In India’s darkest economic hour, with the economy starved of cash, the prime minister extolling the people on the virtues of sacrifice and the Reserve Bank of India (RBI) governor finally emerging from his 14-day absence and silence to reassure citizens, one critical individual has gone “missing”. A look out poster should be released forthwith to find out the whereabouts of Arvind Subramanian, the charismatic chief economic adviser (CEA) to the Indian government.
In the history of independent India, no economic development has impacted so many of its citizens so suddenly as the government and RBI’s ill-conceived, poorly-executed decision to withdraw the Rs 500 and Rs 1000 notes from circulation on the evening of November 8, 2016. An economic decision of such magnitude should have been articulated and defended by the principal economic adviser, but media-friendly Subramanian, who is normally contacted by the business media on the most trivial of economic issues, has been incognito since November 10 when he made a cryptic remark on how the demonetisation will be a transfer of unaccounted wealth from private to the government coffers. His official Twitter account, from where he used to tweet regularly, has also remained ominously silent since November 8, when he last re-tweeted on pollution. While the media had raised the issue on the self-induced silence of the RBI governor and the central bank being a tertiary actor in the most momentous monetary decision in India, they have remained strangely reluctant to question Subramanian on his views.
In the demonetisation fiasco, the RBI, an institution predating independent India and mandated by parliament to manage the currency, has allowed itself to be upstaged by the finance ministry. Now it appears that the government’s CEA was not even informed about the decision to withdraw the high denomination notes. Former finance minister P. Chidambaram has alleged, “It has emerged, through whispers of course, that besides the Prime Minister no more than four officials were in the loop, and the Chief Economic Adviser was not among the four! ” Neither the government nor the CEA has rebutted these allegations.
The foreign-educated economist, on sabbatical from the Peterson Institute of International Economics, has had an uneasy relationship with the far right (Hindutva) elements of the ruling BJP. On March 8, 2016, replying to a question from students of Mumbai University on the controversial beef-eating ban and its impact on the rural economy, the CEA had publicly retorted, “You know that if I answer your question, I will lose my job. But thank you nevertheless for asking the question.” His namesake, fellow economist, member of the Rajya Sabha and Hindutva foot-soldier Subramanian Swamy had launched a campaign for Subramanian’s removal as CEA in June and August of this year, on the grounds that prior to his appointment as CEA, he had voiced critical comments on Prime Minister Narendra Modi and in the US Congress had challenged India’s stance on World Trade Organization for its pharmaceutical companies.
Despite Hindutva elements baying for his blood, the CEA has always been backed by finance minister Arun Jaitley. But lately, the CEA’s public silence has raised questions. Some clues on what he could be thinking can be gleaned from his earlier statements. The implications of the demonetisation are contrary to the position publicly adopted by Subramanian. In the 2014-15 and 2015-16 Economic Survey, of which he was the principal author, he had argued against “Big Bang” reforms because of the dispersed nature of power in India and the absence of that impelling driver — a crisis. He argued therefore in favour of a “persistent, creative and encompassing incrementalism” as the guide for prospective action and the benchmark for retrospective assessment.” The draconian decision by the government and the RBI to demonetise high denomination notes overnight directly contradicts the incrementalist approach advocated by the CEA to achieve India’s economic objectives.
More importantly, in the Economic Survey as well as the Mid-Year Economic Review 2015-2016, the CEA had argued for the need to stimulate demand in the economy through counter-cyclical measures and cautioned that “more attention should be paid to the demand side of the economy. The sharp and continuing decline in nominal GDP growth, as well as the fact that the economy is powered only by private consumption and public investment—is a cause for concern. ”
A direct and instant fall-out of demonetisation has been the slowing of economic activity, especially in the rural hinterland and backward areas. In an already depressed investment climate marked by a steep drop in employment growth, demonetisation has given a death blow to demand.
The brunt of the blow will fall on the labour intensive informal economy consisting of micro and small establishments employing 127.7 mn workers (Sixth Economic Census 2013-14) and around 138.35 mn farms (Agriculture Census 2010-11) that largely deals in cash and engages around 80% or more of India’s employment. A disruption of such magnitude on a large segment of the population is going to have a major impact on demand till the currency situation stabilises.
Taken together, the CEA’s long absence in the public domain at such a crucial juncture, the allegations that he was not informed about the demonetisation and the drastic contractionary impact on demand when he was arguing for counter-cyclical policies to revive aggregate demand make his tenure unsustainable. It is possible that the favourite of the finance minister has fallen out of favour with the all-powerful political supremo as he may have objected to the demonetisation. And the Modi government is not known to treat dissenters kindly. In the face of such developments any self-respecting CEA to the government would tender his resignation. That he has not yet done so puts him in the same bracket as RBI governor Urjit Patel and deputy governor in charge of currency management, R Gandhi. Patel and Gandhi, who have characterised their conduct through incompetence and allowed their institution to be bypassed, will continue to warm their chairs for their refusal to question their political masters.