of counsel book review

Book Review: ‘Of Counsel – The Challenges of the Modi-Jaitley Economy’

of counsel book review
Photo: Penguin/Viking

Of Counsel: The Challenges of the Modi-Jaitley Economy

By Arvind Subramanian / Penguin Viking / ₹699

Available here

 

As the Modi government elected in 2014 comes to the end of its term, this book is highly recommended for anyone wanting to know more about the challenges it faced in managing the economy, what it has achieved, what it has not, and what the next government, including a re-elected Modi government, will face. The book is based on Dr Subramanian’s approximately four years as an outsider turned insider in the role of Chief Economic Adviser to the Government of India. During his tenure the annual Economic Survey, which he and his team prepared, became ‘must read’ documents for high-quality analysis. Findings in the survey fuelled his role as an adviser to government and, on occasion, as a public advocate for government proposals.

The book comprises two main sources: revised lectures, press opinion columns and other publicly available statements, often prepared in collaboration with staff; and systematic reflections on how he went about his work, including what he discovered about obstacles to reform in India and relations with his ministerial boss, the Finance Minister Mr Arun Jaitley, with whom he enjoyed a very good relationship. He reflects also on the value of putting together an effective team of insiders and outsiders and, in particular, on the things he learnt by listening to his young and highly qualified colleagues. The result is delivered in a conversational, easy to read tone, sprinkled with terse references to relevant economic theory and spiced with allusions to Hindu epics and English literature. It is policy and governance analysis of a high order.

A central theme is about how to confront problems of government capability. The author argues that while major policy problems and possible solutions are well known, the system of government as a whole—national, state and local—has limited capacity to act. It is hard to get out of bad policies. Proposals for new ones meet concentrated resistance; beneficiaries tend to be dispersed; perverse incentives and blockages abound.

The value of the book is that the author puzzles about how to overcome such challenges. As he sees it the Modi government’s record of economic reform is significant. Important initiatives included implementation of a goods and services tax (GST), introduction of bankruptcy legislation, and initiatives to deliver services directly to beneficiaries, including by digital means. But apart from the still controversial demonetisation of large banknotes and the GST, it has been cautious about far-reaching changes.  He suggests that to improve economic performance and provide opportunities for those who have yet to experience significant benefits from economic growth, big problems still need to be confronted. He sets out initiatives not taken but on which he and his team tried to sharpen understanding of the issues. The book does not pretend to be a comprehensive account. It reflects mainly what the author worked on. It is also not a critique of the government. For this reason it includes only a short chapter on the puzzles surrounding demonetisation, which like many he heard about only when the Prime Minister announced it.

At the outset Dr Subramanian identifies three limiting characteristics of the political and economic system. The first is that representative democracy has generated demands beyond the capacity of government to meet. He calls this ‘precocious development’. For example, because of limits on the reach of government systems, demands for redistribution of benefits in a developing economy have hitherto been met by subsidies to providers rather than by distribution to beneficiaries direct, with well-known inequities and inefficiencies. Effective development of more complex services, including for education and health, has proved too hard. The second is that long experience of state led economic development has enveloped private business in suspicion and restriction, including among supporters of the Modi government. He calls this ‘stigmatised capitalism’. Limits on entry of new private businesses under ‘socialism’ have been joined by a ‘capitalism’ with limited competition and ‘no exit’. Poorly performing businesses tend to be propped up. There is little appetite for privatisation of poorly performing state owned enterprises or for their significant recapitalisation and restructuring. The third, which pervades the other two, is macroeconomic volatility. Governments can be blown off course by the domestic impacts of exposure to international economic trends.

Problems of lack of exit are characterised as the Chakravyuha Challenge. A Chakravyuha, as described in the Mahabharata, is a maze-like military formation that allows warriors to fight their way into it only to be overwhelmed as the superior forces in the formation reveal themselves. Confronted by such difficulties it is not surprising that governments and their advisers are cautious. Opportunities to make major changes come with costs. But the author’s hope is that with enough forces for change afoot significant ones will break through.

Three examples show the breadth of Dr Subramanian’s reflections. These are: how analysis of the problems of indebted businesses and non-performing loans from public sector banks has yet to lead to resolution; how negotiations with the states, driven by analysis and communication, led to the introduction of the GST; and how direct delivery of services and benefits might be extended further, including by converting subsidies to intermediaries into cash for beneficiaries. Themes that emerge from these examples include: interdependence of the three levels of government is more critical than often thought; use of digital technology to improve equity and efficiency in distribution of benefits has much further potential; more use of economic analysis to understand problems of policy and administration can turn good economics into good politics; improved implementation is helped by good policy design; and the need to negotiate reforms between many different parties leads in the first instance to imperfect design and implementation.

In the author’s analysis the Twin Balance Sheet problem, as the problem of business indebtedness and non-performing loans is known, is critical to economic performance. The reason is that the longer it goes on, ‘the longer corporate investment will remain low, and the longer it will take for the economy to return to vigorous growth’. In his account the problem was underplayed because the extent of indebtedness was underestimated. However once it was recognised the process of resolution has also been too slow. As the option of taking bad loans into a ‘bad bank’ proved unpalatable, the new bankruptcy procedures were applied. While significant cases have been identified and the assets of several failed firms sold, he suggests that the current process may take six years. In the meantime, the costs of recapitalisation of public sector banks continue to grow and regulatory and governance reforms are yet to be effected. Further, significant restructuring of public sector banks, including options for privatisation, has not taken place. Support for action, he laments, may have to await another crisis.

The GST it is argued is a groundbreaking change. It should be valued not only for what it does but also for how it was negotiated. It is an example of the benefits of cooperative federalism and sets an example for managing further reforms. The final result, over ten years in the making and in which the author was closely involved in the final stages as an adviser, cuts crippling restrictions on trade at state borders. It thus fosters growth of a single domestic market. The process, which involved setting up a GST Council, brought the states and the union government together. While the immediate result has been widely criticised because of its complexity and shock to business, the author argues that this is the price of a negotiated settlement involving many parties with very different interests.  The GST Council provides a mechanism for negotiating improvements. These will include difficult adjustments to state finances and reducing a long list of exemptions. The author is particularly keen to see land and real estate included. He argues that this would be a powerful barrier to the growth of black money. In the longer term he proposes that a process like the GST Council could be used to tackle on a national basis problems of agriculture and the power sector. It could also be used to manage issues in fiscal federalism that go beyond immediate adjustments following the introduction of the GST.

Direct delivery of benefits to beneficiaries comprises three components grouped by the author under the label JAM: financial inclusion through no-frills banking (Jan Dhan—People’s Wealth), biometric identification (Aadhaar—foundation), and mobile phones. He sees it at its most ambitious as enabling people to move from ‘bankless to cashless’ via mobile phones. He gives credit to his minister, Arun Jaitley for emphasising that the benefits are about equity as well as efficiency. However JAM remains incomplete and controversial. As he acknowledges, first mile and last mile challenges still need to be addressed: criteria for who benefits need to be clear (they are often unnecessarily complicated) and despite the push for financial inclusion a significant number of people are still excluded (no bank accounts, limited access to banks, limited phone connectivity). But the author is optimistic that JAM can also be extended. He proposes that wasteful use of fertilizers and pesticides by farmers can be combated by converting subsidies for suppliers into cash benefits for farmers. He is also attracted to the concept of a Universal Basic Income. While recognising that the practicability of this approach needs more work he suggests that perennial problems of low farm incomes could be addressed by a Quasi Universal Basic Income scheme for farmers or a ‘grand bargain’ with the states in which funds currently applied to subsidies could be applied by the states to schemes designed to meet specific farm problems. However he does not discuss controversies over Aadhaar’s role in JAM, including privacy issues and attempts by ministries to make what was intended as a voluntary scheme to assist access to benefits into a compulsory one. Like the GST, JAM is a work in progress.

There is much more in the book than these examples. Some are discussed extensively, such as the benefits of cooperative federalism; others are canvassed from time to time, such as the equivocal benefits of competitive federalism; and yet others suggest that the setting of targets and expected outcomes should be accompanied by improved budget process integrity and process and institutional integrity more generally.

A final important theme is the tension between what the public sector can achieve when its people are mobilised to cut through arthritic structures and the obstructiveness of ‘feverishly imaginative’ applications of the licence-permit-control raj. The author is full of praise for the knowledge and skills of the many civil servants with whom he worked. While he laments the number of cases in which, even with very able cooperation, he was unable to overcome obstructions he is nevertheless optimistic about the future.

The book is required reading not only for what it discusses but also for what it suggests for further inquiry.