Sanjaya Baru | Sitharaman’s one bright idea from her JNU days

The Union finance minister has rarely been a political star. Of Jawaharlal Nehru’s six finance ministers, only C.D. Deshmukh made a mark. T.T. Krishnamachari tried to but got into trouble with the first famous corruption scandal of the Nehru government.

In Indira Gandhi’s time, finance minister Morarji Desai became the de facto leader of the opposition. As for the authorship of economic policy during their tenures, both Nehru and Indira have been considered the principal architects of policy. Few credit their finance ministers with such authorship. Morarji Desai tried to shape policy but was ousted as a consequence.

Both in the realm of foreign policy and economic and fiscal policy, Prime Ministers have tended to be hands on. The one singular and famous exception was that of the team of Prime Minister P.V. Narasimha Rao and his finance minister Manmohan Singh. Rao was saddled with so many challenges on the political and foreign policy fronts that he gave full freedom to his finance minister and fully backed him on his policy initiatives. Consequently, Dr Manmohan Singh was able to claim authorship for the fiscal and trade policy initiatives of the 1991 and 1992 Budgets.

Ever since then, all finance ministers have tried to seek their place in history. Yashwant Sinha even wrote a book entitled Confessions of a Swadeshi Reformer: My Years as Finance Minister, in which he claimed some credit for himself. During Dr Manmohan Singh’s decade as the Prime Minister, he kept a close eye on North Block as long as P. Chidambaram was the finance minister, but when Pranab Mukherjee took charge, the PM could do very little. In fact, Dr Singh had often complained that he was not aware till the very end that Pranab Mukherjee would bring in the controversial and ill-advised retrospective taxation provision.

Given this history, it is not surprising that few people credit the current finance minister, Nirmala Sitharaman, with any of the policy initiatives of the past five years. With a domineering PM like Narendra Modi, no minister has had the courage to claim authorship of any initiative of his or her ministry. So, when Ms Sitharaman delivers her fifth Budget speech in Parliament on February 1, it would require considerable courage on her part to claim personal credit for any initiative that has helped deliver a reasonable rate of economic growth with reasonable control over the nation’s finances in the face of so many adversities, including the Covid-19 pandemic, the Ukraine and Israel-Gaza wars and a global slowdown.
While Narendra Modi and his PMO can take all the credit for whatever has been done by North Block, what is it that Ms Sitharaman can truly take credit for? Given their training at the Delhi School of Economics, at American universities and other such places, most of Prime Minister Modi’s policy advisers may not have thought of an idea that finds its place in Ms Sitharaman’s February 2022 Budget speech.

She challenged a foundational argument of what economists call “neo-liberal” economics and the infamous “Washington Consensus” in economics which had guided fiscal policy and public investment policy in the post-Cold War era. That argument was called the “Crowding Out Theory”, that public investment crowds out private investment. India’s growth, it argued, was stymied by excessive State investment and intervention that tended to discourage private investment. To some extent, this argument found validation in the experience of the period 1991-2010, when public investment did decline and private investment increased. But then came the slowdown which got worse after 2015 and even worse after the Covid-19 pandemic struck.

It is at that moment that the economics that Ms Sitharaman must have picked up at the Jawaharlal Nehru University came to her rescue. Sure, her political party abused JNU and most of its staff and students, they relentlessly attacked the university and sought to destroy its reputation. But there was one idea that the economics faculty at JNU consistently made. They rejected neo-liberal economics and the Washington Consensus, and argued that for a developing country like India, public investment remained a critical element in sustaining economic growth.

That idea found its way into Ms Sitharaman’s post-Covid budget speech. The relevant sentence reads: “The virtuous cycle of investment requires public investment to crowd-in private investment. At this stage, private investments seem to require that support to rise to their potential and to the needs of the economy. Public investment must continue to take the lead and pump-prime the private investment and demand in 2022-23.”

Ms Sitharaman will be remembered for reviving public investment at a time when private enterprise has been risk-averse and, one could argue, sullen. Gross fixed capital formation in the private sector has gone down as a percentage share of national income (gross domestic product, or GDP) from around 30 per cent in 2011-14 to 25 per cent in 2017-20. It picked up again only after 2022 when Ms Sitharaman put in place her “crowding-in” policy. Of course, it’s a different matter that much of this public investment was done through increased public debt that would certainly have crowded out private borrowing and so hurt private investment.

The other aspect of the Narendra Modi government’s economic policy in recent years has been the emphasis on income distribution in favour of the poor through a series of welfare measures that have pushed up the fiscal deficit. This too is a rejection of the Washington Consensus. Of course, it has helped that the International Monetary Fund and the World Bank, the original home of that consensus, have themselves gone through an ideological shift.

In the 1990s the IMF mantra was that subsidies are bad and low fiscal deficits good for growth. After the trans-Atlantic financial crisis of 2008-09 the Bretton Woods Sisters went through an ideological transformation. Government spending is good if it can stimulate growth, save firms and boost spending. So, it was easy for Ms Sitharaman to secure approval for her JNU economics from the two ladies at the IMF -- managing director Kristalina Georgieva and chief economist Gita Gopinath. Ms Sitharaman’s troubled tenure may have been saved thanks to some old fashioned JNU economics. Will she and her party have the grace to admit that?