The Daily Fix

‘Risk of a collapse is far fetched’: 10 reads from Left & Right on Yashwant Sinha and the economy

Analysts and commentators spent the week discussing what the economy needs – and whether former finance minister Yashwant Sinha is right.

The Indian economy continued to be the main talking point for yet another week, especially after former finance minister Yashwant Sinha wrote an Op-Ed saying he would be failing in his national duty if he did not speak up about the way the current administration is handling policy. Prime Minister Narendra Modi effectively admitted concerns that all is not well with the economy by announcing the creation of an Economic Advisory Council. That institution had been abolished when Modi came to power in 2014, but has now been brought back and given the task of advising the prime minister on macroeconomic policy.

The council, and Modi, will have its work cut out. India’s Gross Domestic Product growth has been declining for six consecutive quarters, and shocks like demonetisation and the hasty rollout of the Goods and Services Tax have not helped. Policymakers will have to find a way to separate transient effects from more structural ones, and find the money that will allow the government to map its way out of what some are calling an economic crisis.

As expected, much of the commentary over the week focused on what had gone wrong, and what needs to be done:

  1. In case you missed it, here is senior Bharatiya Janata Party leader and former finance minister Yashwant Sinha saying in the Indian Express that he “needs to speak up now” because the economy is on a downwards spiral and that many in the BJP know it but are not speaking up out of fear.
  2. Union Minister of State for Civil Aviation from the BJP, Jayant Sinha – who also happens to be Yashwant Sinha’s son – appeared to respond in the Times of India, saying recent articles “draw sweeping conclusions from a narrow set of facts, and quite simply miss the fundamental structural reforms that are transforming the economy”.
  3. “I too need to speak up now,” wrote Rajya Sabha Member of Parliament and vice chairman of the BJP-run National Democratic Alliance in Kerala, Rajeev Chandrasekhar in the Indian Express saying that the current government has repaired and rebuilt the economy since 2014, putting it in a better place than it was in 2014 and on the path to deliver longer periods of high growth.
  4. V Anantha Nageshwaran, senior adjunct fellow at Gateway House: Indian Council on Global Relations, examines in Mint the six big economic mistakes that have led India to this current position and considers whether a fiscal stimulus would correct this. “Discussions of solutions must take into account costs and alternatives considered and discarded. Otherwise, solutions could end up becoming the case of committing a second wrong to right the first wrong.”
  5. “Given India’s faltering growth and weak capex, fiscal policy is simply too tight. In the past, when spending growth was as weak as it is now, the fiscal deficit was wider by about two percentage points of GDP, or about Rs 3 lakh crore. I don’t want to suggest that those policies were perfect and have to be emulated. Hardly,” writes Srinivas Thiruvadanthai, managing director of the Jerome Levy Forecasting Center in Swarajya. “However, in the present situation, with the private economy faltering and government debt near two-decade lows, a dose of fiscal boost is what the economy needs.”
  6. “Clearly, the lag effects of notebandi are still playing out,” writes R Jagannathan, editorial director of Swarajya, calling for a fiscal stimulus to revive animal spirits. “There may be no real cash shortage, but the “psychology” of shortage remains.”
  7. “Neoliberal economists have been arguing that the solution to the present economic predicament is structural supply-side reform, disinvestment in public sector companies combined with interest rate cuts by the Reserve Bank of India, while at the same time, cautioning the government not to go astray from its path of fiscal consolidation and adherence to the target fiscal deficit of 3% of the GDP,” writes Sashi Sivramkrishna, an associate at NMIMS in the Wire. “Many supply-side reforms are no doubt beneficial to liberating industry from unnecessary constraints; however, in the present context, they seem like nothing more than attempts to push the economy to a higher growth trajectory with a feeble piece of string.”
  8. A leader in Mint says it is imperative that Indian policymakers find a way to separate transient effects of the downturn from the more structural ones. “The economic slowdown over the past six quarters as well as structural challenges like the banking crisis need the sort of clear economic thinking that this government has not believed in till now. The risk of an economic collapse seems far fetched, but an inability to deal with the ongoing slowdown could come back to bite the ruling party in the next national election.”
  9. “There are two major strands in this debate,” write Sunil K Sinha & Devendra K Pant, principal economist and chief economist respectively of India Ratings and Research, in the Economic Times. “This first one says that transformational reforms do lead to shortterm disruption in the economy. But the economy is on the right track and the benefit of reforms will be visible soon. The second one believes that instead of addressing the issues plaguing the economy, GoI has taken recourse to policy adventurism. So where does the truth lie? Probably somewhere in between.
  10. “While the government must be vigilant to the decline in growth rate, as it demonstrably is, it should avoid overreacting to it. Any claims of fundamental weakness in the economy are so far unsupported by data,” wrote Arvind Panagariya, former vice-chairman of the NITI Aayog, in the Times of India.

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