Reform is a Dirty Word in India: An Update

A previous post made the case that India’s difficulty in advancing serious economic reforms is ultimately due to the lack of a home-grown intellectual tradition that can undergird them.  As business leader turned public intellectual Gurcharan Das notes, the country is bereft of “a liberal party that openly trusts markets and focuses on economic and institutional reform.”

So does the likelihood of Narendra Modi becoming the next prime minister render this argument void?  The long-standing chief minister of Gujarat has made his state a major industrial hub and a magnet for foreign investment through business-friendly policies.  Under his leadership, the state experienced an average annual growth rate of over 10 percent – the second highest-pace among the larger Indian states – in the 2005-2012 period.   One Washington-based think tank ranks Gujarat as the most economically-free state in the countryThe Economist magazine recently termed the state “India’s Guangdong” and said it “offers a glimpse of a possible industrial future for India.”  McKinsey is similarly laudatory, and some are even speaking of Modi as a new Thatcher.

The prospect of Modi’s ascension has sent the country’s stock markets booming (here and here) and led Goldman Sachs to raise its investment stance on India.  Indian corporate leaders are pinning their hopes on his being able to revive the faltering economy and rejuvenate what many now see as rudderless policymaking in New Delhi.  Anil Ambani, for example, likened him to Arjun, a peerless warrior in one of the Sanskrit epics of ancient India, and extolled him as “a lord of men, a leader among leaders, and a king among kings.”

(It is sobering, however, to recall that another Indian leader with strong reformist credentials and popular support was being hailed in similar terms not too long ago.   In July 2008, following his victory in a dramatic no-confidence vote in the Indian parliament over the U.S.-India civilian nuclear accord, current Prime Minister Manmohan Singh was lauded as the country’s “Lion King” and – borrowing from the Bollywood movie then playing – shouts of “Singh is King” filled the air.  A year later, after becoming the first Indian prime minister in decades to win re-election, the Australian newspaper called him “one of the greatest statesmen in Asian history.”   Newsweek magazine went on to place Singh on the top of its list of the world’s top 10 leaders and praised him for “inspiring awe among his fellow global luminaries.”  Mohamed El Baradei acclaimed that he is “the model of what a political leader should be.”)

Modi has grand ideas for India’s economic resurgence, which have now been formalized in a just-released election manifesto.  The 52-page document contains few convincing details, but the greatest disappointment is on the one point where it is quite explicit: A pledge to roll back the Singh government’s policy granting the individual states authority to decide whether to permit foreign participation in the multi-brand retail sector in their areas.  This policy, tepid as it is, has attracted considerable political opposition, especially from Modi’s Bharatiya Janata Party, which fears that the millions of mom-and-pop shops that form its electoral base would be forced to go under.

All of India’s major political parties confront the challenge of reconciling ideological orthodoxy with the imperatives of economic modernization.  The Congress Party, with its long history of anti-business sentiment, has devoted much of its time in power over the past decade to instituting expensive, market-distorting social welfare schemes instead of productivity-enhancing measures.  For the BJP, the credo of swadeshi (national self-reliance) runs up against the ideals of global free markets.

At the party’s leadership conclave earlier this year, Rajnath Singh, the BJP’s president, exemplified this conundrum when he offered up kissan bazars (“farmer’s markets) as an alternative to retail-sector liberalization.  “Modernization and vested business interests have sounded the death knell for vegetable markets and weekend markets,” he proclaimed.  “In the 21st century, we need to revive these markets in each and every town and city of our country as organized retail will neither benefit farmers nor consumers.”  Indeed, the emphasis of the meeting was more on extending costly welfare programs proposed by the Congress Party than on instituting much-need economic reforms.

Modi is something of a maverick, however, with a record of bucking party precepts in favor of economic pragmatism.  In a recent address, he even hinted that he was open to rethinking the BJP’s stance on retail reforms, arguing that small businesses should instead welcome the rigors of global competition.  One Indian analyst took his words as an important signal that Modi “is preparing the ground for a shift away from opposition of foreign retail.”

The manifesto makes clear that this was false hope.  It is discouraging that the BJP is moving backwards since, since as my earlier post emphasized, retail-sector liberalization would have major positive ramifications.  The announcement is also at odds with the document’s innovative call to make state governments partners in the conduct of foreign policy.  Indeed, it undercuts what has been a salutary development in India over the past decade or so: The emergence of the states as laboratories for policy experimentation and good governance.

No place better exemplifies this trend than Gujarat under Modi.  To take one illuminating example: Many experts believe that the anarchic laws governing labor markets have stifled the growth of labor-intensive manufacturing, something which should be a huge comparative advantage for India.  With Modi at the helm, Gujarat has instituted a more flexible interpretation of these laws.  A new Goldman Sachs report estimates that if the rest of India did the same, the result would be the creation of some 40 million new manufacturing jobs over the next decade and that an even more basic reform of labor regulations would lead to 110 million jobs during that period.  Modi has spoken in the past about devolving labor laws to individual states and according to some media reports the BJP is even contemplating major labor reforms.  But in light of its just-announced policy on retail liberalization as well as the high political costs such a step would entail, one must remain quite skeptical of these reports.

Another new exhibit in my argument is provided by the Aam Aadmi (“Common Man”) party, the up-start anti-establishment movement that oddly combines an emphasis on clean government with backward economic views.  Its election manifesto emphasizes that “Clean, open and transparent governance is in the heart of [the] AAP’s economic agenda” and argues that crony capitalism is the gravest scourge confronting the Indian economy.  The party also indulges in economic populism, including opposition to opening up the country’s vast retail sector to foreign businesses.  Perhaps the best that can be said for the AAP is that its recent short-lived, amateurish stint running the Delhi municipal government has soured its prospects ( see here, here, here and here).

I will close by reiterating the final point in my previous post: “Until a political party emerges genuinely committed to the reform agenda, India will remain the proverbial ‘country of the future’ – full of vast potential but never coming close to achieving it.”

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3 thoughts on “Reform is a Dirty Word in India: An Update

  1. I have witnessed and heard this debate on economic reforms vs social sector spending many times and on many forums.
    Economic reforms are very much part and parcel of any economy, and I do not agree the Congress and BJP or for that matter any political party is anti-any reform.
    BJP under Vajpayee junked the Swadeshi Model of RSS ideologues Sudarshan and Gurumurthy and embraced the Rao-Manmohan economic development model of increasing liberalization but preference for a mixed economic model.
    Their anti-FDI stand in multi-brand retail is just vote bank politics-the mom and pop store owners are their traditional voting block and also funds the party!
    The 7star Free Market ideologues Gurusharan Das and Surjit Bhalla are all for a complete free market economy.Now this duo will blatantly claim that there is only 1% poor and no hunger at all, and that social sector spending is giving away freebies.
    This duo probably never opened the windows of their air conditioned bedrooms and looked outside around their area.Any blind man can see abject poverty and hunger right below our windows but not Gurucharan Das or Bhalla.
    Secondly these are no freebies, it is their share of their contribution to the GDP.!!
    The Left on the other hand would like more state run enterprises to power the economy, more based on the liberalized Chinese model!
    Then we have a population of 1.23 billion, predicted to cross 1.56 billion in 2050 and 2 billion by 2100 AD, we need a mixed economy to keep people from hunger, disease and starvation.
    Social Sector spending has to be high too.
    How do we earn the money for the spending?Free market enthusiasts say let the industry and business drive the economy in a free market environment!
    Well if it was easy as that the world would be without hunger and starvation no?
    Lets not worry too much about the Western Rating Agencies-their recommendations do not seem to plucking Western economies out of severe recession for a full decade.Jobs growth in US has remained flat for 12 years-zero growth.
    Thinking that they have any serious way ahead for a developing economy like India, is to test the intelligence of even a non-economist!
    Now lets take Guj-the wonder state often quoted.Lets look at some of the latest figures
    Guj has slipped below the national average on income growth both urban and rural over the period 2002-2012.
    Human Development Indices Guj trails far behind many states, though I must admit once the criticism rose to a crescendo, the Govt has started many initiatives to plug this gap!

    Guj has slipped from 11th in 2001 to 16 in 2011 in the Policy Effectiveness Index(PEI)
    What is PEI?
    It is an index of
    a)rule of law
    b)livelihood opportunity
    c)social opportunity
    Now I can quote a dozen indices to prove that Guj may have fast corrupt free project clearance mechanisms but is way behind in human indices.
    And governance and development is all about improving human developmental indices!

    So Guj is not really the wonder state as is being claimed!

    I think the Indian Industry has had not a great record in building indigenous capabilities, except for a few who can counted on their fingers!
    Even Ariel is on borrowed technology!P&G was headed by Gurusharan Das!

    I think what we need a Chidambaram type of economist who can switch on and switch over economic development strategies as the economy grows and vanes- a very flexible approach.
    A static long term approach is unlikely to get India the best results!
    A mixed economy of the UPA with increasing economic restructuring to give industry a controlled free hand is the best model for India, I can see, without taking party sides or sides in economic modelling!

  2. Mr Holland you really need to expand on that, than pass just a cryptic comment.
    I am by nature a bit verbose in what I want to say, and hence understand things better when it is put in a more elaborate way.
    Well lack of ethical behaviour is not a political leadership only manifestation.I would say it is more a an intrinsic behaviour pattern in India and daresay among Indians in general.
    When you see Indian diaspora in USA or Europe, this may seem an exceedingly derogatory comment.
    Most of them perform exceedingly well and may be are model citizens there, that is a capacity that is inbuilt into Indians too- to adjust quickly to the social ethos yet stay almost separate as an identity.
    In India on the other hand, it may not be so!
    Well I have to go into a bigger discussion why it is so!Simply put Indians believe in surfeit of rituals that replaces having hard core ethics and behaviour in daily life!
    A transgression can be easily be handled by placating the deity by a ritual-a disconnect between the very high spirituality Indians seem to have but low in ethics, discipline and a casualness towards infringing on others rights!

    Secondly there is no popular supported market based economic growth model.It is probably supported by the 30% who constitute India’s upper classes(economically), who would like also heavy subsidies in many sectors-like fuel, health, electricity, water, education,transportation etc.
    The existing Govt the UPA2 has lost this voluble and influential electorate by cutting these very subsidies and redirecting them to the 65% who really need it.

    Hopefully that answers the question you have posed partly!

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