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OPINION 11
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Volume XXII Number 208

ILLUSTRATION BY BINAY SINHA
MUMBAI | FRIDAY, 1 JUNE 2018

A steady recovery
Manufacturing, investments help buoy economic growth

T
he provisional estimates of annual national income for 2017-18,
released yesterday by the Central Statistics Office, confirm the wide- ing will fall from 3.3 per cent to 2.8 per cent. These
ly held belief that the Indian economy is on a slow but steady path of deficit-shrinking changes are unlikely to happen,
recovery after the twin shocks of demonetisation in November 2016 causing the 2028 deficit to be 7.1 per cent of GDP –
and the launch of the goods and services tax (GST) eight months later. Gross val- two percentage points higher than the official pro-
jection.
ue added (GVA) at basic prices grew by 6.5 per cent in 2017-18, slightly higher than
If a deficit amounting to 7.1 per cent of GDP were
what the second advance estimates had put out earlier in February. This still allowed to occur in 2028, and to continue thereafter,
makes the 2017-18 figure the lowest in all the four years of the Narendra Modi gov- the debt-to-GDP ratio would reach more than 150 per
ernment. But the trajectory of growth captured in the quarterly GVA numbers cent, putting the US debt burden in the same league
unmistakably establishes a clear recovery trend. To be sure, the upward revision as that of Italy, Greece, and Portugal. In that case, US
of the 2017-18 figure was largely due to the fourth-quarter numbers , which esti- bonds would no longer look like a safe asset, and
mated GVA growth in the January-March period at 7.6 per cent, the highest lev- investors would demand a risk premium. The inter-
el reached in the last seven quarters. est rate on government debt would, therefore, rise
substantially, further increasing the annual deficits.
Four sectors contributed to the uptick in the fourth-quarter numbers for 2017-
Because financial markets look ahead, they are

US’ exploding
18. Agriculture came out with an impressive figure of 4.5 per cent, overcoming already raising the real (inflation-adjusted) interest
the high-base disadvantage of the last quarter of the previous year. What boost- rate on long-term US bonds. The real rate on the 10-
ed the agriculture number was the use of the third advance estimates of crop pro- year US Treasury bond (based on the Treasury’s
duction released by the ministry of agriculture, which were higher than those inflation-protected bonds) has gone from zero in
put out in the second advance estimates. Manufacturing at 9.1 per cent was the 2016 to 0.4 per cent a year ago to 0.8 per cent now.
With annual inflation running at about 2 per cent,

budget deficit
highest in the last seven quarters. Helped as it was by higher corporate earnings,
its performance is indicative of how the effect of demonetisation has worn off the increase in the real interest rate has pushed the
nominal yield on 10-year bonds to 3 per cent.
and the pain of transition to the GST regime has been absorbed by businesses.
Looking ahead, the combination of the rising debt
Another sector that bounced back in the fourth quarter was construction, which ratio, higher short-term interest rates, and further
at 11.5 per cent, reflected the positive outcome of the pick-up in the government’s increases in inflation will push the nominal yield on
road-building programme. 10-year bonds above 4 per cent.
The biggest contribution to the improved numbers in the fourth quarter came
from public administration, which broadly corresponds to government spend-
Slowing the growth of Social Security and Medicare must What can be done to reduce the federal govern-
ment’s deficits and stem the growth of the debt ratio?
ing. Over a 16.4 per cent growth rate in the last quarter of 2016-17, public admin- be part of the solution It is clear from the forces that are widening the deficit
istration again clocked a 13.3 per cent rise in January-March of 2017-18. The sec- that slowing the growth of Social Security and

T
he United States has an enormous and rapidly
tors that disappointed include mining and trade. Both of them showed little
widening budget deficit. Under existing law,
improvement. This is no surprise. The absence of a sustainable regulatory the federal government
framework for the mining sector has seriously undermined it, just as exports con- must borrow $800 billion this
tinue to suffer from woes over GST refunds. year, and that amount will dou-
Gross fixed capital formation, which indicates the investment rate in the econ- ble, to $1.6 trillion, in 2028. During
omy and is the key to sustaining growth, has also maintained a healthy trend. this period, the deficit as a share of
For the second successive quarter, it grew as a per cent of gross domestic prod- GDP will increase from 4 per cent
uct (GDP). At 31.4 per cent of GDP for 2017-18, it still has some catch-up to do, but to 5.1 per cent. As a result of these
annual deficits, the federal gov-
its steady, though slow, rise since 2016-17 is comforting for the economy’s growth
ernment’s debt will rise from $16
prospects. trillion now to $28 trillion in 2028.
For the Reserve Bank of India, however, which is to review the monetary The federal government’s debt
policy next week, the national income numbers for the full year will present has risen from less than 40 per
a new set of challenges. Inflationary pressure in the economy has not yet sub- cent of GDP a decade ago to 78 per
sided. Financial outflows in the last several weeks have complicated the cent now, and the Congressional
risks. With the improved numbers on economic growth for the last year and Budget Office (CBO) predicts that MARTIN FELDSTEIN
the continuing risks of inflation and financial outflows, the RBI may have to the ratio will rise to 96 per cent in
2028. Because foreign investors hold the majority of
look at its options afresh.
US government debt, this projection implies that
they will absorb more than $6 trillion in US bonds
during the next ten years. Long-term interest rates on
Opposition arithmetic US debt will have to rise substantially to induce
domestic and foreign investors alike to hold this
very large increase.
The by-poll outcome is a big jolt for the BJP Why is this happening? Had last year’s tax legis-
lation not been enacted, the 2028 debt ratio would
So the cause of the exploding debt lies elsewhere.
The primary drivers of the deficit increase over
the next decade are the higher
cost of benefits for middle-class
older individuals. More specifi-
cally, spending on Social Security
retirement benefits is predicted
to rise from 4.9 per cent of GDP to
6 per cent. Government spend-
ing on health care for the aged in
the Medicare programme —
which, like Social Security, is not
means tested — will rise from 3.5
per cent of GDP to 5.1 per cent. So
these two programmes will raise
the annual deficit by 2.7 per cent
of GDP.
This officially projected
increase in the annual deficit would be even worse
but for the fact that the cuts in personal income tax
enacted last year will lapse after 2025, reducing the
2028 deficit by 1 per cent of GDP. The official deficit
projections also assume that the recently enacted
increases in spending on defence and non-defence
discretionary programmes will be just a temporary
boost. Defence spending is expected to decline from
3.1 per cent of GDP now to 2.6 per cent in 2028, while
Medicare must be part of the solution. Their com-
bined projected addition of 2.7 per cent of GDP to the
annual deficit over the next decade is more than
twice the officially projected rise in the ratio of the
annual deficit to GDP.
The best way to slow the cost of Social Security is
to raise the age threshold for receiving full benefits.
Back in 1983, Congress agreed on a bipartisan basis
that this threshold should be raised gradually from
65 years to 67, cutting the long-run cost of Social
Security by about 1.2 per cent of GDP. Since 1983, the
average life expectancy of individuals in their mid-
60s has increased by about three years. Raising the
future age for full benefits from 67 to 70 would cut
the long-run cost of Social Security by about 2 per
cent of GDP.
At this time, slowing the growth of Social Security
and Medicare is not a politically viable option. But as
the deficit increases and interest rates rise, the pub-
lic and the Congress might return to this well-tried
approach.
Martin Feldstein, Professor of Economics at Harvard
University and President Emeritus of the National Bureau
of Economic Research, chaired President Ronald Reagan’s
Council of Economic Advisers from 1982 to 1984
©Project Syndicate, 2018

I
s a trickle becoming a flood? Earlier this year, the defeat of the ruling still reach 93 per cent of GDP, according to the CBO.
Bharatiya Janata Party (BJP) in the Phulpur and Gorakhpur Lok Sabha by-
elections — won by the party by a margin of over 300,000 votes each in the
2014 general elections — was dismissed as an aberration, an upset achieved
by an artificially unified Opposition. The BJP said airily that unity of parties with
conflicting interests was transactional and could not last. Prime Minister
Narendra Modi repeated this at Baghpat earlier this week on the eve of the
To Orban via Thatcher, Harper and Yew
T
he by-poll results across the country,
Kairana election, warning voters that enemies of the BJP were coming togeth- announced on Thursday, are in stark con-
er for selfish ends. But this argument seems to have had few takers. In 2014, the trast to the euphoria experienced by
BJP had won Kairana by a margin of over 200,000 votes. It lost the seat by around Narendra Modi and the Bharatiya Janata Party
45,000 votes yesterday. It also lost the Nurpur Assembly seat to the Samajwadi exactly four years ago. In May 2014, the Indian elec-
Party. This, despite being in government. torate thought it had found the solution to all its
It is not just Uttar Pradesh. The party lost the Bhandara-Gondia constituen- problems in Mr Modi’s leadership. As against the
cy in Maharashtra after its own sitting MP quit the BJP following public criticism bumbling and mumbling Manmohan Singh-led
government, Mr Modi had come across as someone
of Mr Modi. The BJP’s humiliation can only have deepened by the fact that it has
who had the commonsensical answer to all wor-
had to cede the seat to the Nationalist Congress Party, currently only a bit play- ries. For instance, to farmers, he promised higher
er in the politics of the state. Despite being in power in Jharkhand, the BJP could prices, and to consumers, he promised lower prices.
not win the Silli and Gomiya Assembly seats because the entire Opposition sup- The promises flew in all directions and were made
ported the Jharkhand Mukti Morcha (JMM), which retained both. to everyone in a secular manner, regardless of age,
But even in constituencies where the Opposition was not unified, the BJP’s gender, class and caste barriers. For
performance has been below par. In Chengannur, Kerala, a state where the BJP some, although, it was enough that
is making a determined bid to mark its presence, it stayed a distant third though he was a kattar Hindu (a firm
believer in Hinduism) and could
opposition coalitions challenged each other. Its alliance partner, the Shiromani
build roads. But, the fact remains
Akali Dal (SAD), lost the Shahkot Assembly constituency to the Congress even that he never clarified, nor was he
though no opposition unity was in evidence. The only good news for the ruling asked by anyone, about the vari-
party came from the east. In the Maheshtala Assembly constituency in West ous internal contradictions in such
Bengal, the BJP displaced the CPI-M to come in at second place. It has formed promises. Not surprisingly, people
an alliance with the ruling Nationalist Democratic Progressive Party (NDPP) and have spent the last four years point-
ing out how many promises remain
won the Nagaland seat. It also managed to defeat the Shiv Sena to win Palghar
in Maharashtra, driving another nail in the coffin of relations with its most frac- unfulfilled. To blunt such criti- CLAY SQUARE
cisms, Modi Sarkar has lurched
tious alliance partner.
from one propaganda drive to
UDIT MISRA
After the latest round of by-polls, warning bells ought to begin ringing in the another. Here’s a recap. The four
BJP headquarters, which has clearly been caught unawares by the segueing of years of Modi Sarkar can be summarised under four
opposition arithmetic into winning chemistry. That is not good news for the par- broad phases. Each of these phases, even though
ty in the run-up to the 2019 elections. True, contradictions in the Opposition they are not watertight compartments, gives a
abound. Those working in the field in Kairana noted that the Congress had been flavour of how Mr Modi’s rule was seen — both by
somnolent throughout the campaign. No Congress leader of any standing cam- its supporters and its detractors.
paigned for the NCP in Bhandara-Gondia and the justification was that the
Thatcher and Reagan
Congress does not go where it is not invited. It is also uncertain whether the
This was the first phase and its beginning pre-dates
Opposition comprising political parties that are bitter rivals in several states can Mr Modi becoming prime minister. During this
really stay together. But while Mr Narendra Modi’s popularity and credibility phase (mid-2013 to mid-2015), Mr Modi was seen as
remain high, people are beginning to notice the sudden wealth of local BJP India’s answer to Margaret Thatcher and Ronald
cadres, their swagger and their challenging mien. In India, more than one elec- Reagan. Mr Modi berated the Congress-led UPA gov-
tion has proved that seemingly popular leaders can be unseated in days by a wave ernment for the politics of doles and handouts. The
of sympathy for the underdog. real solutions lay not in wasteful rural employment
guarantee-type programmes but in empowering the
young to voluntarily join India’s growth story by
the GDP share of non-defence discretionary spend-
equipping them with skills. It was hoped that India
would finally accept that its true inclination was
right of centre and, under Mr Modi, get the chance
to act on it. Minimum government, maximum gov-
ernance was the motto and markets were supposed
to find the solutions. It appeared as if Mr Modi could
disband any policy and any institution (remember
Planning Commission) regardless of its history,
provenance, role and achievement.
Stephen Harper
The Reagan-Thatcher phase carried on until Mr Modi
came up against his first real challenge — reforming
land acquisition in India. After failing to amend the
land acquisition law despite repeat-
ed Ordinances, he finally gave up
on the issue in the first half of 2015.
Since then the official line seems to
be that India does not have a land
acquisition problem. Many also
saw the BJP’s resounding loss in
the Delhi Assembly election to a
political upstart in the Aam Aadmi
Party and jibes such as “suit boot ki
sarkar” bemoaning Mr Modi’s pro-
market stance as significant con-
tributory factors bringing about an
almost 180-degree change in Modi
Sarkar’s positioning. From mid-
2015 to October 2016, it was thought that the real wis-
dom lay in incremental change, not big bang reform,
as was promised earlier. During this phase, Mr Modi
was seen as India’s answer to conservative Canadian
PM Stephen Harper, who was known for this policy
approach.
Lee Kuan Yew
The tide of propaganda turned yet again when, in the
immediate aftermath of the demonetisation
announcement, it was held that the days of incre-
mentalism were over and Mr Modi would not stop at
anything short of a transformation of the Indian
economy, society and polity. Mr Modi was reintro-
duced as the man determined to bring about trans-
parency in public life. (For obvious reasons, political
www.project-syndicate.org
funding was kept out of this drive.) For public con-
sumption, big bang reforms were back in favour and
there was not a moment to lose. Mr Modi was now
India’s answer to Singapore’s Lee Kuan Yew: Clear-
cut thinking focused on achieving growth with a
strong dose of illiberality thrown in. The only prob-
lem with this phase was that economic growth fal-
tered under the strain of Mr Modi’s policy enthusi-
asm. And that robbed the LKY-type image building
of its sheen. People were increasingly asking about
jobs and the PM had little more than pakoda-selling
to offer.
Victor Orban
We are now in the fourth phase. That’s because eco-
nomic growth and jobs do not matter as much. That's
because, if you listen to the government, all this has
been achieved. It is now about saving the country, in
a manner of speaking, from those who are not hon-
est and patriotic. That is why, Mr Modi is increasingly
being grouped with the likes of Viktor Orban, prime
minister of Hungary, and Recep Tayyip Erdogan,
president of Turkey. The first thought that comes to
mind when you think of these leaders is the “illib-
erality” of their regimes. Mr Orban, in fact, went on
record in July 2014 to proclaim: The “new state that
we are building is an illiberal state.” That is not to say
that he is undemocratic. Far from it. Since then he
has won another term and remains popular just like
Mr Putin is in Russia and Mr Erdogan is in Turkey.
Next phase?
It is hard to suggest what the next phase of propa-
ganda may be. But it is said that “propaganda is that
branch of the art of lying which consists in nearly
deceiving your friends without quite deceiving your
enemies”. In essence, biggest victims of Modi
Sarkar’s ever-changing narratives are its support-
ers. That should be cause for worry for the BJP more
than anything else. The next election is unlikely to
be fought on economic growth data (not that we
have accurate and comparable data). Mr Modi’s fate
rests on one simple question: Do his supporters still
believe in him? More so, because his detractors sure-
ly dislike him even more and are now joining hands.

Evolution of people management sector banks enjoyed in the marketplace,

industrial relations in a particular setting.
The second looks at the evolving leader-
ship strategies in managing a workforce
and aligning it with the overall objectives
of the organisation, and the third part inte-
BOOK REVIEW grates the two parts towards crystalised
concepts. The methods are systematic and
M S SRIRAM rigorous in the first part, reflective and
experiential in the second.
clearly. In any organisation, we find struc-
tures for career progression, lateral hires
and churn. Organisations also have a strat-
egy on leadership transitions. On reading
the book (and seeing the public sector
banks) we know that: (a) there is no later-
al recruitment; and (b) the top manage-
ment at the whole-time director level is
mostly a lateral hire from outside, and if
it was a recipe for lethargy and bureau-
cratic processes to set in.
The first part of the book has concerns
about managing employee relations with
the linkage to the business performance
being weak. The business performance is
important, but the management of per-
sonnel is more focused on how to commu-
nicate, manage militancy, disciplinary pro-
cedures, transfers, and industrial relations.
Fixing these ensures that the business
works. In the second part of the book (also
management was seen in the framework
of union-management relationship,
industrial harmony and worker rights. He
moved to middle management when the
economy opened up when the thinking
had moved from personnel management
to human resource management and the
business imperatives involved incentives,
motivation and personal development.
He moved to the senior management
when the concepts moved to human
resource development, empowerment
and looking at employees as individuals
with some interesting academic frame-
works from the outer world). At the same
time, the paradigm changes in the bank
also reflected how the personnel (later
human resource) function was changing
elsewhere. Given that Mr Khandelwal was
active in the HR network, the expectation
was that some connections to the changes
in the HR world outside of the bank would
also have some resonance and relevance
in the book. Of course, there is always a
wish in every book and it is rare that a
reviewer finds a book to be perfect.

I
t not often that we have an academic
who is also a hands-on manager. There
are always occasions when senior pro-
fessionals take a break to write their mem-
oirs, teach and do an academic type of
job. The obverse that an academic makes
a switch to a job of a hands-on profes-
sional is even more difficult. It is in this
binary world that we need to see Anil
Khandelwal’s book. Although the title may
indicate that this is a book on leadership
styles, it has much more on offer.
This book has three parts. The first is
more academic in nature examining
We have a researcher, hired in the
training establishment of a mainstream
commercial bank who is sucked into the
management function where he needs to
redefine his role and put his research into
action, while navigating the complex
functions of banking, much beyond the
comfort zone of an HR professional. Since
the whole book is set within a single
organisation, it is also possible for us to see
how the interventions have played out at
various stages.
That Indian public sector banks have a
flawed management structure comes out
somebody from within the bank makes it
(as in the case of Mr Khandelwal) it is only
a matter of chance.
So, we have a stable middle and lower
middle management and a moving top
management. In this structure, the organ-
isational culture is deeply set in the lower
and middle management and the top
management has little time to change any
of these with the proverbial tail wagging
the dog. Add the complication of the pub-
lic sector and, therefore, no hire and fire
policy, and the tail becomes even stronger.
With the near-monopoly that the public
when the banking sector is opened for pri-
vate sector participation), we see that the
paradigm moves beyond industrial rela-
tions to developing human resources to
take on the challenges in the marketplace
and how Bank of Baroda was internally
responding to the ecosystem changes.
It is interesting to note that Mr
Khandelwal’s career, the larger shifts in
the thinking pattern of management of
human resources and the competitive and
market forces have all moved in harmony.
Mr Khandelwal was somewhat junior in
the hierarchy when the concept of people
who contribute to the business. Mr
Khandelwal’s canvas gets wider in each of The reviewer is a faculty member with Centre
the stages. for Public Policy, Indian Institute of
The story of Bank of Baroda is unique Management, Bangalore
because of the specific actions taken dur- mssriram@pm.me
ing Mr Khandelwal’s leadership. However,
it is also the story of the public sector CEO CHESS MASTER OR GARDENER:
banks. The uniqueness is that Mr
Khandelwal was there at the helm, with all
HOW GAME-CHANGING HR
the tools and academic inputs at his com-
REFORMS CREATED A NEW FUTURE
mand to undertake fundamental human FOR BANK OF BARODA
resource-centric reforms. Anil K Khandelwal
As I was reading, one aspect struck me. Oxford University Press
The book is inward looking (embedded 360 pages; ~750