Seductive economics: The theory that 2017 is like 2002

As theories go, this one is seductive alright and quite a few in the corridors of power and policy are smitten.

Published: 17th September 2017 04:00 AM  |   Last Updated: 17th September 2017 08:47 AM   |  A+A-

(L-R) Jaswant Singh, Yashwant Sinha and Atal Bihari Vajpayee

Shankkar Aiyar Author of Aadhaar:  A Biometric History of India’s 12 Digit Revolution, and 
Accidental India

As theories go, this one is seductive alright and quite a few in the corridors of power and policy are smitten. The essence of the thesis is that the economy in 2017 is where it was in 2002. Embedded in the enticing theory is the surge of expectation—buffered by the conflation of coincidence, correlation and causation. The hope is that the economy could shift trajectory as it did then, and grow at 9-plus per cent as it did for three years. 

Theories are either born out of facts or of belief—often propped by a confirmation bias. In his seminal tome Poverty of Historicism, Karl Popper says, “If we are uncritical we shall always find what we want: we shall look for, and find, confirmations, and we shall look away from, and not see, whatever might be dangerous to our pet theories. In this way it is only too easy to obtain what appears to be overwhelming evidence in favor of a theory which, if approached critically, would have been refuted.”

So is the 2017 economy like the one in 2002? Does it feel like it felt then? The answer depends on Albert Einstein’s exposition on the relativity of simultaneity—it depends wholly on the situation of the observer. Will the economy take off like it did in the previous decade? The poser draws on a logical fallacy—post hoc ergo propter hoc, that is, since event B followed event A, event B must have been caused by A. More critically whether the 2002 turnaround will be repeated depends on necessary and sufficient conditions.

However, it is possible to view and review the state of the economy then and the state of the economy now to appreciate if indeed 2017 is like 2002. Yes, the headline series is revised and there will be variance, but the trends should be readable. What does data say about the 2002-03 economy? Take a look at the levers of growth—deposits grew at 16.1 per cent, bank credit grew at 23.7 per cent, exports grew at 20.3 per cent, industry grew at 7.2 per cent, services grew at 6.97 per cent, while agriculture was hit by drought and was negative. 

How does that compare with 2017? Deposit and credit growth are range-bound in single digits. Exports have yo-yoed between negative flat and tepid—this week, the Ministry of Commerce said, export grew at 10.27 per cent between April and August. Despite a series of cuts in interest rates, gross capital formation dipped to 27.5 per cent and notwithstanding average growth of 7-plus per cent across three years, gross domestic savings dipped to sub 32 per cent. The answer to whether the economy is bottomed out depends on who is telling the story. Unlike in 2002, Consensus eludes inferences from data. 

Be that as it may, it is critical to factor context—local and global—to understand what, how, why and when of economic growth.  The ‘how’ of the quantum jump in India’s GDP from 2003 till  2008 is answered by data on global growth. World GDP grew at an average of 4.2 per cent from 2004 for four years. It is crucial to factor the explosive growth of Chinese economy, which averaged 12.1 per cent in the same period—hence, a major consumer of products and services. Fact is, India piggybacked global growth to touch 9-plus per cent GDP growth—to be fair to the UPA-I regime, they didn’t interfere. 
What was critical to the growth story is that India was primed for this opportunity. Remember that the economy in 2002 was traumatised by post Pokhran sanctions, Kargil war and Operation Parakram, plus the fallout of the 1996 hubris and the Asian contagion—gross NPAs were 12-plus per cent. Much like the fab-four of the Indian cricket team, the fab-five of the Vajpayee regime—politicos Yashwant Sinha and Jaswant Singh and technocrats Vijay Kelkar, Bimal Jalan and Y V Reddy—enabled deleveraging of balance sheets without the rhetoric of surgery, cut interest rates and enabled investment in infrastructure. 

The scent of hope, that 2017 is like 2002, rests on the fact that the macro fundamentals have improved. It leans on the belief that the 5.7 per cent GDP growth in the first quarter of this year represents the “bottoming out of the economy”. For sure, this government has managed subsidies better, introduced GST albeit with warts, and there has been fiscal consolidation. But there are vulnerabilities ahead—impact of 7th Pay Commission, farm loan waivers and transfer of debt of SEBs on the states. In the real economy, capacity utilisation is sub-par, the NPA story is far from resolved and there are fears that it could get worse—with emerging challenges to cost and earnings in power and telecom for instance.

Import penetration of manufactured goods—particularly from China—has hurt manufacturing and industry. There is also the issue of weakening consumption reflected in the GDP data and investment demand underlined by the RBI. This has led to poor job creation—remember nearly 60 million jobs were created between 1999 and 2004—triggering the cycle of skepticism if not pessimism. The resurgence of animal spirits, which drives growth, is constrained by conflicting policy and political narratives.

Yes, global growth could be higher—estimations of World Bank and IMF place world GDP growth between 2.9 per cent and 3.6 per cent for 2018, a level close to that of 2003. And it is an opportunity. The why of tepid growth witnessed is partly explained by the fact that exports, which account for a fifth of the economy, is suffering. So, theoretically, higher global growth could jump-start export growth as it did from 2003 averaging 25 per cent growth for five years. 

The question is can IT-Services, pharma, iron ore, chemicals and engineering goods lead the charge as they did then? Fact is, 2017 is vastly different from 2002—both in terms of buyers and what they want to buy. Price competitiveness is a factor, but more critical is the challenge of need or rather product competitiveness—delivering what the world wants.In any political economy it is vital to know ‘what is’ to decipher ‘what could be’. The poser, if 2017 is like 2002, could yet be useful—to trigger a necessary debate on whether India is ready for the next big boom!

Whether India is, to use a Kelkar phrase, on the ‘growth turnpike’ is really an open-ended question. The answer is located in the delta between the observed and the observable, and depends on what the visible hand of government does and what the proverbial ‘invisible hand’ perceives. Eventually, as P V Narasimha Rao once said, “who knows the horse may fly”.

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