In the midst of the paeans showered on Manmohan Singh after his death there has been one dissenting note. This has been struck by the Radical Socialists , a small group that is a remnant of the grand socialist movement that had dominated public discourse in large parts of the world, including India, for four decades after the Second World War.
Today, half a century after the advent of economic globalisation, its destruction of state-directed socialism in economic policies, and the near-total eclipse of the communist parties in India, this movement stands politically depleted. But their moral voice remains strong, for these are now almost the only elements of the urban intelligentsia that still care, actively, for the fate of the poor in the new, somewhat heartless, world that globalisation has created .
In a detailed critique of Singh’s contribution to the Indian economy shared on e-mail, the Radical Socialists have said that a proper evaluation of his record can only come from the poorest of the poor of this nation (where an) overwhelmingly large majority of people are struggling with poverty, hunger and unemployment. No one, not even Narendra Modi, can disagree with this, but it is their choice of yardstick, for measuring this, that is highly questionable, for it is not the work of even the most socially conscious of Indian economists but that of the French economist Thomas Pikety, best known for his seminal book Capital in the 21st Century.
Citing UN data that had been analysed by Pikety and a colleague, L. Chancel, Piketty had found that :
“The annual average real income growth of the bottom 50% of the Indian population was higher in the period 1951-80 than in the period 1980-2015, when the moves towards neoliberal globalisation began and decisively accelerated in the 1990s under Rao and Manmohan Singh.”
This is a classic example of the selective use of data to arrive at a pre-determined conclusion. Pikety and Chancel’s data tell us nothing about why this happened.
The answer lies in the wrenching changes that the Indian economy went through in this period. India’s private industry, which had flourished during the Second World War and the first decade after independence, was severely stifled. This was due to a combination of two factors: the strangling controls imposed by the 1956 Industrial Policy Resolution, and a crippling shortage of foreign exchange. The latter was caused by the exhaustion of India’s sterling reserves, which had been built up during the second world war.
The shift in investment from the private to the public sector, and from consumer to capital goods, that these two simultaneous developments caused not only strangled industrial growth but made industry more capital intensive. Hard on the heels of this shift came rising urban unemployment and under-employment, and consequently a drastic slowdown of improvements in the standard of living.
Not surprisingly therefore, for more than two decades India had one of the six slowest growth rates in the world, of 3.6%. Employment growth was miserable, at less than 2% a year, and half or more of it was taking place through huge overstaffing in central, state and local government service, industry was not absorbing more than a fraction of the burgeoning youth population of the towns, let alone the villages.
The developments in agriculture were the mirror opposite of those in industry. While employment growth in industry was being stifled by controls, agriculture was thriving. This growth was driven by – a rapid increase in cultivated land area in the 1950s, resulting from forest clearance in the Terai and other regions, and the subsequent onset of the Green Revolution in cereals, which began with wheat in the mid-1960s and rice in the mid-1970s.
The trends in real income growth identified by Piketty and Chancel were reversed only after India began to relax its regime of industrial controls in the late 1970s and 1980s. GDP growth rose to 4.5, then 5 and finally 6% in 1990, as controls on trade and manufacturing were relaxed. But since India’s strictly controlled exchange rate was too high, exports lagged further and further behind imports.
Also read: The Manmohan Singh Era: A Decade of Transformational Change in India’s Economy and Society
India met the deficit by borrowing abroad, increasingly relying on short-term money markets as long-term lenders became increasingly reluctant to provide further loans. The inevitable happened when Iraq invaded Kuwait. Oil prices went through the roof and India ran out of both foreign exchange and international lenders willing to bet on its future.
That was when Singh, as finance minister, managed the crisis in a way that landed him in the prime minister’s chair a decade later. His carefully phased economic liberalisation saved India from the shocks that other countries had had to endure. Growth accelerated to 7% in 1993-94, the second year of liberalisation, and remained at that level for four years. It then entered a mild five-year recession, from which India emerged in 2003-04, on the eve of Singh’s prime ministership.
Between 2004-05 and 2009-10 the economy grew at close to 8% a year, and industry and the services sector created 7 to 7.5 million jobs a year, drawing an average of 4 million workers, mostly youth, from the villages into the cities. But the honeymoon ended with the global financial crash of 2008 followed by the onset of global recession in 2009.
Singh first fought the recession the orthodox way by forcing the Reserve Bank of India (RBI) to drastically lower its prime interest rates which had been rising steadily since 2007, back down to their pre-2007 level. The result was a greater than 10% growth in industry and a continuation of close to 8% growth of GDP for two additional years. However, in March 2010, he succumbed to the RBI’s pressure. The central bank had pointed to a small increase in the inflation rate as a harbinger of things to come, and ultimately got its way.
The impact this had upon the economy was immediate and catastrophic. Industrial growth crashed from 8.2% in 2010-11 to 2.8% in 2011-12. In the next year, it rose marginally to around 4% and remained there till well after the Covid lockdown. And, if one believes the calculations of Arvind Subramanian, once the chief economic adviser to the Modi government, real GDP growth fell to 5% or less, and stayed there throughout the Modi years till the post-Covid rebound.
Industry was hit hardest of all. By December 2015, sky-high interest rates of 12% or more, even for blue-chip companies, had forced the abandonment of nearly all infrastructure and heavy industrial projects due to their long gestation periods. As a result the country was saddled with Rs 880,000 crore worth of “stalled” i.e abandoned projects, and 415 out of 2300 operating companies that were heavily invested in infrastructure, were not making enough profit to pay the interest on their debt.
Nine out of India’s dozen steel plants were insolvent and some of the biggest infrastructure companies, like Jaypee and Gammon India, that had piled up debts in excess of Rs 33,000 and Rs 15,000 crore respectively, were unable to service them. As a result, Public Sector Banks (PSBs) were saddled with Rs 400,000 crore of bad debt..
Not surprisingly the growth of non-agricultural employment shrank to 2 million a year, forcing millions of recently employed youth back to their homes in small towns and villages.
Also read: The Education of Manmohan Singh
Being the superb politician that he is, Modi sensed that this, and not the slew of corruption scandals that had surfaced in 2012, was the Achilles’ heel of the United Progressive Alliance (UPA) government. He, therefore, promised to create 20 million jobs a year; 42% of the voters under 30, who make up almost a third of the electorate, believed him and voted for him. This, without a doubt, was the cause of the 12% jump in the BJP’s vote, from 19% in 2009 to 31% in 2014, that brought the Modi government to power, and has now endangered the future of Indian democracy.
In the years that have gone by since then, I have often wondered why Singh went back on his initial decision to fight the recession in the orthodox way by lowering the interest rate. The only explanation I have been able to come up with is that after allowing the private sector to borrow money from international banks in 2008, India had by then accumulated $1200 billion in external debt and was relying upon short term capital inflows into the Indian money market to meet the interest payments and repayments that came due. Even the whisper that a devaluation of the rupee was possible, let alone imminent, would cause this highly volatile capital to disappear in a matter of minutes.
Furthermore, in sharp contrast to the debt that had accumulated till 1990, a quarter of this was private debt, taken by around two dozen large companies with immense influence in the market and the RBI. Having lived through the trauma of one near-bankruptcy in 1991, Singh did not feel that India could weather another.
In 2012 and 2013, I wrote repeatedly in one or another of my weekly and fortnightly columns that raising interest rates was a mistake. I argued that continued high industrial growth would restore the confidence of foreign investors in the Indian economy after the initial shock and bring back foreign investors. Furthermore, I stated that failure to restore employment growth would bring down his government. However, Singh had been through one foreign exchange crisis and can’t be blamed for being cautious about triggering another one. He ultimately succumbed to the RBI’s pressure, and the rest is history.
Prem Shankar Jha is a veteran journalist.
