Macroeconomics

“New Welfarism”: Old wine, new bottles?

  • Blog Post Date 28 January, 2021
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R. Nagaraj

Centre for Development Studies

Rayaprolu.Nagaraj@gmail.com

Commenting on the recent policy paper by Subramanian and Felman, R Nagaraj contends that the authors imaginative re-branding of the erstwhile ‘populist schemes’ as “New Welfarism of the Right” is an endorsement of the current government policies, without contending with burgeoning evidence on their shortcomings. Nagaraj further argues that what the authors call ‘software’ problems of policymaking are essentially matters of governance, and the issue of crony capitalism needs to be addressed.

A diagnosis of the current economic problems and their remedial measures suggested by a former Chief Economic Adviser and a former IMF (International Monetary Fund) official with intimate knowledge of India, should be taken seriously. Subramanian and Felman (S-F, hereafter) view the current state of the economy through the lens of structural reforms initiated since 2014 and seek to identify an ‘actionable agenda’ for the forthcoming budget. The paper (Subramanian and Felman 2021) builds on two earlier studies: Subramanian and Felman (2019) (a macroeconomic analysis), and Anand, Dimble and Subramanian (2020) (examining the concept of “New Welfarism” – public provision of critical private goods and services). 

S-F classify the problems into two categories: “hardware of reforms undertaken so far” and “software of economic stewardship”. The hardware consists of the goods and services tax (GST), Insolvency and Bankruptcy Code (IBC), inflation targeting, pro-market liberalisation, “New Welfarism of the Right”, and physical and digital connectivity. These are well set in place – the authors claim, complimenting the ruling government for its success.

When the present regime assumed office in 2014, S-F believe that the economy was in a mini-crisis. Since then, the macroeconomy has stabilised with lower inflation and tolerable balance of payments (BOP) deficit. On ‘development’, S-F credit the government for initiating New Welfarism, consisting of access to cooking gas, toilets, bank accounts and, electricity at homes. While S-F acknowledge a reversal in the health and nutritional progress, as per the results of the National Family and Health Survey (NFHS), 2019-20, the reasons for it are not analysed. 

Further, S-F concede that data on the gross domestic product (GDP) growth rate have been contested. Fixed investment rate and corporate profits as ratios of GDP have collapsed after the global financial crisis. Distressed firms lacked exit options. IBC was set up to address the problem of the ‘twin balance sheet’ – that is, declining corporate profitability and the banking sector’s rising non-performing assets (NPAs). As the bankruptcy mechanism has barely worked, it was practically abandoned last year. Post-Covid-19, bank NPAs will shoot up, S-F admit, as RBI (Reserve Bank of India) has indicated in its recent financial stability report

“Summing up the scorecard so far…”, S-F opine, “… the government has performed well on the policy front but has still not been able to overcome the problems it inherited. And now Covid has dealt another, serious blow to the economy. What then needs to be done?”. In other words, S-F give a clean chit to the current regime for economic management, shifting the blame for the current mess to the earlier regimes. 

In S-F’s view, the answer to the current economic problems lies in, “… improving the “software” of policymaking itself: the way that policies are formulated, publicly articulated, and implemented. This requires ensuring data integrity, embracing transparency and a level playing field in policy decisions; governing through consensus-building, compromise, and patience; maintaining policy consistency; respecting and building institutions; and promoting rule of law.”

An assessment of S-F’s analysis

S-F crediting the government (though with mild qualifiers) for putting the policy hardware in place, seems questionable. They seem to have ignored the widely contested and contentious discourse and many insurmountable difficulties in the implementation of the hardware. For instance, in GST, the problems are not mere glitches but design flaws, as red-flagged by GAG. The IBC was abandoned, given the ground realities of initiating bankruptcy involving large firms in networked industries, and infrastructural projects in a bank-centric financial system with poor judicial and legal infrastructure. There are also deeply ingrained political economy considerations involved. The two are hard to disentangle, in a democratic polity. 

Inflation targeting was practically given a go-by as the growth slowdown gained greater attention, leading to an unpleasant public disagreement between the government and the Central Bank, culminating in the change in RBI (Reserve Bank of India) leadership. Thus, without a close and dispassionate analysis of these policy failures, the authors’ commending the ruling government for the success of the hardware, seems unpersuasive.   

S-F’s term “New Welfarism of the Right” indeed sounds progressive, unlike the negative connotation associated with ‘populist schemes’ of the yesteryears. Scratch the surface and the new initiatives are the proverbial old wine in new bottles. The authors report evidence on outcomes of four schemes for 1992 to 2019 (Figure 2 from Anand, Dimble and Subramanian (2020)). In two cases, namely, the proportion of households (HH) with access to toilets and electricity, no change in the trend lines is evident after New Welfarism was launched. For access to a bank account and cooking gas, the trends are distinctly upward. The strike rate is 50%.    

Yet, the shortcomings of the successful schemes become clear when the evidence is examined beyond the headline numbers. For instance, the ‘no frills’, or zero balance bank account of the past (as part of the financial inclusion policy of the second United Progressive Alliance regime was renamed Jan Dhan Yojana (JDY). Its initial success in enrolling a massive number of the poor (especially women) was based on the election promise reportedly made in 2013 of distributing up to Rs. 1.5 million in each such account. As the promise faded away, most such accounts have become dormant (Sinha and Azad 2018). 

JDY has neither mobilised domestic savings (which, as a ratio of GDP, has fallen), nor boosted credit disbursements for the poor, and informal-sector firms. The government has however been, rightly, using these accounts for direct benefit transfers (DBT). But serious questions on the efficacy of the methods have come to light by numerous ground-level reports, demonstrating the hurdles in the electronic pipeline (Somanchi 2020). 

Similarly, under PM Ujjwala Yojana, official sources show that 94% of households have access to LPG (liquefied petroleum gas) in 2019, up from 56% in 2014-15. However, the National Sample Survey (NSS) results find that only 46% of households used LPG compared to 15% in 2011-12. Moreover, usage per household has declined sharply after the first free cylinder, as most families could not afford a refill 

Similarly, in the case of the Swachh Bharat Mission, the recent – though partial – NHFS data for 2019-20 show widespread persistence of open defecation, and the actual toilet usage estimates are significantly lower than the official figures. Understandably, without adequate water and sewage facilities, simply constructing toilets in household premises would not be useful. Hence, villagers are reportedly using the built-up space for storage.

Access to digital devices and applications has gone up enormously in India, as elsewhere. However, the ‘backend’ of digital connectivity (requiring substantial investments) has remained weak, slowing down the service. A major problem is the poor internet connection speed. Here is a telling statistic: India’s global ranking in internet speed has gone down from 63rd in 2017 to 86th in 2020. The speed in the top-ranked country in 2017 – South Korea – was 4.4 times in India and in 2020the top-ranked country – Canada – had an internet speed 7.4 times that of India . Incidentally, in 2020, Pakistan ranked a notch ahead of India.  

There is a silver lining though. The speed of highway construction has more than doubled, from 4,410 km in 2014-15 to 10,855 km in 2018-19, as per the annual report of the Ministry of Road Transport and Highways, 2019-20.

The ‘software’ problem 

S-F’s concern for accurate official economic statistics is well taken. Likewise, S-F’s apprehension that lack of trust in the government is hurting the governance is widely shared. For instance, former Prime Minister Manmohan Singh in a 2019 op-ed expressed his anguish in this regard. 

The remaining software issues S-F list, put simply, deal with the political economy of public decision-making. The problems flagged by the authors seem to get accentuated by the ruling establishment’s majoritarian ethos of viewing political democracy as corporate democracy. The government’s policies seem to have underlined crony capitalism, which Pranab Bardhan, in a recent public lecture at George Washington University, termed as “crony capitalist oligarchy”. S-F seem to be alluding to the same phenomenon, though they perhaps shy away from saying so explicitly. The closest the authors come to recognising it as such is by saying “…stigmatized capitalism remains a serious problem”.

Glaring omissions  

The authors’ 2019 piece flagged the ‘twin-deficit’ problem (mentioned earlier) as the principal constraint on reviving the economy and rejecting the scope for fiscal expansion for the sustainability of public debt and the fear of stoking inflation. However, S-F’s policy stance in 2021 remains unchanged even after the Covid-19 pandemic and the unprecedented economic contraction last year (about which they are acutely worried). The paper is conspicuously silent on the need to address massive jobs losses, migration, and livelihood crises after the shock lockdown. The authors’ policy prescriptions seem at variance with the widely shared views (across the ideological spectrum) on the need for boosting aggregate demand, at a minimum, to restore the economy to its pre-Covid level at the soonest.1 2

Moreover, in their zeal for structural reforms, the authors seem to have overlooked potential adverse consequences of the new farm laws and labour codes that were hurriedly passed during the pandemic bypassing standard parliamentary processes and mandatory consultations. For instance, the changed labour laws will practically abrogate the standard length of the working day of eight hours for government-mandated minimum wages. A foretaste of the labour conflicts to come was evident last month at Wistron’s iPhone assembly factory in Karnataka, where nearly 8,000 temporary workers were short-changed of their legitimate earnings.

Concluding remarks

To sum up, S-F’s paper has some useful suggestions. Their affirmation for the hardware of policies put in place since 2014 seems questionable. The authors’ imaginative re-branding of the erstwhile (often pejoratively called) populist schemes as New Welfarism of the Right is an endorsement of the current government policies, without contending with burgeoning evidence on their shortcomings. The authors seem to have a lot of trust in fiscal conservatism, and faith in the virtues of structural reforms, amidst severe demand retrenchment. In plain language, what S-F call the ‘software’ problem of policymaking is a question of governance. By avoiding calling a spade a spade, and taking refuge under managerial jargon, S-F fail to grasp the nettle of crony capitalism and the growing tentacles of select oligarchs.

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Notes:

  1. In the just-released book of essays on post-Covid economic policy, Baru (2021), there is a surprising commonality among economists of various stripes and ideologies on the need to boost aggregate demand by fiscal measures and to protect jobs and livelihoods.
  2. Even the IMF has changed its policy stance now.

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