Macroeconomics

An assessment of policy performance under the current regime

  • Blog Post Date 01 February, 2021
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Maitreesh Ghatak

London School of Economics; IGC India

m.ghatak@lse.ac.uk

Commenting on the recent policy paper by Subramanian-Felman, Maitreesh Ghatak discusses why – looking at the same numbers – he would tend to be less generous in his grades for the performance of policy initiatives under the current regime. Regarding the Covid-19 shock, Ghatak contends that to the extent there is a policy trade-off between lives and livelihoods, one wonders why India does not score highly on either – whether it is “hardware problems” or “software” glitches in policy design and implementation.  

What qualifies as a ‘reform’ and how does one judge its impact? This question kept cropping up as I read Arvind Subramanian and Josh Felman’s (henceforth, S-F) thought-provoking essay that provides a thorough discussion of India’s economic performance under the current regime and preceding ones over the last three decades.

The ‘production function’ of policy

One can list all the initiatives and changes a regime makes as ‘reforms’ but ultimately their success lies in the outcomes, not in the implementation process (“software”, in the language of S-F) or the policy initiatives themselves (“hardware”). To use the analogy of a production function, policies are inputs and policy reforms are changes in the input mix or the technology, but in the end, it is the outputs that we use to evaluate the performance of a firm or the whole economy.  

The authors are well aware of the problem. As they say: “After all, policies are just inputs; what matters is whether they succeed in improving peoples’ lives. And if over a reasonable period the economy fails to recover from its initial problems, then the reform effort has been inadequate to the task at hand, regardless of how it measures on some absolute scale.”

To go about establishing their otherwise sensible thesis, there are many challenges.  

First, the initial situation a government inherits, that depends on the performance of the previous government. As S-F note, some governments have an inherently difficult task, while others benefit from the reform efforts of the previous government.  

Second, what other confounding factors are at work, such as the external environment governed by trends in the global economy (for example, oil prices), the role of other important players such as state governments and the RBI (Reserve Bank of India), and exogenous events (the usual example would be weather but of course, of great relevance at present is the pandemic). Again, S-F make note of this. 

Third, given that each policy initiative affects multiple outcomes of interest and each outcome is affected by multiple policy initiatives, there is also the problem of focussing on specific channels. Which policies do we credit or criticise when focusing on a particular outcome variable? And which outcome variables do we focus on when assessing a particular policy? 

Assessing policy performance: macro stability, development, and growth

Of course, there are fundamental limitations as to how much one can address these concerns given the data. With those caveats noted, S-F’s assessment is as follows: the government deserves high marks for restoring macro stability and for its performance on development, as measured by what they call the government’s “New Welfarism” schemes. SF do note that the growth performance of the current regime has not been great, with no sign of a recovery since the dip during UPA-II (United Progressive Alliance), and growth indicators actually deteriorating. They attribute the decline in the health of the corporate sector (as measured by the level of profits) due to excessive lending during the infrastructure investment boom of the early 2000s, which received a rude shock with the global financial crisis. The resulting weight of non-performing assets (NPAs) are dragging the economy down, reflected in real credit growth falling to historically low levels. 

They conclude: “Summing up the scorecard so far, the government has performed well on the policy front, but has still not been able to overcome the problems it inherited. And now Covid-19 has dealt another, serious blow to the economy.” 

Looking at the same numbers, I would tend to be less generous in my grades for the present government’s performance. Let me illustrate with a few examples from these three broad classes of outcome indicators that S-F discuss – macro stability, development, and growth. 

First, let us take macro-stability. If we take inflation, S-F are right in pointing out that the average annual inflation rate in consumer or retail prices – as measured by the Consumer Price Index – during the current regime is 5.1%. This is significantly less than in UPA-II (9.5%) and UPA-I (7.1%) but higher than NDA-I (National Democratic Alliance) (3.9%), as their graph indicates. However, one of the determinants of inflation is the external sector – in particular, oil prices. Suppose we take the world average inflation rate during these periods and then compare average inflation in India relative to that – the smaller the gap, the better being the relative performance. Using this metric, the current BJP (Bharatiya Janata Party) government comes third, with NDA-I being the best performer, UPA-I being the next, and UPA-II coming last among these four regimes. Therefore, while the Modi government deserves credit for controlling inflation, at least some of the improvement can be attributed to external factors affecting the global economy. The general point is, just comparing averages across these different regimes may be misleading. 

Second, let us take the development indicators. A look at Figure 2 of the S-F paper indicates that while for banking and cooking gas, there has indeed been sharper growth trajectory under the present regime, no such trend is visible for toilets and electricity. At best, the earlier trend has continued. So, if we are to blame the earlier regime for the problems they left behind, we should also acknowledge their contributions. In terms of outcomes, S-F correctly point to the deterioration in various measures of child health and nutrition. And as far as development indicators go, there is an interesting and important indicator that is completely missing in the discussion – poverty. Of course, updated poverty numbers are not available since 2011-12 and the NSS (National Sample Survey) report for 2017-18 was provisionally released and then withdrawn. Preliminary analysis of these numbers (for example, Subramanian 2019) actually report an increase in poverty according to the head-count ratio. Even if we take different nationally representative household samples such as the CMIE (Centre for Monitoring Indian Economy), using the Rangarajan poverty line and adjusting for inflation, there is an increase in poverty relative to 2011-12. Therefore, it is difficult to agree with the high grades that S-F give on the development front. 

Third, let us take various growth indicators. S-F correctly note the deterioration of growth indicators, but they seem to attribute the blame entirely to the problems the current regime inherited from the UPA. Surely some of the problems they outline about the NPA mess is correct, but it is odd that they do not discuss the role of some of the policies they list as “reforms”. Take, for example, demonetisation. They summarise its impact as “Little apparent gain; large short-term costs, especially for informal sector” but do not return to it when discussing the growth indicators. Perhaps because they perceive the costs of demonetisation in terms of growth indicators as short term. But what about the long-term effects of the rise in protectionism on growth? As they themselves note, trade reform has led to an inward turn, with many tariff increases. Surely the fact that exports plummeted under the current government relative to the earlier regimes, had some impact on growth.  

Covid-19 and the Indian economy

Finally, let us take Covid-19 and its impact on the economy and public health. Covid-19 has definitely dealt a serious blow to the economy. But, it has dealt a serious blow to all economies. As the recently published IMF (International Monetary Fund) World Economic Outlook (January 2021) suggests, India’s estimated rate of contraction in 2020 (8%) has been on the higher end, both globally and among peer countries with similar per capita income. India also ranks high among countries that took the most stringent lockdown measures. One could argue that the economic contraction induced by the stringent lockdown was a necessary price to pay to deal with the public health crisis. Yet, if we take health indicators such as total confirmed cases or deaths per million people, India’s record does not look great compared to other Asian countries.   

To the extent there is a policy trade-off between lives and livelihoods, one wonders why India does not score highly on either one of them – whether it is “hardware” problems or “software” glitches.

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