Pratap Bhanu Mehta writes: India’s growth slowdown is a signal of declining confidence in government

But the faith in “cyclical” is a fatalistic evasion. We still have a “monsoon” economy mindset. Like the seasons, the economy will correct itself. Perhaps this is appropriate for an economy where good rain and modest agriculture growth in this cycle have saved us from what might have otherwise been a bigger slump. Capital formation in the private sector has been expanding at a snail’s pace for close to a decade now. High net worth individuals continue to flee India; private consumption is virtually stagnant, wages are stagnant, there is a slump in manufacturing, household savings are declining, the middle class is squeezed, small retail loan defaults are rising, albeit from a small base; India’s cash-rich large companies seem to struggle for investible projects. Three and a half decades after liberalisation, India is still massively reliant on public spending and the monsoon to shore up growth. This is an astonishing thought.

But here is what should be worrying the government more. Investors may not say it openly out of fear or politeness. But privately, even amongst those industrialists who will vote BJP, there is a crisis of confidence in the government. This, ironically, often stems from things the government thinks it is doing well, not just from things it is not doing. Here are three new issues that investors are talking about.

It is no secret that growth has been driven by increases in government capital expenditure. But there are two worries about the nature of this capital expenditure. It is dominated by Roads and Railways. In principle, these are two important items. But there is increasingly a worry that India is doing its capital expenditure more mindlessly.

Unlike the capital expenditure on the Golden Quadrilateral, PMGSY or other road projects, the efficiency and productivity gains from the type of projects we are now funding seem to be far less. Smaller investments that can produce greater efficiency gains are being neglected at the cost of capex mania. Capex is driven more by a penchant for spectacular infrastructure nationalism than economic sense. Second, transition into construction labour may hold current employment levels steady, but construction labour in India is seldom a pathway to enhancing the quality of lives and of human capital. So, the government’s success is actually being treated as a potential liability. Given how dependent India is on government capex, there has not been, since the Planning Commission was abolished, any analytically worthy assessment of India’s capex priorities and the costs it entails.

Second, there is amongst investors talk of a “governance delusion” in India. While the government announces new schemes galore, its spectacular schemes are now seen as failures. As is often the case in India, the government was good at distributing one-off goods: Opening bank accounts, gas and electricity connections and so forth. But these schemes simply cannot paper over systemic weaknesses. Its grandiose schemes are now littered like torn-up advertisements, which is what many of them turned out to be or were meant to be. There was no scheme for which excitement was greater than Swachh Bharat. It was an economic, moral and social necessity. But after the initial success in building toilets, even the health gains of reducing open defecation were reduced because of an inability to prevent waste discharge into groundwater. Travelling around India it is hard to avoid the impression that it is at least as filthy if not filthier.

Since the Kumbh Mela is on, it might be pertinent to ask where Namami Gange virtually disappeared. How slow our progress has been in sewage treatment plants. But failure of these schemes is part of the credibility crisis of the government. This is the governance delusion. When not executed well, they signify misallocation of energy and capital. And they have lowered confidence that India can address long-standing routine problems that make it an unattractive country.

From a regulatory point of view, the government’s four cardinal sins are, first, reneging on minimum government maximum governance. Admittedly, this is a complex issue. But there is an almost offensive insensitivity in the finance ministry to concerns about needless regulatory confusion and complexity, whether in taxation or GST. And defenders of the prime minister will often blame it on the bureaucrats. This is a bad move, it makes the government look weak and evasive. Second, the sheen is now off the government on corruption. There was always going to be centralised and wholescale corruption: The demands of political finance make that inevitable. But the reputation for retail corruption at the level of transactions is back with a vengeance. Third, there is diminishing confidence that India’s political economy will push for real reform. The government is quite comfortable with a political economy of growth for the top 10 per cent, combined with gestures of a “welfare architecture” for the bottom; Indian capital has made its Faustian bargain with the state. Finally, and this must be repeated ad nauseam, India’s capital concentration and championing of three or four large players is sucking out the competition and energy of India’s private sector. The fear of any moderately successful enterprise that it can be “expropriated” to benefit existing big players is real. This a conscious choice the government has made,

India has a real opportunity. But the growth slowdown is a signal of declining confidence in the government. Nothing cyclical about it. Or as the nursery rhyme goes, “Michael ki cycle kharab ho gayi.”

The writer is contributing editor, The Indian Express