Power of the narrative in economic belief systems
This Friday marked exactly three years since Prime Minister Narendra Modi announced demonetization, which sucked out 86% currency from Indian markets and wreaked havoc with trade, transactions and trust, three critical ingredients that keep economies lubricated and growing. The motivation was to hoover up illegally hoarded cash and end corruption. The Indian economy is still reeling from this unilateral policy’s after-effects. In the end, though, all the money has come back. Yet, loyalists and sympathizers see it as a successful move, echoing the party line that demonetization helped root out corruption. Oil minister Dharmendra Pradhan tweeted: “Demonetization, a bold and historic reform has ensured clean money and a cleaner economy. It has resulted in greater formalization and has pushed the direct taxes in the right direction.” Arvind Gupta, head of think tank India Digital Foundation, also tweeted: “Demonetization… has ensured clean and formal economy. It has resulted in broader tax base, higher digital payments…” This is the power of story-telling, or narratives: keep repeating the same thing and there’s a chance it might become a truism. The use of narrative for achieving a particular objective has been in use for centuries. Shakespeare’s characters used it to great effect in his plays, especially in Julius Caesar. Nazi Germany’s narrative of anti-Semitism and its horrific outcomes are too gruesome to be forgotten. Crossing over from politics to the economic realm, it is questionable whether story-telling enjoys the same efficacy. Ideally, reality has a tendency of catching up when penury or reduced spending collides against a grand narrative. But these are untested hypotheses for volatile times. Election 2019 demonstrated how nationalism is a more potent narrative than economic hardship. But the Indian economy’s slowdown is now irrefutable; any amount of spin-doctoring, or attempts to paint grand visuals of a powerful $5-trillion economy, is unlikely to reverse this slow-motion train wreck, and the government realizes that. Economic planners and administrators will thus have to carefully thread their way through different narratives that dominate thought waves emanating from advisers, the commentariat and vested interests. After corporate tax rates were cut, there are now expectations of a reduction in personal income tax rates, which hopefully will drive demand and consumption. This expectation is slowly transforming into a demand; yet, it is also true that only 56.5 million people filed their income tax returns in 2019, which is a meagre 4% of India’s 1.37 billion population. Any tax break for this 4%, no matter how sharp, is unlikely to jump-start the growth process. The unfortunate reality is that, despite demonetization, only 56.5 million out of 927 million adults are on the tax register. There is another narrative emerging from a small band of favoured economic advisers: asking the government to exercise restraint on spending and to tighten purse strings. This seems to ignore the established wisdom of a counter-cyclical fiscal policy during downturns. Yet another common refrain is sticky factor markets—land, labour and capital—to explain the falling investment rate, which might be true only to a limited extent. A relatively smooth factor market will require many other ingredients in the mix, including a different social welfare system. Also, going by insolvency court submissions and recent forensic audit reports, it would seem that large parts of Indian industry have unique skills in converting bank capital into personal equity; so, lack of capital actually doesn’t seem to be such a problem. Economist and Nobel laureate Robert Schiller has a new book out called Narrative Economics, based on a 2017 paper of the same name. In the paper, he stated: “The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs.” Discussing the book in a recent podcast, Schiller debunked the myth of the Laffer Curve; it’s an economic idea that captivated many politicians. Legend has it that Arthur Laffer drew his famous curve, which postulates higher revenue generation from lower tax rates (and hence higher economic growth), on a cloth napkin during lunch with Dick Cheney and Donald Rumsfeld in the early 1970s. Schiller contests the existence of this lunch, the story surrounding it and the theory; Laffer himself contradicts the story in his book: “My only reservation… concerns the fact that the restaurant used cloth napkins and my mother had raised me not to desecrate nice things…” But the idea had huge momentum, even catapulting Ronald Reagan and Margaret Thatcher to power. India’s exit from the Regional Comprehensive Economic Partnership has given birth to another kind of narrative. The national head of the Bharatiya Janata Party’s IT department, Amit Malviya, recently asserted in an oped: “Prime Minister Narendra Modi’s decision to opt out of RCEP sent out a strong message to the world that gone are the days when India caved in to pressures from global powers.” This is flexing non-existent muscles, shading the truth with imagined realities. The economy needs acknowledgement of a crisis, a medium-term strategy and concrete action. That will make for the most compelling narrative.
Rajrishi Singhal is consulting editor of Mint. His Twitter handle is @rajrishisinghal