Why Gurumurthy has to employ voodoo economics to defend demonetisation (and attack Manmohan Singh)

The term “voodoo economics” entered popular lexicon when George HW Bush derisively used it to describe his presidential opponent Ronald Reagan’s economic policies for the United States of America in 1980. It is also best suited to describe what the Rashtriya Swayamsevak Sangh’s principal economic theorist, S Gurumurthy, has been saying recently in defence of his fellow RSS pracharak Prime Minister Narendra Modi’s demonetisation policy.

But before I elaborate on that, given that any criticism of the party in power, or its supporters, is deemed as an expression of support for the Congress regime, particularly the United Progressive Alliance’s 2004-2014 tenure, it is perhaps best to start with where I stand with respect to it.

The golden decade

I have never been an admirer of Dr Manmohan Singh for many reasons.

Most of all, because he never articulated a vision for a truly liberalised society, where the jackboot imprint of the state would become smaller, 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 regime, 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 the free ingress and exit of foreign capital into capital markets and a freer regime for foreign long-term investment to cater to India’s rapidly expanding demands.

Singh followed the code of Omerta, ignoring all the wrongdoings around him, and showed inertia when his ministers quite openly flouted his directions. But, most of all, I detested his excessive deference to the Congress president, whose sense of right and wrong was largely shaped by her family’s immediate interests.

Despite this, I recognise that from 2004 to 2014, the Indian economy grew by an average of over 7.8% each year. Included in this decade were two years at over 10%, two years at over 9%, two at almost 8% and even during the years, when the national mood turned sour, India grew at 4.0% and 5.9% respectively. If there ever was a golden decade of India’s economic growth, it was this. By contrast the first two Modi years saw Gross Domestic Product grow by less than those last two Congress years if the 2.2% tweaking of national income accounting is factored in.

In these last two years there has been zero job growth, though the prime minister claims to have created 31 million new jobs.

Fantasy figures

Modi derives this extraordinary conclusion by directly linking it to his claim of having disbursed 3.1 crore Mudra loans. What makes this patently bogus is the fact that the average Mudra loan is about Rs 1000 each. If a loan of Rs 1,000 can create one new job, as Modi assumes, then the country will largely rid itself of unemployment by spending just Rs 1 lakh crore to create 100 million new jobs.

These are the kind of fantasy economic figures only pracharaks – literally, propagandists – can cook up. That is not all – they don’t only cook up what doesn’t exist, they also ignore the reality pertaining to their main political adversary.

In his recent column, Gurumurthy blandly writes that the National Democratic Alliance I government of Atal Behari Vajpayee created 600 lakh jobs during its five years, while the UPA I and II just resulted in 27 lakh jobs. The reality is quite the opposite.

According to the Economic Census, “new jobs grew at an annually at 3.2% between 2005 and 2013 (UPA period), faster than the annual pace of job growth of 2.78% 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 fastest in the UPA years when economic growth was the fastest.

The growth rate in employment since 2005 was 38.13% 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 Gurumurthy’s voodoo economics, “the well-kept secret” of the Manmohan Singh period’s high economic growth was “huge asset price inflation, not production.”

Now, economists track economic growth by measuring the change in the 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, 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 that Gurumurthy seems to be ignoring.

Gurumurthy ascribes high GDP growth to increased money supply. The reality is that a growing economy needs more cash, and India is a cash-driven economy where almost 40% of wages are paid daily by cash. The demonetisation exercise, which has rendered large swathes of the economy sterile leaving behind in its wake huge number of unemployed people, should tell him that now.

It’s unfortunate that this realisation must come after shooting oneself in the foot.

Gurumurthy would do well to start with reading and digesting Economics, an introductory textbook by the great Paul Samuelson. It is the best selling economics textbook of all time, described as “the canonical textbook of mainstream economic thought.” My advice to him is that what is not in it on economics does not exist – as yet, anyway.

Old technique

In early 1999 I had an intellectual encounter with 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.

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 be achieved by retrieving the gold held in Indian households which, according to him, was worth several trillion dollars.

He kept repeating that all those who advocate foreign direct investment and the import of technologies must be foreign agents.

I see the same technique of simply maligning the opponents, being employed in defence of demonetisation, not only by Gurumurthy but also by his great friend and fellow conspirator, Finance Minister Arun Jaitely.

Mohan Guruswamy heads the Centre for Policy Alternatives, New Delhi, an independent and privately funded think-tank. He is also a Distinguished Fellow at the Observer Research Foundation, New Delhi.