Time magazine calls Manmohan Singh a 'loser' - well not quite, only 'underachiever'

As soon as I read the headline that said that the Time magazine has called Manmohan Singh an under-achiever, I suspected it was in line with the many events recently that seem to be attempting to influence the discourse on the direction of the Indian economy. One of the significant and visible events, recently, was the downgrading of the outlook of the Indian economy by S&P and Fitch. (And interestingly, not by Moody's [1]. They seem to have not got the memo.) Moody's spokesperson said that the slowdown in Indian economy was unlikely to be a permanent feature, that there was nothing very much unexpected about most of the recent adverse developments, and that the ratings already took into account the fact that any reforms would be slow to come by, given the nature of the Indian coalition government, and so there was no significant development specific to the Indian economy in a recession inflicted global economy, to warrant a threat of relegation of India to junk status. And the fact that India was still the second fastest growing economy globally. These were almost precisely my thoughts after S&P's downgrade announcement. And yes, that is in spite of the fact that the Indian economy took a hit in terms of rapid slowdown of the manufacturing sector, weakening of rupee and increased current account deficit. Many European economies doing much worse and on the brink of recession, had got better investment ratings. Many commentators in the Indian corporate sector voiced similar sentiments. The markets (sensex) also more or less ignored these signals by S&P and Fitch. 


The downgrade itself wasn't so interesting (and troubling). It was the explanation that was quite instructive. Apart from using colorful language ("India might be first fallen angel among the BRIC nations") that you wouldn't quite expect to hear from rating agencies who claim to be operating rationally on cold economic statistics and parameters, S&P and Fitch cited, other than the things mentioned above, corruption, weak political setting and lack of liberalization reforms.


Now, all the corruption scandals will make UPA pay politically (I hope). But, I don't quite understand how the exposing of all the scandals translates into a discernible signal of any kind to the potential investors. What exactly is the implication? Will it be increasingly difficult now for the companies to bribe the government? Or did these exposes cause moral outrage among companies who were going to invest in India, but realized that corruption permeates through all levels in India? (And I say this without trying to minimize the scale of all the recent shocking scandals.) I feel if there was a better explanation than that, the generally verbose rating agencies would have spelled it out. My feeling is that the word corruption was thrown in the mix only to get nodding heads, because everybody hates corruption in India. (Yeah.) The real agenda to push through and to influence popular opinion on, was the 'slowdown of liberalization reforms'. (An economic crisis is just the right moment to push through agendas. In Euro zone and the US, it's 'austerity' that is being pushed as the solution for high unemployment, flat growth and recession-like situations. Richard Koo, an economist with similar experiences in Japan, has this to say on that issue.)


So all the heat on the government due to corruption and its general incompetence was being brought to and expended on the issue of liberalization, in general, and on some other specific cases like the Vodafone tax issue, and GAAR, in addition to the usual demands of reducing subsidies, carrying out land acquisition reforms etc. There was intense lobbying pressure put on the Indian government by the UK [2] and the US [3] administration at the highest levels to backtrack on the retrospective taxation. Several pundits appeared on media (western, especially) to explain that the Vodafone tax issue had a big role to play in the rating downgrade. They were worried that India was projecting an image of lawlessness. One very common refrain was that the Indian government would use the amended IT act to tax transactions going back as far as 1961 - the year of passing of Income Tax Act, even though Pranab Mukherjee had clearly said that 'cases beyond six years will not be re-opened' [4], because the same act had such a provision too.


If I may digress once more, on the issue of perceived lack of rule of law in India, I was a bit amused by how these commentators seemed to define 'rule of law'. I wouldn't agree with the retrospective taxation policy, even though India is not the first country to employ such a policy, with China, US, UK and Australia setting the precedents [5]. It is clearly a bad policy that increases uncertainty, reduces trust in the government, and, generally speaking, should not be employed. (And Pranab Mukherjee accepted so.) But surely the real lawlessness in India is that due to Naxalites in one-third of the country, caused by policies like land acquisition (which the rating agencies say should be liberalized even more), rather than due to a law passed by the Parliament of the country? But that's just me being dramatic.  (Though I do feel and find it interesting that the problem of Naxalism in India, given its extensiveness, gets disproportionately low amount of attention in the western media. Not that I am really complaining though.) The lawlessness argument gets more interesting, when one notices that Vodafone paid zero (I mean zilch) corporation tax in the UK this year [6], in spite of soaring profits, causing much anger in the UK.


Coming back to the Time magazine, the word 'under-achiever' is again very instructive, aside from the fact that the magazine bothered judging the performance of the Indian PM at all, given that there are many more crucial global economic actors in the spotlight currently across EU and in the US. The Time says that Manmohan Singh is 'unwilling to stick his neck out for reforms'. 'UPA has been burning through its boom-time chests, spending on subsidies and social benefits. But business-friendly laws that could spur growth to offset that spending are languishing, and industry is struggling'.


S&P had said something similar. "It would be ironic if a government under the economist who spurred much of the liberalization of India's economy and helped unleash such gains were to preside over their potential erosion."


The only real message that I see there, is that the world expects Manmohan Singh to do more of what he is famous for. Opening up the economy. And the 'under-achievement' tag has nothing to do with anything else the magazine has mentioned, including the corruption scandals. It is only meant to impress upon him and the people the need to rush through aggressive liberalization to solve the current crisis. There are people who wish that the crisis in India deepened, which would make imposing of their ideology from the outside easier.


The 1991 reforms have brought India its economic growth. But there is such thing as indiscriminate liberalization, which can destroy local economy and cause much pain, especially to the small players, who are in huge numbers in India. It is thus an extremely sensitive balancing act, with huge political, economic and social repercussions. It is only fair that such reforms are brought cautiously. Governments in India indulge in populism. But if a policy has the potential to disrupt the lives of a sizable portion of the population, it is democracy in action if that gets reflected politically in the actions of the government. Populism may be bad. Crony capitalism that rejects popular demands isn't much good either. (Yet that is not to say that there are not reforms that demand immediate attention and scrutiny. Before it was done for petrol, the reform I thought of as most reasonable and quite needed was the deregulation of oil prices; given that sooner or later we need to reconcile our oil demand with international oil price, by either reducing our oil consumption or by making it more efficient. Liberalizing FDI in retail, in steps, starting from metropolitan cities, as Kaushik Basu has suggested, is another that seems to have the potential, among other things, of improving the back-end infrastructure, storage facilities and making available better prices for farmers' produce. I digress.)


All of it may be paranoid talk. But it hard to ignore what seem to be serious and sustained efforts to disguise and aggressively push neo-liberal policies as 'reforms' and panacea for all economic ills. There are a host of agencies that eat into the sovereign space of policy debate. And it is a bit disconcerting, especially noticing the effect of their methods, like in UK, which under Tories has imposed austerity on itself by convincing its people as the way out of their current economic problems, leading to slashing of housing benefits for their young, slashing of benefits to the handicapped and attempts to cut down their well functional National Health Service [7].


It is impossible for anyone to prescribe the rate at which reforms need to be brought and their quantum, if at all they should be brought, but I would like to think that there are sufficient pulls within Indian political system to bring them about at a rate, if at all, that will be in the best interests of most of the stakeholders.




[1] http://articles.economictimes.indiatimes.com/2012-04-26/news/31410584_1_outlook-revision-s-p-credit-analyst-moodys
[2] http://www.businessweek.com/news/2012-04-01/u-dot-s-dot-u-dot-k-dot-business-groups-protest-india-retrospective-tax-move
[3] http://articles.economictimes.indiatimes.com/2012-04-28/news/31453518_1_foreign-investment-investment-climate-pranab-mukherjee
[4] http://www.indianexpress.com/news/pranab-defence-retrospective-changes-should-not-be-done-but.../925452/0
[5] http://www.businessworld.in/businessworld/businessworld/content/Following-Precedents.html
[6] http://www.guardian.co.uk/business/2012/jun/26/vodafone-faces-tax-payment-row
[7] http://ht.ly/aTM7Z