Within days of Arun Jaitley taking over as the Finance Minister of the new BJP government, the buzz in ministerial corridors was that the post of Chief Economic Advisor, which had been lying vacant for more than a year, would soon be filled in. The name doing the rounds was that of Dr. Arvind Subramanian, a globally renowned economist ranked among the world’s “top 100 global thinkers.” However, more than three months passed by before the appointment was finally made in early October. This has put to rest speculation about the reasons for the delay, but it has also sparked off a set of new questions and conjectures.
Will Arvind Subramanian’s role be restricted only to preparing the annual Economic Survey and mid-year review of the economy, as his predecessors have done ? Will he be reporting only to the Finance Minister, since his designation is chief economic advisor to the Ministry of Finance, or will he become CEA, government of India ? Are there plans to enlarge the role of the post of CEA to replace the now virtually defunct Planning Commission ? Does Prime Minister Modi intend to treat Arvind Subramanian as the main counselor for fine-tuning and sequencing the entire gamut of economic reform measures ?
In a sense, his appointment itself is somewhat surprising, because Dr. Subramanian is not a run-of-the-mill economist, but has the image of being something of an iconoclast. Nor do his recent writings reveal him to be an uncritical admirer of Narendra Modi’s Gujarat model of development. What appears to have clinched the decision to make him the CEA of the Modi government, is his keen insight into the complex range of problems plaguing the Indian economy, and his unconventional and sometimes provocative prescriptions for resolving the contradictions. Those who claim to know him well, and those who have studied his prolific writings on economic policy and theory, say the thing about Arvind Subramanian is that wherever he goes and whatever he does, he has a talent for stirring things up. His views are avant-garde and he makes bold forecasts that ruffle the feathers of establishment economists. But more often than not, he eventually turns out to have been right. The fact that he is oft outspoken in his criticism initially irritates vested interests and even governments, but later they invariably wish they had paid more heed to his warnings. A classic instance is his book “Eclipse: Living in the Shadows of China’s Economic Dominance,” which challenged the conservative belief that the United States would remain the global leader for the rest of the 21st century. Subramanian went to the extent of saying: “Within the next 15 years, I see China’s Renminbi replacing the US Dollar as the global reserve currency.” He presented facts and figures to indicate that although the world would remain “unipolar”, it would be dominated not by the United States, but by China. Regarding India, a country about which he has written books and a series of analytical articles, Dr. Subramanian has said equally startling things. His assertion is that the economic reforms era began, not in 1991 as most people think, but in the early 1980s, when corporate taxes were lowered, price controls were lifted and import restrictions were partially removed to help Indian business to become more competitive. This view is not exactly to the liking of the present BJP government since it would imply that Mrs Indira Gandhi and Rajiv Gandhi were liberal reformers who played a part in opening up the Indian economy. Incidentally, President Pranab Mukherjee, who held key economic portfolios at that time, is known to have been very pleased with Arvind Subramanaian’s treatise entitled “Hindu Growth to Productivity Surge: The Mystery of the Indian Growth Transition,” in which he propounded this theory. As far as the present Prime Minister’s views on economic development are concerned, Dr Subramanian has been both appreciative and critical. In April this year, a month before the Lok Sabha election results were out, he wrote: “If Narendra Modi becomes the next Prime Minister, his first impulse will be to be hyperactive on reviving big stalled projects. As a decider and fixer, he would relish kick-starting growth by reviving investment. He will hyperactively locate the bottlenecks and remove them.” Then he adds his punch-line: “This hyperactivity will face two challenges. Firstly, Modi will not be able to achieve his goals, because the Indian economy is too decentralized. Real economic power is in he hands of the States. Moreover, too much power is in the hands of other institutions like the Supreme Court, the Election Commission and the office of the Comptroller and Auditor General.” Secondly, according the Dr. Subramanian, the big dilemma Modi will face is whether to give priority to “short-term expediency or long-term efficiency.” The Prime Minister will have to choose between “the perils of ad hoc decisions and the requirements of durable reform.” Subramanian’s mind seems to constantly grapple with the short-term versus longterm conflict in seeking solutions to economic problems. On the power sector, for example, he has written that “to get this sector back on track in the medium term is difficult without reforming pricing policies. Yet in the short term those reforms may be hard to achieve, not least because offering subsidised power retains great political appeal even in States controlled by Modi’s BJP.” Never a man to mince his words, Dr. Subramanian refers to the political mood of the country and says “getting the large private sector infrastructure companies to invest in national development projects might require taking some of the debts off their books.” But this, he warns, will arouse a cacophony of criticism about “crony capitalism.” Already, he notes, “stock prices of companies perceived to be close to Mr Modi have soared.”
Clearly, Arvind Subramanian is neither afraid to call a spade a spade nor to refer to sensitive matters like the nexus between political parties and big business. The fact that he has been appointed the new Chief Economic Advisor despite his known and publically expressed views is both intriguing and revealing at the same time. All the more, because he has even put into cold print his view that as Prime Minister, Narendra Modi will increasingly face a “paradoxical tension between his mandate and mission.” He elaborates by saying: “The electoral appeal of Modi was based on the public perception that he is a doer who knows how to wield power, ruthlessly if necessary. His success in governing the economy, however, will depend on coming to grips with the reality that his power as Prime Minister is highly restricted.” Apart from that, during the intervening months between his name first began doing the rounds as the likely CEA designate and his actual appointment, Arvind Subramani a n h a d candidlyexpressed a slight disappointment with Arun Jaitley’s maiden Budget and also with the “dovish policy” of the Reserve Bank under Raghuram Rajan. Engaging in his favourite pastime of crystal-ball-gazing, he says: “The RBI’s dovish policy after mid-2014 will begin to look increasingly untenable, and to preserve a modicum of credibility it would raise the Repo Rate from 7.5 percent to eight percent”. But even that “modest inflation-slaying effort will provoke politicians into public expressions of displeasure against the RBI.” Much earlier, he had projected a possible grim scenario for India on the economic front by the end of 2014. His analysis ran along the hypothetical reasoning that “in case the Monsoon fails, inflation could go up above 10 percent. Budget deficit will rise to five percent of GDP. Current account deficit will also be increasing.” Putting this thesis into international perspective, he said while employment might pick up in the United States, the bad news would come from China, where a number of projects financed by the shadow banking system would fail and investors will once again retreat from all emerging markets, including India. Taking this gloomy forecast to its logical conclusion, he said: “There could be an Emerging Markets rout, with India hit unusually hard in 2015 because it performed rather well in 2014.” However, after pointing to the possibility of such a grim scenario, he goes on to say that this may not really happen. Yet,Finance Minister Arun Jaitley would be well advised to prepare in advance for a “food crisis” by year-end or early in the coming year. This, he argues, is a prudent policy because anticipating a crisis ahead of time will “create a basis for successful crisis management action later.“ How was an economic thinker who makes such dire forecasts appointed as the Chief Economic Advisor ? The answer seems to be that Arvind Subramanian does not stop at merely giving forewarnings of potentially frightening situations, he goes right ahead to suggest solutions and prescribe remedies to counter and survive such worst-case scenarios. That’s why he is regarded as being among the top 100 global economists. That’s why his name was so strongly recommended by Finance Minister Arun Jaitley. And that’s why Prime Minister Narendra Modi wants him to be in his Think Tank. It is very likely that Modi was fascinated by Arvind’s motto: “Prepare for the worst. If things don’t turn out to be half as bad as you had feared, then you are already equipped to handle the crisis.” Also, Modi must surely have been inspired by Subramainian’s hidden political message that to effectively implement economic policy and push through vital reforms, the Central Government must wield much more power than it possesses under the present system of parliamentary democracy. It is not enough to have an absolute majority in Parliament, it is also necessary to wrest control of State Legislatures as well. This explains, like nothing else can, why Modi campaigned with such verve and vigour during the Assembly elections in Maharashtra and Haryana. And why the BJP’s sights are set to capture power in Jharkhand, Jammu & Kashmir, and all other States currently ruled by non-BJP parties. Over the next couple of years, every Chief Minister – from Patnaik to Paneerselvam, Mamata to Manjhi, Siddaramiah to Ibibo Singh, Akhilesh to Abdullah, Gogoi to Chandy to Lalthenhawla – will be in the line of fire. As the traumatic experience of Uddhav Thackeray of the Shiv Sena has shown, even NDA partners like the Badals of Punjab and Naidu of Andhra, are neither immune nor indispensible. Narendra Modi has taken Chief Economic Advisor Arvind Subramanian’s advice seriously – Decentralization is Detrimental to Development.
First consolidate political power through out the country and then go full steam ahead to implement the economic development agenda on full throttle.