Book review: ‘The Lost Decade’ decodes how India’s growth story fizzled out

Representative Image

The Lost Decade (2008-2018): How India’s Growth Story Devolved into Growth Without a Storyby Puja Mehra
Rs 599
Hardcover
Penguin India

One can say there are at least three kinds of writers who specialise in analysing financial policies. The first kind critiques whatever policy is in effect.

One kind makes excuses for the flawed decisions of whoever is in power, notwithstanding the contrary indications and facts staring them in the face. This is the kind of writer who said of demonetisation, “Oh, we have to judge DeMo by the intentions behind it, not by its effects.” At which one might as well repeat the old saying, “The road to hell is paved with good intentions.”

The third kind of writer is more interested in impartiality. This kind is a precious, if also rare species, being in one stroke economic historian, truth-teller to financial powers and good old-fashioned muckraker who seeks to disinfect the corridors at Raisina Hill. Among this kind is the senior journalist Puja Mehra. Mehra has a master’s degree in economics from the Delhi School of Economics, has served as the Economic Editor of The Hindu, and has a two-fer of Ramnath Goenka Excellence in Journalism Awards on her shelf. She has been in journalism for over 17 years, according to her bio on her publisher’s website.

Mehra, in December 2019, brought out her excellent book titled The Lost Decade (2008-2018): How India’s Growth Story Devolved into Growth Without a Story. If you read one book on financial and economic matters all year, let it be this book. For the general viewer, this book is often a tough read on account of its financial jargon; thankfully, it also contains explanations for many of its technical terms. You would do well to persist with it. It offers a brisk education on current liberal economic thought for the interested observer. For those interested in good governance it dissects the knee-jerk disaster that is the current dispensation. For the would-be policymaker it lays bare the temptation of and problems with ditching sound economic policy in favour of populist measures. It gives you, the voter, insights into the difference between sound policy-making and a focus on optics. For everyone in general, it compellingly answers the question, “Why did the India Growth Story become so tragic?” and also has suggestions for bringing at least some of the shine back.

Before the ‘lost decade’, there were the relatively good times. The writer says that before 2008, the Indian economy was growing at 8.8 percent and above each year and per capita income was growing at 7.4 percent each year. Several markers of economic well-being were floating upwards, from protein intake in poor families to lifestyles of city dwellers, hiring by industries and salary increments, “demand and wages for construction labourers”, travel by air instead of rail, and purchases of new houses by young people, among several others – a phenomenon known as the ‘India Growth Story’. India was nearing what economists call a ‘take-off’, which means a period of “rapid and self-sustained GDP growth”. Of course, as we know, it was not to be. The global financial crisis of 2008 inaugurated the ten-year period that saw the Indian economy flounder drastically, and the effects of which persist to this day. It is this ten-year period from 2008-18 that forms the time-frame for The Lost Decade.

Global financial crisis and RBI's remedial measures

The book shows how the global financial crisis of 2008 spurred the Reserve Bank of India to take immediate remedial steps to protect the Indian economy from any cardiac events. First, the RBI reduced the repo rate by one percentage point, meaning banks could borrow from it more cheaply. Second, the RBI tried to attract foreign investments to India by raising the interest rate at which non-resident Indians could avail currency deposits in Indian banks; also, by relaxing to a large extent the norms under which Indian companies could borrow money from abroad; and other measures. In addition, the Indian government took steps in order to contain the impact of the global financial crisis on the Indian economy – giving farm loan waivers and boosting outlay on the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) so as to inject purchasing power into the economy, temporarily reducing direct taxes, spending an additional Rs 20,000 crore on infrastructure development, and paying arrears to government employees under the Sixth Pay Commission. All this worked to a large extent, says the book. The economy began to grow satisfactorily again. Then the recovery was bungled, and the ‘lost decade’ took place. It’s a good setup for the rest of the book.

The ‘lost decade’ had its inception in one decision, the writer says, when “in all likelihood” it was UPA Chairperson Sonia Gandhi who nominated Pranab Mukherjee to the post of finance minister. The writer says, “Mukherjee... seemed to swear by the socialist-era ideology that had long been retired. His approach and instinct were still defined by an abiding faith in the jaded dirigisme doctrine,” (where ‘dirigisme’ means ‘state control of economic and social matters according to the New Oxford American Dictionary).  The writer says, “... missteps followed with Mukherjee at the helm.” The result, she says, was that “The recovery, not nurtured, proved to be short-lived...”

Mukherjee ignored the opinions of economists in favour of political considerations, the writer says. He launched a third stimulus package. This “overheated the economy and stoked inflation” when the supply side of the economy could not meet demand; inflation then infected wages, and then the rest of the economy. Yet Mukherjee did not implement supply-side reforms, such as “... reduced wastage of farm produce and steps for increasing output of proteins...” which would have mitigated the rise of prices by increasing supply of farm produce. Without such measures, prices continued to rise. Rising prices added to the unpopularity of the UPA government among the voters, and must have led to its downfall. Meanwhile, the fiscal deficit too had swelled. Mukherjee had held back on economic reforms, such as “liberalization of foreign investment norms in sectors like multi-brand retail, insurance and pension”. Further, the spate of allegations of scams against UPA-II, such as the 2G spectrum allocation scam, created a “policy paralysis” when “files stopped moving and bureaucrats stopped acting” and led to stalling of even legitimate projects, which in turn contributed to the economic slowdown. Given the technical nature of most of these topics, that all this is detailed in reasonably accessible language is definitely to the writer’s credit.

The writer says that the seeds of the non-performing assets (NPA) crisis were sowed during Mukherjee’s tenure as Finance Minister; the writer provides a brief case study of Vijay Mallya’s Kingfisher Airlines, which received huge loans from banks – allegedly because of political pressure. The writer doesn’t tell us who applied the pressure, and we have to read between the lines.

The writer takes us into the corridors at Raisina Hill, making us privy to Mukherjee’s working style, his alleged machinations to consolidate his dominance of his ministry, and the breakdown of communications between him and his Prime Minister, which according to the writer was caused largely because of Mukherjee.

The book has by this point identified for us its notion of the ‘good guy’, namely Manmohan Singh, whose stimulus packages are characterised as timely and welcome; and the ‘bad guy’, that is, Mukherjee, whose actions guided by his dirigiste mindset are said to have caused a mess. Is Manmohan Singh as obviously a hero as the writer makes him out to be? What about the things that Singh got wrong? To try and answer the question, one need only turn to economist Amartya Sen. As Sen told India Today when being interviewed on the subject of Singh’s performance as Prime Minister, “...the country was much more concerned with kerosene prices and fertiliser subsidy and getting cheaper electricity rather than getting food to the hungry and getting healthcare fixed. And even when they started doing the expansion of education, there wasn't sufficient interest about the quality of education that was being offered.” While Mehra’s assessment of Mukherjee may be accurate, her portrayal of Singh is too devoid of greys for my liking. These greys might have lent more nuance to this book and brought out the poignancy of the book’s name even more.

Immune to good counsel

Mukherjee was said to have been immune to good counsel. This is a fine point raised through subtext. The reader infers that politicians, even in a democracy, cannot necessarily tell good advice from bad, and do not always know when their information or mindset is outdated. That despite these flaws they remain in circulation is alarming; likely, because they have political currency or because of interpersonal equations with their political masters. The writer hints that because Mukherjee was on good terms with UPA Chairperson Sonia Gandhi, he could land the post of Finance Minister, despite his obsolete mindset. It’s a devastating detail when seen in the context of Mukherjee’s subsequent decisions, and thus creates outrage in the reader. Is this how the country should be run?

We are then shown, in good detail, the attempts made by Mukherjee’s successor, P Chidambaram, and the RBI governors including Raghuram Rajan, to bring down inflation and dampen the economic slowdown. At this point the book dwells on the financial policy prevalent at the time, and goes into detail, also paying due attention to the Urjit Patel report on monetary policy reform.

It becomes clear, however, that if the UPA II (with Mukherjee as Finance Minister) was determined to dangle from a noose of its own making, the then-opposition helped tighten the knot. The writer also identifies the Bharatiya Janata Party as the chief opponent to the rollout of the Goods and Services Tax in the UPA II regime. The writer says, “The BJP, keen to make him [Manmohan Singh] and the UPA government seem ineffective, was in no mood to facilitate passage of the bill and let them walk away with further credit.” As a result, the GST proposal could not move towards enactment. Not so surprisingly, when the BJP came to power it promptly brought in GST.

According to the writer, however, ignoring advice from economists was no monopoly of the UPA. Its successor, the BJP-led NDA government with Narendra Modi at the helm, has been equally phobic to advice. “The resistance to qualified economists [assumed] unprecedented shrillness and toxicity in Modi’s tenure, when nearly every technocrat and IAS officer holding a PhD in the subject [decamped] from the finance ministry.” Indeed, in the current regime, critical advice seems to be missing entirely from the corridors of power, which has caused “decisions that have inflicted economic distress on the nation – demonetisation, defence purchases, the introduction of electoral bonds... and the handling of NPAs, where profits are privatized but losses socialized.” The book thoroughly critiques the Modi government’s mishandling of the Indian economy, laying the blame with the Prime Minister’s office. Modi’s hunger for publicity, impatience with economic theory and preference for flashy but dubious decisions is depicted without pulling punches. It is most welcome that the writer calls out the BJP, and that she does so even now when the mainstream media hesitates to rub this powerful party in the wrong way.

Perils of demonitisation

As you might have expected, whole sections of the book are devoted to demonetisation. The writer in clinical and spare prose depicts the harrowing hardships faced by the poor and middle-class citizens who were suddenly confronted with the invalidation of large chunks of their hard-earned cash, banknote shortages at ATMs, humiliation by standing in queues, confusion caused by frequent changes in rules related to demonetisation, and in some cases even death while standing in queues. Moving on, the writer critiques the government for its confusion as regards the need for demonetisation, as well as the shroud of secrecy that the government draped overall statistics of demonetisation, clearly because the exercise had failed to curb the problem of black money. The writer says, “... the various written submissions from the RBI, when pieced together, suggest that the demonetisation exercise was carried out in haste and without adequate application of mind, and possibly without a plan. It could well have been on a whim.” There’s no mincing words here, thankfully, but most welcome plainspeak. The writer goes beyond verbal condemnation, however. She quotes an anonymous source of hers, who tells her that the RBI board had failed as an institution – that the board had given its assent to demonetisation. The writer also raises the question why the then-RBI governor Urjit Patel, who was no pushover or yes-man, maintained a mysterious silence over demonetisation. Patel’s predecessor, Raghuram Rajan, had in 2016 prepared a note critiquing demonetisation and pointed out more effective means to tackle the problem of black money. The writer emphasises that the government preferred not to act on Rajan’s advice and instead went ahead with the disastrous exercise of DeMo. Why? asks the writer, and by way of answer points to political, not economic, reasons. Just before DeMo, the BJP had lost the Delhi assembly polls badly to the Aam Aadmi Party. It went on to lose Bihar, too. Further, it lost Tamil Nadu, Puducherry, Kerala, and West Bengal. Moreover, Rahul Gandhi had begun calling the Modi government the ‘Suit boot ki sarkar’ because of the government’s intention to let industrialists buy farmers’ land without consent – and the epithet had become popular. DeMo was a political exercise, the writer says, to remake Modi’s image as pro-poor.

GST implementation

Another section in the book assesses the Goods and Services Tax as implemented by the Modi government, and concludes that the implementation was deeply muffed. The architecture of the GST as introduced by Modi’s government turned out to be in no way the ‘One Nation One Tax’ that had widespread support across party lines. In fact, a number of products and “nearly 83” categories of services were omitted from the taxable list. The tax rates were different for different products, and in many cases came with additional cesses. Further, the writer says, “More than sound economic, or political, logic, the GST seemed driven by the deciding authorities’ discretion. The GST rate for gold, a luxury good, was set lower than that for matchboxes... [and] was the same on environment-friendly hybrid vehicles and fossil-fuel-guzzling SUVs.” Moreover, the GST collection and refunds system was ungainly and inefficient, leading to exponential increases in paperwork filed by assessees. The too-high GST rates in some categories also led to diminished collection. Worse, as even the BJP admitted, the GST regime as designed by the government had led to the shuttering of numerous small-scale companies that could not cope with complex GST filings. Finally the government began to use the GST for populistic purposes, and in one instance reduced the GST rate on Gujarati snacks just before the assembly polls in that state. The writer analyses in considerable detail the excessive complexity of the GST, through quotes from eminent financial experts, including economist Vijay Kelkar, who had laid down the original guidelines for GST. The writer says that the state governments, which had a say in the formulation of GST, made GST mimic the complexity of the existing tax regime out of a desire to preserve the magnitude of their revenue collection. Many of these states were controlled by the BJP.

Farmers’ protests, which rose in number during the tenure of the Modi government, also receive due attention. The writer says the protests were sparked because agriculture was no longer viable as an occupation thanks partly to Modi’s policies. A variety of these policies – from demonetization, to muffed drought relief, muffed minimum support price procurement, discouragement of agricultural exports, and a baffling encouragement of agricultural imports – are mentioned in depth. We are told that all these, and more, led to a deepening of the agricultural crisis. This section like any other in the book, comes with impressive detail and analysis.

In summing up, the writer condemns both the UPA-II and Modi-led governments for failing to make the economy grow – but it is her critique of the economic policies (or lack thereof) of Narendra Modi’s government that make this book an indispensable read. We will need such forthright telling of truth if the country is to be brought out of its economic doldrums.

Suhit Kelkar is a freelance Journalist. He is the author of the poetry chapbook named The Centaur Chronicles.