Of Counsel

Title: Of Counsel - The Challenges of the Modi-Jaitley Economy

Author: Arvind Subramanian

Publisher: Penguin Viking, 2018 (First)

ISBN: 9780670092093

Pages: 347

Arvind Subramanian was in the news recently when he exploded a bombshell in knowledgeable circles when he claimed that Indian governments from 2011 onwards regularly massage the GDP figures to quote a value which is almost 2-3 per cent higher than the actual. Coming from a former chief economic advisor (CEA) to the government from 2014 to 2018, this comment struck on the very credibility of the financial establishment. However news clips now appear which negate Subramanian’s contentions and deride him for producing an erroneous report without the rigour of a serious academic paper. Whatever may be the truth in this set of claims and counterclaims, one thing that is incontestable is that our former CEA is not averse to courting controversy. He had a dream career spanning four years at the helm of economic decision making in India which was full of challenges and opportunities. Demonetisation and implementation of GST were two major hurdles of the government which assumed epic proportions. Memoirs of such a person who contributed his part in driving the country to safety is of great significance to readers. That is how this book becomes worthwhile for the reader – before he actually gets hold of it.

If I can say it without disrespect to the wisdom of a financial guru of the stature of Arvind Subramanian, I would straightaway conclude that the book is a deep disappointment to laymen who are not much conversant with the finer nuances of economic theory. Instead of a memoir, what we get is a series of opinions on the problems facing the country, some of which are formed three or even four years ago. In short, it is not a record of how it was done, but rather how it should be done. On the other hand, his primer on the uniqueness of India is appealing. India is claimed to be a complete outlier among the comity of nations in that it sustains a fully functional democracy at very low levels of income, low level of literacy, with deep social fissures and with a highly agrarian economy. In short, it is an exception rather than the rule that democracies are rich, industrialized Western nations having small populations. Subramanian points out that we had committed two great economic sins when we went for heavy licensing in industrial policy and the nationalisation of banks in 1969. In all the other cases, we tried to protect Indian industry against competition through import substitution and public sector. But in this case, we taxed and expropriated domestic investors. This was a very costly mistake.

Though India is undeniably capitalist, the system doesn't find many backers among mass media or the public. The author identifies India's economic system as stigmatised capitalism. It assumed the stigma from its troubled experience in the country’s failed socialist experiment. The private sector was midwifed the in the pre-1990 licence raj which was marked by widespread corruption and collusion between industrialists and politicians. The stigmatized capitalism thus grew through crony socialism. The slur associated with capital in the public mind prevents the officials from deciding in its favour even though circumstances demand it. The decision is thence left to the courts. Capitalism in India is still unwieldy as there are no exit routes for failed enterprises other than simply dragging along. Earlier, we had socialism with limited entry that led to capitalism with no exit. Even with this dichotomy, India is more integrated than we think. Language – which are so many in India – is not a barrier to the flow of goods, services and people. Ratio of internal trade to GDP is 54%, which is quite high. Indian trade is more focused on products requiring higher skill to manufacture. This leads to outflow of human resources from states where living conditions have not improved much.

Subramanian suggests many solutions for India's economic woes. The point of listing all such options after demitting one’s office is anybody's guess. His plan for tackling the nonperforming assets of banks is ingenuous. Banks as well as private enterprises are involved in bad loans. The author proposes an asset rehabilitation agency in the public sector to take over bad loans and resolve the issues, possibly by selling the company itself. Capital demanded by this exercise may be obtained by diverting the surplus capital owned by the Reserve Bank of India. This amounts to a whopping 4.5-7 lakh crores of rupees and Subramanian calls this forced transfer rationalisation of capital.

Demonetisation was a bold initiative of Narendra Modi. There are arguments on its rate of success, but there is no denying the great audacity on the part of the government. Instead of relating in first person the undercurrents of the decision, Subramanian calmly presents a few analytical details that are not much exciting than the Op-Ed page of a conventional newspaper. Demonetisation is said to have engendered two puzzles. It was exceedingly popular politically even at great economic cost as attested by BJP’s sweep in the 2017 Assembly elections in Uttar Pradesh which was the first major election that followed this initiative. The breadth of its impact could have been a credibility-enhancing device. If-it-hurts-me-so-much-it-must-have-hurt-the-rich-immeasurably-more must have been the reasoning of the poor. The second puzzle is that it didn't have bigger effects on overall economic growth in spite of the draconian 86% reduction in cash supply. He suggests a possible mechanism for this. There are no timely measures on informal sector activity that gets reflected in GDP calculation. GDP figures are tied only to the formal sector. After demonetisation, the informal sector declined, but was not displayed by the numbers. This is just a hypothesis of the author.

What is uncharacteristic of a scholar with strong links to the West is the author’s less than forthright approach to the continued use of coal discounting its effect on global warming. This book argues for clean and green technologies that can improve the way coal is used in India. The social cost of coal is still higher. The chapter titled ‘Renewables May be the Future, But Are They the Present?’ is an excellent technical argument with lots of charts and diagrams. Readers would however find this tedious. Subramanian is not much enthusiastic about renewable power as subsidy for renewables eventually lead to stranded power assets in the traditional sector. Profitability and efficiency would decline for thermal power, and public sector banks which liberally lent to them would find their assets nonperforming.

The author’s resentment against fertilizer subsidy is partially powered by irrational fears of the incidence of cancer due to supposedly high use of fertilizers. This is totally baseless and pseudoscientific. The book is burdened with a lengthy introductory chapter which practically sums up the entire argument. Each chapter is further provided with the long preface, repeating the structure in a somewhat fractal way. An issue is discussed briefly, followed by a number of possible reasons listed with ordinal numbers. This becomes taxing further into the text. Some of the arguments in the book stray into flights of fancy such as this one: “One lesson we could draw is that we should go back to restricted franchise, which, of course, is a decision no one in this day and age would make”. What should one expect from a high government official who waxes nostalgic about a thoroughly undemocratic construct?

Many chapters were written in 2015 or 2016 and don't represent insightful opinion made with hindsight. The author concedes that the first seven chapters are turgid and provides a diversion by dwelling on tennis, which itself is cumbersome to follow. The economist’s terse style is visible here also.

The book is recommended

Rating: 2 Star