The Finance Ministry recently put out a report praising itself. Was the praise justified? How should we judge the economic performance of the Modi government? Can we do it only with statistics and without reference to economic theory?
Economists, some of them quite well regarded, seem to agree on two things. One, that the ‘world’ is facing many crises. Someone has coined a new term for this, polycrisis. Two, that India is a part of the solution, and not of the problem. It’s no longer a part of the ‘Fragile Five’ of 2014.
Which of these conclusions you prefer depends on your prejudices and, therefore, which factors and variables you are looking at.
Thus, if you look at employment, India is in a crisis but not if you look at inflation. In the US, it’s the other way round. And so on for other countries. If you try to fix one, you disturb the other.
An added complication is whether you look at the economies of the world as a single organism or a collection of different organisms that are interconnected. Depending on which markets you are looking at, it’s probably the latter. But if you look at the consequences of policies, it’s also the former.
That’s why what the US Fed does with the price of money in America has an impact not just on the US bond market but the bond markets of other countries, too. Likewise, what China and Europe do with their trade policies impacts product markets in other countries too.
However, here’s a dose of reality: what India does makes no difference to the world because its share in global trade and investment is so small. So by and large, we are still quite irrelevant economically. Is this bad? Not necessarily because this gives us a lot of manoeuvrability. That’s why we need to recall Don Patinkin.
Remembering Don Patinkin
He was an influential Israeli economist who wrote a book in 1956 called Money, Interest and Prices: An integration of monetary and value theory.
Patinkin was a Keynes unbeliever. He saw economies primarily as three markets: the market for labour, the market for money and the market for the products that the first two produced when they combined.
His conclusion was that for an economy to be functioning smoothly all three had to be in balance, or equilibrium as economists call it. But they never were because, and this was his insight, they couldn’t be. Reason: when you tried to fix the malfunctioning one, you upset the other two. Only the degree varied.
So the key policy question was whether governments and central banks should intervene or let the markets find their own balance or ‘equilibrium’. Patinkin’s view was that intervention should be minimal.
He thoroughly disapproved of intervention at the drop of a hat which is so fashionable now.
If you apply this criterion to India you will see a strange paradox: the Modi government with its careful and cautious macroeconomic policy has got it mostly right. It has intervened massively only in infrastructure. But, for political reasons, it insists on denying this. It wants to pre-empt allegations that it was inactive.
The Finance Secretary and the Chief Economic Adviser should, instead, emphasise its calibrated intervention. After all, avoiding what in Tamil is called korangu cheshtai (monkeying around) is very good policy, suggesting a high level of maturity which is now showing in the numbers.