Like Keynes, Manmohan Singh is treading the middle way, balancing
contending ideas in an effort to stimulate the animal spirits of
enterprise
We were flying to Mumbai where the Prime Minister was to address a
gathering of business leaders. I had drafted a speech that he found time
to read only on the plane. Half way through the journey he returned the
draft with his notes scribbled in the margins. “I have added a
quotation from Keynes”, he wrote. “But this is from memory. You will
have to check it against the original.”
As soon as we reached Mumbai’s Raj Bhavan I asked the university library for a copy of John Maynard Keynes’s The Economic Consequences of the Peace
(first published in 1919). A soiled old copy arrived in time. The quote
in the printed volume matched, almost to the last word, the one
scribbled by the PM on the margins of the draft.
This was October 2006. Prime Minister Manmohan Singh was addressing an
audience that included every big name in Mumbai’s business community,
quoting Keynes from memory:
“If the rich had spent their new wealth on their own enjoyments, the
world would long ago have found such a regime intolerable. But like bees
they saved and accumulated, not less to the advantage of the whole
community ... [they] were allowed to call the best part of the cake
theirs and were theoretically free to consume it, on the tacit
underlying condition that they consumed very little of it in practice.
The duty of “saving” became nine-tenths of virtue and the growth of the
cake the object of true religion.”
Prime Minister’s religion
Ensuring the “growth of the cake” has been Dr. Singh’s religion for over
three decades. In his first term, growth accelerated on account of a
sharp rise in both the savings and investment rates, the latter rising
sharply from 24.6 per cent in 2003-04 to 32.3 per cent in 2008-09.
However, the second term has been hit by a decline in the investment
rate largely on account of the government’s own acts of omission and
commission. Quite understandably, therefore, the focus has again shifted
to stimulating investment.
The clue to Dr. Singh’s thinking on economic policy lies in the lasting
intellectual impact of Keynes and his disciples on him. Dr. Singh’s
teachers included Nicholas Kaldor and Joan Robinson, two of Keynes’s
greatest disciples, and one of his tutors at Cambridge was Gautam
Mathur, the architect of Osmania University’s economics department who
thought of himself as a post-Keynesian messiah!
Uninformed commentators in the media often view Keynes only as the
doctor who had a medicine for depression. Undoubtedly that was his most
important policy contribution. Which is why, quite understandably,
Keynes’s celebrated biographer, Robert Skidelsky, titled the second of
his three-volume tome, covering the period 1920-1937, The Economist as Saviour.
However, among Keynes’s many contributions to economics was his analysis
of the role of ‘expectations’. Investors and consumers are ordinary
people responding to a variety of economic, social and political
signals. Their response is shaped by experience and hope, price and
prejudice.
Understanding why investors and consumers, savers and sellers do what
they do is not just about analysing past data but requires getting a
grip on what motivates them. Human behaviour, even in taking economic
decisions, is motivated by a variety of stimuli and so economics is, in
its essence, a behavioural science.
An important behavioural idea that Keynes introduced to modern
macroeconomics was that sentiment plays as important a role as rational
calculus in shaping investor behaviour. His now famous quote on ‘animal
spirits’ (that many in India have discovered after last week’s use of
that phrase by Prime Minister Singh), is in fact a fine exposition of
the idea.
In his magnum opus, The General Theory of Employment, Interest and Money
(1936), Keynes writes: “Even apart from the instability due to
speculation, there is the instability due to the characteristic of human
nature that a large proportion of our positive activities depend on
spontaneous optimism rather than mathematical expectations, whether
moral or hedonistic or economic. Most, probably, of our decisions to do
something positive, the full consequences of which will be drawn out
over many days to come, can only be taken as the result of animal spirits
— a spontaneous urge to action rather than inaction, and not as the
outcome of a weighted average of quantitative benefits multiplied by
quantitative probabilities.”
Apart from the weight Keynes gave to sentiment in economic policymaking,
he was a liberal who preferred what Skidelsky terms “The Middle Way”.
Manmohan Singh too is a liberal, centrist Keynesian walking the “middle
way.”
Keynesian or neo-liberal?
Far too many of both his critics and enthusiasts think of him as a
“neo-liberal”. I recall once asking Prabhat Patnaik, the distinguished
Marxist economist, a CPI(M) ideologue and my teacher and doctoral
supervisor, why he referred to Dr. Singh as “neo-liberal” when he knew
that he is in fact a Keynesian. Professor Patnaik replied “Manmohan
Singh is a Keynesian but the policies of his government are
neo-liberal.”
The policies too are a mix of contending ideas. It is perhaps not an
accident that Dr. Singh has chosen to surround himself with economic
advisors of very different intellectual persuasions. His longstanding
policy aide, Montek Singh Ahluwalia, can be dubbed a neo-liberal, a
traditional neo-classical economist. The chairman of Dr. Singh’s council
of economic advisors, Chakravarti Rangarajan, is in fact a traditional
monetarist, and proud to be so. On the other hand, the more recently
inducted policy wonk Kaushik Basu, chief economic advisor to the
Government of India, is more of a post-Keynesian.
What this diverse intellectual upbringing of India’s key economic
policymakers has meant is that Indian policy has not been orthodox, but
flexible. Skidelsky also dubbed Keynes a “Practical Visionary” — a
description that aptly describes Manmohan Singh as well. As a “practical
visionary”, Dr. Singh listens to the advice he likes and rejects what
he does not.
Thus, while Mr. Rangarajan is a fiscal conservative and would like to
see the fiscal deficit brought down sharply and monetary policy deployed
more forcefully, Dr. Singh has opted for a “middle way”. Similarly,
while Mr. Ahluwalia would like to see more privatisation and a more open
economy, here too Dr. Singh treads a middle way. Dr. Singh has always
encouraged internal debates within his team of advisers, picking and
choosing ideas based on their political practicality and feasibility,
almost always treading the “middle way”, a term that has more recently
become globally fashionable — from Washington to Beijing, Brussels to
Brasilia.
Best exposition
The best exposition of the “middle way” in Indian politics was in fact
given by Dr. Singh’s “political mentor”, former Prime Minister P.V.
Narasimha Rao, who dedicated a large part of his presidential address to
the Tirupati Session of the All India Congress Committee in 1992 to an
exposition of how the policies that he and Dr. Singh were following at
that time were in fact neither “pro-market” nor “anti-state”, but aimed
at a judicious mix of public policy and private enterprise — the “middle
path” as Narasimha Rao eloquently put it, seeking inspiration from the
Buddha!
True, Congress governments have always walked the “middle path” and the
sooner all Congressmen/women understand this about Dr. Singh’s policies
the better. There is much that a government can do for business without
succumbing to cronyism. Today, the government’s biggest contribution
would be to alter the ‘state of expectations’ for the better, stimulate
the ‘animal spirits’ of enterprise and end this long summer of
uncertainty that has come to grip Indian business.
This requires an economic strategy, a political strategy, as well as a
media strategy. If economic policymakers operate in a political vacuum
and fail to properly communicate to the general and the investing
public, their efforts would be in vain, as we have seen so often these
past three years. There has to be a meeting of minds between the
government and the political leadership and out of that must come an
effective strategy of policy intervention and communication.
India remains one of the world’s faster growing economies and there is
no reason why it should not become the fastest growing one before Dr.
Singh’s term is over.
(Sanjaya Baru is Director for Geo-economics and Strategy,
International Institute for Strategic Studies, and Honorary Senior
Fellow, Centre for Policy Research, New Delhi)
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