of the state are usually powerful enough to expand their spheres of influence, with none liking the stop signs imposed upon it by the others. Nevertheless, no truly democratic nation state in the modern world has permitted any one of the three arms to fundamentally encroach upon the affairs of the other two. There have been enough checks and balances to prevent this.

Unfortunately, this structure of separation has been dangerously eroded in India. Starting with the last couple of years of UPA-1 and through the tenure of UPA-2, the executive has been shown up in very poor light. Some of the worst forms of corruption and rent seeking have come to the fore as politicians-qua-ministers consciously approved incorrect procedures to benefit from the allocation of lucrative natural resources such as telecom spectrum and mining rights. This has occurred in an environment where many of the elected legislators have been objects of public ridicule – inept, absent at work, and narrowly partisan to have engaged in mass walkouts, thus rendering useless the task of law-making in successive sessions of the Lok Sabha. Repeated failures of the executive and legislature have helped create a dangerous caricature in the public mind: that in matters small or big, the judiciary remains unsoiled and is the ultimate saviour of the state.


In response, the judiciary has also shifted gear, and is now often seen as the super-overseer of, and direction-giver to, the executive. Consider three examples. First, the way in which the courts have directed executive action relating to the reallocation of telecom spectrum after the Supreme Court judgement of 2 February 2012 cancelled 122 unified access service licenses granted under the tenure of A. Raja. Second, the manner in which the Supreme Court has continued to review the details of executive actions and give directions after banning iron ore mining in Karnataka in 2011. And third, the way in which the Central Bureau of Investigation (CBI), an executive agency, has been made a servant of the Supreme Court in matters relating to the allocation of coal mines.

I am not opposing the case for judicial oversight when needed. Nevertheless, caution is called for – especially when people believe that the only spotless authority, the judiciary, must like Hercules clean the Augean stables of an enormous quantity of dung. However tempting and well-intentioned, regular doses of Herculean heroism breaks the premise of separation of powers, and invariably portends ill for the future of a healthy state.

Let us introspect a bit on what such interventions are doing to the civil service upon which the government’s administration rests. As an example, it is worth considering the first information reports (FIRs) filed by the CBI regarding coal block allocations, many under directions from the Supreme Court. Of these, the fourteenth FIR has caused an uproar for explicitly suggesting that Kumar Mangalam Birla of the Aditya Birla Group and chairman of Hindalco, and an ex-coal secretary, P.C. Parakh, have colluded to garner a coal block called Talabira II in Odisha that was originally allocated to two public sector enterprises.

Known to be an efficient and honest administrator, Parakh has made a strong defence. In an interview in Business Standard, he said, ‘Birla made a representation. I made a recommendation. The prime minister [as minister of coal and mines] examined it and took a decision.’ The prime minister, too, has been uncharacteristically strong and clear in defending his executive actions. Leave Birla and Parakh aside to consider how such judicial overreach is causing the death of executive decision-making.


It is an economic reality that three critical resources will determine India’s pace of growth over the next three to four decades. These involve access to land to create infrastructure and build factories; to mining to tap into the country’s huge mineral and hydrocarbon resources; and to spectrum for telecoms as well as rights to fly passengers and cargo. According to different estimates, using these resources can raise GDP growth by something like 1.5 percentage point per year.

These are in the domain of the state, and getting permission depend upon the decision-making remit of India’s civil service. In today’s investigative environment, no senior bureaucrat in key ministries is ready to take any decision worth the name. At the best of times, the civil service was not sufficiently rewarded for expeditiously taking the right decisions. Today, it faces inquisition. Since nobody has got sacked for elongating the life of a file, even the best administrators have opted for safety over duty to the nation. At best, they let the file meander. At worst, they insert a noting that can kill an important project but saves their skin as they approach retirement. For all intents and purpose, work has stopped in the economic ministries – much of it as unintended consequences of judicial and investigative overreach.

The judiciary is not the only cause of dysfunction. Often enough, lawmakers have exhibited disgraceful self-seeking actions. Consider the latest: an ordinance to protect convicted legislators that was ratified by the Union cabinet and sent to the President for his approval. It was no different from the Representation of the People (Second Amendment) Bill, 2013, which the government introduced in the Rajya Sabha during the monsoon session of Parliament, but couldn’t get passed. The hurry to go the ordinance route was the imminent fodder scam conviction of an ally, Lalu Prasad, and of Rasheed Masood, a Congress MP from UP convicted for cheating, criminal conspiracy and forgery.

Section 8 of the Representation of the People Act, 1951 relates to disqualification on conviction for a large list of offences. In 1989, our lawmakers introduced sub-section (4) of section 8, which grants relief to sitting MPs or MLAs. It states that such notables will not be disqualified until three months of the date of conviction or, if they have appealed, until such an appeal has been disposed of by the court. No such provision exists for other citizens of the land. For over two decades this sub-section saved the skin of our legislators. Then, on 10 July 2013, in a public interest litigation, the Supreme Court struck it down stating that Parliament had no power to enact it and that it was ultra vires of the Constitution.

Immediately, the government introduced an amendment bill in the Rajya Sabha to countermand the Supreme Court order. It stated that no disqualification of an MP or an MLA shall take effect if an appeal is filed within 90 days of the date of conviction and/or if such a conviction is stayed by a higher court. Moreover, in the interval, a convicted MP or MLA may continue to participate in the Parliament or legislative assembly, without drawing salary, allowances or voting. The bill didn’t go through. Then came the proposal through ordinance. If the President had assented, Lalu and Masood would have been still sitting in the Lok Sabha. Thankfully, he did not and Rahul Gandhi publicly abused it as ‘complete nonsense and that it should be torn up and thrown away.’ Being the crown prince helped. The executive retracted. And our pusillanimous prime minister was back to his virtuous best. Such are some of the many examples of a sclerotic state, made worse by the non-performance of legislators and the UPA-2 government.


Who next? My guess is that a vast cross-section of those who have voted before and the mass of first-timers want a change of leadership at the Centre. They are fed up of corruption and executive inaction and can clearly see the political and economic slide over the last four years. Rahul Gandhi may be an earnest young man who means well and wishes to woo voters with his dimples, stubble and disarming smile, let aside his comments on astronomy and gravitational pull. But nobody that one speaks to, including the seemingly knowledgeable, believes that he and his party have a hope in hell of getting remotely close to winning the 206 seats captured in 2009. Though these are early days, most poll pundits believe that the Indian National Congress will be hard-pressed to win 145 seats – its tally in 2004. The bets are on 120 to 130 seats.

If this turns out to be correct, I would be surprised if the Congress lays stake to forming a UPA-3 government. The coalition will be incredibly difficult to cobble. With the tail wagging the dog, it will be even more challenging to lead and sustain such a government. Sane politics would suggest that the Congress occupy the opposition benches while crafting a comeback.


What about the BJP whose Lok Sabha campaign is being led by its prime ministerial candidate, Narendra Modi, the new ‘iron man’ of the party? Winning handsomely in Gujarat, Rajasthan, Madhya Pradesh, Chhattisgarh and Jharkhand will take the tally to a tad less than 100 seats. To lift that to something around 170 to 180 will depend upon how well it does in Bihar, UP and Karnataka; how it can leverage the non-Telengana seats in Andhra Pradesh to an alliance of its advantage; and how well its allies do in Punjab and Maharashtra. As always, with 80 Lok Sabha seats in the kitty, UP holds the key. The BJP won 10 in 2009. Can it win 25 in 2014? Similarly, it won 12 seats from Bihar in 2004. Can it significantly cut into Nitish Kumar’s base and win another 12? Can it win at least four seats in Delhi versus none in 2009? It is too difficult to make a call at the end of 2013.

If the BJP were to win 170 to 180-odd seats, it will have an excellent chance to find many willing post-poll allies and form a coalition government. That raises a fundamental question: Does Modi have it in him to lead such a coalition? Atal Bihari Vajpayee certainly did, with wit, patience, collective understanding and panache. Does Modi have such a style of leadership? The Gujarat experience suggests otherwise. For the moment, forget about his RSS links, or his turning a Nelson’s eye to the post-Godhra killings in 2002. Ask a simple question: Is Modi in a mould of a supreme commander or a collegiate leader? The first can lead a state but not a country like India. The second is not easy to accomplish – especially when every bit of the persona is exactly the opposite.

Keep aside the negative views about Modi, which are probably shared in their entirety by most if not all the readers of this magazine. The limited but important question is whether he can manage a coalition of various states and political interests over a period of five years in a mature and non-hectoring manner, while getting the country back to a higher and more widespread growth. An erudite and politically shrewd person associated with the BJP had something very interesting to say. According to him, Modi is most comfortable leading a presidential form of government; first among equals is not his cup of tea.

So, Modi may well win. What then? Can he lead? With wisdom and a smile, like another swayamsevak called Vajpayee? The jury hasn’t even been assembled for this one.


Finally, back to the title. ‘Bad, badder...’ suggests ‘baddest’. That doesn’t have to do with the economy. However difficult today’s situation, India can get back to 6% growth over the next five years without breaking into a sweat. Instead, it relates to two horrible post-election scenarios. The first is where the Congress, with 150 seats or less, still forms government, bringing to bear an unholy coalition of power grabbers. The other, though remote, is the so-called Third Front. Holy Mother of God, save us from those two. This nation and its people have done no wrong to you.