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Catch-23 Economics, Catch-24 Politics

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Caught between wanting to be an ideal swayamsevak like Mohan Bhagwat, and a moderniser like Vajpayee, Prime Minister Modi could become an Indira-like statist.

Joseph Heller’s Catch-22 Lieutenant Milo Minderbinder earned his fame trading with himself, in a way that everybody involved in the circular transaction made a profit which, ultimately, came out of the government’s pocket. The reason he became an enduring brand ambassador of cynical capitalism is precisely because nothing mattered to him except profit for his company (called the Syndicate). He always made a profit, usually buying up the entire supplies of some commodity: eggs, tomatoes in a village, selling at a monopoly price to his own unit.

Except once, when he bought up the entire stock of Egyptian cotton in the world. There were no buyers left, as even if somebody bought it from him, they sold it back to him. In creative desperation, he even soaked balls of cotton in chocolate and tried selling them to his fellow soldiers’ mess. He had killed the Egyptian cotton market by becoming a monopoly trader — with himself.

But the genius figured out a way. Why not sell it to his government? Of course, as a pucca capitalist he believed the government had no business to be in business. But the sarcastic words of former laissez faire American President Calvin Coolidge (one with a hundred quotable quotes) came in handy: It’s the business of the government to be in ‘business’! Coolidge was, after all, a president, and what he said must be right, said Milo, government’s business is to be in business. So why not sell the cotton to the US government instead.

Now replace Milo Minderbinder with Bharat Sarkar, post-1969, and Egyptian cotton with India’s banks. See that economics play out now. Indira Gandhi first nationalises all of India’s major banks and creates a state monopoly in banking and finance, particularly as it also owns all insurance companies and developmental financial institutions (former ICICI, IDBI, IFCI etc).

Then it starts buying from itself: getting banks to invest in its own bonds, lend for its own projects and PSU enterprises, its loan melas and then, ultimately loan-waivers. So effectively its banking monopoly also became its unbeatable vote-buying business. In the process, the banks kept going bankrupt at regular intervals.

Now, since the banks were all state-owned, they couldn’t be allowed to fail and the government is too big to fail and it has the power to tax, and print money. So the government again buys its own banks (recapitalisation). And if it has to be done through an off-budget method so as not to make the fisc look bad, you can have your banks issue bonds. Which, in turn, you can get your other companies, PSUs holding spare cash, to buy. Now tell me, isn’t our government an even sharper capitalist than Milo Minderbinder? It’s even better in fact. If his economics was Catch-22, Bharat Sarkar’s is one better, Catch-23.

If you are the googling type, you might be tempted to ask how does all this Catch-23 sarcasm square with my published appreciation of the latest bank bailout plan. It is a good plan, because it is the only thing possible under the circumstances. If your patient is asphyxiating in an extreme asthma attack, and you are the doctor, what do you do but pump the body with steroids, never mind the side-effects.

So, in a situation where 70 per cent of banking is state-owned, is near-bankrupt (bad loans generally exceeding their capital) and a collapse looms, what do you do? Let one domino collapse and pick up the debris? In a situation where something had to be done, this bailout is decisive, bold and, if I may add in fairness, a little bit creative. The idea of issuing bonds to raise a bulk of the funds is smart. But now the suggestion that other cash-rich PSUs, obviously mostly energy monopolies, would be “nudged” to buy these, is disturbing.

There were bolder, more decisive and reformist options. Great leaders never waste a crisis, but Narendra Modi blew one here. We aren’t so unreasonable as to demand that he should have fully reversed Indira Gandhi’s worst economic legacy, bank nationalisation. Toxic economic ideas have a very long half-life. But he could have made a beginning by selling off just the two most stressed small PSU banks, and then announced that each year for the next 10, one government bank with the most messed-up balance sheet will be sold. It would have electrified the markets, shocked his other banks into better behaviour, constrained the political class from writing more tax-payer cheques to buy votes, and marked Modi’s name among the great reformers.

But is that really what Modi wants, to be remembered as an economic reformer? Commitment to PSUs, or of government being in business, may not be the only touch-stone of a reformer, but it is an important one. No Indian leader, not even Manmohan Singh, P.V. Narasimha Rao and P. Chidambaram, have dared to sell off PSUs, especially profit-making ones. The only one to have that instinctive commitment was Atal Bihari Vajpayee.

He was thwarted by a Supreme Court order rooted in the 1970s political economy – it barred any disinvestment without parliamentary sanction and prevented the sale of two oil giants, HPCL and BPCL. We would have expected Modi to pick up the thread from his own party’s idol, Vajpayee. What’s he doing instead? He is selling HPCL. But to his own ONGC. Once again Milo trading with Milo, with the state’s money. Catch-23.

Narendra Modi’s supporters have a point that unlike the period 1991-onwards when much reform could be carried out by stealth, today everything is in the public eye and has political consequences. But who is better equipped than Modi to mould public opinion? The questions, therefore, are: why is he not doing so? Does he even want to do so? And if not, what exactly does he want?

The answers lie in his politics. Unlike Vajpayee, he is a committed swayamsevak, and unlike him again, instead of dismissively laughing at the juvenility of the old RSS socio-economics, he is a true believer in ideology. Caught between his ingrained devotion to the idea of being a swayamsevak in the image of a Mohan Bhagwat, and an urge to be remembered as a modernising reformer like Vajpayee, he ends up as another Indira Gandhi, another great statist. A great economic-nationalist running an expanding and increasingly control-freak government. I would hazard to read his politico-economic mind as: there’s nothing wrong with the state running the economy, as long as you run the state wisely, and honestly. The quest for the perfect state has never succeeded. It is unlikely to now.

Modi has spent his youth and middle age as a full-time swayamsevak and that conservative upbringing won’t evaporate. But his exposure of the world now, meeting global leaders, watching how more successful economies and societies function would also make him want to embrace the neo-liberal ideal. The two forces, socio-religious conservatism and neoliberalism— whatever their faults — are contradictory. They can’t coexist. That’s the politics where Modi’s economics is trapped. What do we call his dilemma? Let me suggest: Catch-24 Politics.

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  1. I enjoy reading Shekar Gupta’s writing. He is original. On Mr. Modi’s reformist credentials, we have his record as CM. If anything, He is a more accomplished polariser than a reformist.

    • Agree. I have grown up reading his articles in India Today. He is certainly one of the most objective journalists.

  2. To the moderator: Sir, you should NOT cull plain, simple comments posted by readers as long as they are NOT offensive and abusive. I feel that you prefer to post comments that look ‘intellectually weighty’. You should be happy that ordinary readers like me are coming to your website and reading your articles.

  3. ‘Jekyll and Hyde’ and ‘hatred for another party’ are opinions. The issues are better analysed through the prism of Ramachandra Guha’s 23rd Justice Sunanda Bhandare Memorial Lecture or through the theories of leadership. As long as democracy is not subverted, and electoral process is fair, who cares whether Modi hates Congress. The people of India will decide whether they want bold leadership or spineless, mute proxy rule by a family bent upon perpetuation of dynasty in a country with 1.25 billion people. Thank you.

    • If bold leadership is cold (blooded) leadership where the bold leader is immune to people dying because of his policies like demonetisation, (or incompetent at Law & Order records like in Gujarat), then I’d prefer spineless leaders. They might stay stuck at 6 pc GDP instead of 9, but they might have some empathy – basic human considerations. The world has had enough ‘bold leaders’ who sacrificed a few without blinking for the benefit of what they perceived as greater good. I thought Indians were smarter than to fall for such foolishness. Maybe they aren’t, but plz don’t sell some gratifying macho idea of ‘bold leadership’. India’s young generation has many yrs to live and can do without such cold leaders who are simply unmoved by their citizens dying.

      • Go for it. But if it does not happen, do not whine that so and so got only 30-35% vote share and therefore has no right to be at the helm of affairs. And please do NOT come up with ‘EVMs tampered’ argument unless you have solid proof. Not defending any personality here, but there is no holier-than-thou in the post-1975 political landscape in India. If majoritarianism is winning, it is because Liberals in India (borrowing from Alexis de Tocqueville) ‘are so enamoured of equality that they would rather be equal in slavery than unequal than unequal in freedom’.

  4. It’s stunning how delusional the author is. The “reformer” and RSS are the same man. I understand India has wholesale bought into the idea that his communal agenda and his “development” are Jekyll and Hyde. But it’s just distressing that a seasoned writer can be conned into believing that this is two different ppl. He is just a cynical Congress baiter who will destroy the country for his personal hatred of another party. Not to mention incompetent. Wake up – stop deluding yourself.

  5. Like yours, my personal feel is bank nationalisation was the best move to isolate the economy from external factors. Very few countries in the world own their bank and that is the reason of their economies at the mercy of international factors. Anyway even US had to bail out Lehmann’s from its Treasury.
    The issue of PSU banks underperforming has more to do with politics than with their management.
    Poor foresight with the blinkers of next elections have eclipsed the wisdom of the politicians and awareness and expression of discontent by public is the go forward.
    Howsoever hard you try, you failed to link catch 22 and RSS. The article would have developed much better but for the futile attempt to link it with NAMO.

  6. It seems since Modi is not following your one way approach, you have assigned him the statist innuendo. Tell me who will buy distressed banks, some brave entity in private sector may take it up but at a significant discount price. On the contrary, if the banks are recapitalized and their books are in order – valuation of banks would be much higher and a significantly high premium price could be obtained.

  7. Call me naive – thankyou – but the way i understand it is that banks lent to private businesses who leveraged in anticipation of the “Land Reform Bill” which never showed up. Now that Modi has the majority in the upper house – it might come through.

  8. Shekhar! We have botched up right from independence. We people are steeped in our thoughts of getting our gods to grant us everything for free. Only requirement is prayers and elaborately designed rituals. Last 70 years have seen god being replaced with ‘sarkar’ for vote gains. To add to it, we are hardly the democracy type and it comes up loud and clear in one of the recent surveys where 55% preferred autocracy. When there is fire you douse it without thinking whether it is catch 22 or 23 or 24. We need a new constitution that is rooted in our peculiarities and not an imported one like the current ‘khichdi’.

  9. Shekhar! We have botched up right from independence. We people are steeped in our thoughts of getting our gods to grant us everything for free. Only requirement is prayers and elaborately designed rituals. Last 70 years have seen god being replaced with ‘sarkar’ for vote gains. To add to it, we are hardly the democracy type and it comes up loud and clear in one of the recent surveys where 55% preferred autocracy. When there is fire you douse it without thinking whether it is catch 22 or 23 or 24. We need a new constitution that is rooted in our peculiarities and not an imported one like the current ‘khichdi’

  10. i read you often but i got very confused reading this article by so many analogies. perhaps you should have stayed away from milo, coolidge, catch 22, and even mohan bhagwat. instead you could have spent the space on more facts related to the banks’ situation and how they got there. and then moved on to modi as to what he should do.

  11. Since the column quotes Mrs Gandhi and her nationalisation of banks – which also allowed her to privatise the Congress party – it would be instructive to recall how fragile her electoral strength proved to be, despite the aura of the creation of Bangladesh and the nuclear test of May 1974. The first oil shock set off high inflation, popular unrest and then the emergency. Governments must help put more and better food on the table for their citizens. No other way to sustain their popularity.

  12. Call it the beauty of the market : even with the Harshad Mehtas and the Ketan Parekhs surfacing with distressing frequency, it delivers superior outcomes than a government dominated, statisit set up, even if it is run by men of exceptional industry and integrity.

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