This ‘voodoo economics’ has no place

Chennai-based chartered accountant and economic theorist S. Gurumurthy has tried to come to the rescue of Prime Minister Narendra Modi, a fellow RSS pracharak, with the help of arguments based on voodoo economics.

Voodoo economics entered the lexicon when Ronald Reagan outlined his economic prescriptions for America during the 1980 presidential campaign based on the “principles” of supply-side economics and the dubious trickle down theory by swallowing strange notions like the Laffer curve. His fellow Republican challenger, George H.W. Bush, described it as voodoo economics, meaning it was economics based on facts, conforming to well established theories, but based on some very funny notions. Hence he called it “voodoo economics”.

But in these convoluted times the rebuttal of a sarkari acolyte will be deemed as support for the Congress government, particularly the UPA’s 2004-2014 tenure, and the trolls will creep out of the woodwork in large numbers. So I am first coming clean on the UPA and its helmsman.

I have never been an admirer of Manmohan Singh for many reasons. Most of all was because he never articulated a vision for a truly liberalised society with the jackboot imprint of the state becoming smaller and with the state relying more on compensation and conditioning and less on coercion to govern and build this nation. Instead, he assumed that by just dismantling the industrial licensing system, of which he was a strong votary long after the evidence against it had piled up, he was liberalising India. He also did not distinguish between a regime that ensured free ingress and exit of foreign capital into capital markets, and a freer regime for foreign long-term investment to cater India’s rapidly expanding demands.

Above all, I never admired Dr Singh’s omertà, ignoring all the wrongdoings around him, and inertia when his ministers quite openly flouted his directions. Most of all, I detested his excessive deference to the lady whose sense of right and wrong was largely shaped by her family’s immediate interests.

But I will recognise this. From 2004 to 2014 the Indian economy grew by an average of over 7.8 per cent each year. Included in this decade were two years at over 10 per cent, two years at over nine per cent, two at almost eight per cent and even in the years when the national mood turned sour, India grew at four per cent and 5.9 per cent respectively. If there was a golden decade of India’s economic growth, it was this. In contrast, the first two years of the Modi government saw GDP grow by less than those last two Congress years if the 2.2 per cent tweaking of national income accounting is factored in.

In these last two years there has been zero job growth, though the PM claims to have created 31 million new jobs. Mr Modi derives this extraordinary conclusion by directly linking it to his claim of having disbursed Rs 3.1 crores’ Mudra loans. What makes this patently bogus is the fact that the average Mudra loan is about Rs 1,000 each. If a Rs 1,000 loan can create one new job, as Mr Modi assumes, then the country will largely rid itself of unemployment by spending just Rs 1 lakh crores to create 100 million new jobs? These are the kind of fantasy economic figures only pracharaks can cook up.

Not only do pracharaks like Mr Modi and Mr Gurumurthy cook up things that never were, they also ignore reality pertaining to their main political adversary. In his column Mr Gurumurthy blandly writes that the NDA-1 government of Atal Behari Vajpayee created 600 lakh jobs during its five years, while UPA-1 and 2 just resulted in 27 lakh jobs. This is typical of the falsehoods and untruths these pracharaks internalise.

The reality is quite the opposite. According to the economic census “new jobs grew at an annually at 3.2 per cent between 2005 and 2013 (UPA period), faster than the annual pace of job growth of 2.78 per cent between 1998 and 2005 (NDA period).” Employment generation and economic activities grew at their fastest pace in nearly two decades with over 13 crore people employed and 1.92 crore new establishments set up in the country in the eight years leading to 2014.

Most of non-agricultural employment is in the “informal sector”. The sub-sectors that account for a dominant share of informal sector employment are manufacturing, construction and trade. It is these sectors that grew the fastest in the UPA years. The growth rate in employment since 2005 was 38.13 per cent and manufacturing was the largest employer, followed by retail trade. But I will leave it to the UPA to put forward its case. It has quite a few people in the Rajya Sabha who are qualified to speak on such issues and are yet to earn their pay and repay the trust reposed in them by the Congress.

According to Mr Gurumurthy’s voodoo economics “the well-kept secret” of the Manmohan Singh period’s high economic growth was “huge asset price inflation, not production”. Economists track growth by measuring the change in GDP, and then adjusting for inflation. Asset-price inflation refers to the nominal rise in the prices of stocks, bonds, derivatives, real estate and other assets. All standard measurements of inflation, such as the consumer price index (CPI), do not account for rising asset prices. GDP does not factor asset price inflation. Real GDP is just a plain and simple sum of all the goods and services produced, adjusted for comparison. Paradoxically it is nominal GDP, not adjusted for inflation, that is the real GDP. These are basic economic principles he has clearly not internalised.

Mr Gurumurthy ascribes high GDP growth to increased money supply. The reality is that a growing economy needs more cash, and India is cash-driven economy where almost 40 per cent of wages are paid daily by cash. The demonetisation exercise, which rendered large swathes of the economy sterile leaving behind huge unemployed, should tell him that. But it’s unfortunate this realisation comes after shooting oneself in the foot.

What Mr Gurumurthy clearly needs is to read and digest is Economics, an introductory textbook by the great Paul Samuelson. It’s the bestselling economics textbook of all time. It’s described as “the canonical textbook of mainstream economic thought”. My advice to him is that what’s not in it on economics doesn’t exist, as yet anyway.

In early 1999 I had an intellectual encounter with Mr Gurumurthy at an event held at the Administrative Staff College of India, Hyderabad, about how to stimulate investment and hence growth. I argued that foreign investment is a key driver of rapid industrial growth, as it was in China, because it invariably brings with it the latest technologies and opens up great export markets. Like Ford, Suzuki and Hyundai now do in India. Mr Gurumurthy argued that ancient India had all of the technologies needed and we need to just draw from them. He said all the capital investment could come by retrieving the gold held in Indian households, which according to him was worth several trillion dollars.

He kept alleging that all those who advocate foreign direct investment and the import of technologies must be foreign agents. When I see his great friend and fellow conspirator, Arun Jaitley, debate on TV these days, I see the same technique, which is not to debate on actual facts but just to malign the opponent.