RAMESH THAKUR. The markets school Modi: India needs reform (Policy Forum 22-10-19)Oct 25, 2019
The Indian government’s tinkering has not been enough to enact real change – Prime Minister Modi must listen to the market and undertake a serious structural transformation, Ramesh Thakur writes.
On 11–12 October 2019, Prime Minister of India Narendra Modi hosted China’s President Xi Jinping at their second informal summit outside Chennai. The most notable feature of their interaction is how India continues to be a poor relation of China.
Three quick but very telling examples: Firstly, China’s flagship global telco Huawei is the world leader in 5G technology. With no indigenous firm with this technology, the Indian government is still assessing the national security implications of permitting Huawei entry into the Indian market because of national security sensitivity.
Secondly, China is in the global market to export bullet train technology and credit lines, and India is in the market to import the technology and concessional credit to build its first bullet train service.
Third, India pleads with embarrassing monotony its entitlement to permanent membership of the UN Security Council. China leverages its permanent membership to expand global influence and place Chinese nationals into top UN positions.
Robust and sustained economic growth has transformed China, delivering superior health, education and welfare outcomes for citizens. Thus in the latest Global Hunger Index, China ranks 25 while India languishes near the bottom at 102, down from 95 in 2010. Instead of transformative structural reforms, Modi has presided over incremental tinkering.
The failure to close the education gap is an embarrassing indictment of Modi’s education and economic policies in particular. A literate and skilled population is critical for long-term economic success, but Modi has been delinquent in addressing the scandalous state of India’s education, from primary through to tertiary levels.
In the 2019 Times Higher Education university rankings, China has seven universities in the top 200 universities, Tsinghua ranks 23rd, while India has zero in the top 300.
India’s economy has been decelerating for five quarters and almost all key indicators are trending down. On 10 October, Moody’s forecast India’s GDP growth rate to decline to 5.8 per cent for the 2019–2020 fiscal year, down from 6.6 per cent on the previous year.
As Shekhar Gupta puts it, instead of a ‘crouching tiger with its tail up’, India’s economy ‘is more like an abandoned puppy cowering with its tail between its legs’.
Unlike King Canute who demonstrated the limits of his own powers to his flattering courtiers, Modi is susceptible to courtier-sycophants. On 12 October Law and Justice Minister Ravi Shankar Prasad dismissed talk of an economic slowdown by noting that three Bollywood movies had grossed about USD $20 million in one day.
Lacking economic literacy themselves, captured by quacks peddling voodoo economics that led to the demonetisation disaster, and reliant on statist bureaucrats and hostile to businessmen, Modi and his cabinet and party colleagues have compounded their self-harm by their failure to tell friend from foe among critical commentators.
Like King Canute’s command to the tides to stop and not wet his feet and robes being disobeyed, Modi is learning that he can fool the citizens into believing in voodoo economics, browbeat the opposition, and bribe and bully the media, but he cannot control the markets.
Unlike cabinet and party colleagues or bureaucrats, the markets are still speaking truth to power in communicating the bad news to the all-conquering and powerful PM who bestrides the Indian political landscape like a Colossus.
The budget presented on 5 July, the first for Modi’s second term, was lacklustre and timid.
When Modi announced the aspirational target of a $5 trillion economy by 2024 – up from the present $2.4 trillion – he seemed to have switched his mindset from Indira Gandhi’s limiting slogan of ‘garibi hatao’, end poverty, to ‘amiri lao’, bring prosperity.
The budget was woefully inadequate to this ambition that requires an annual GDP growth rate of 10-11 per cent. Foreign investors fled India’s stock markets and the Sensex shed nearly 2,500 points.
There are some signs of hope. Since the badly-received budget, slowing growth and tanking stock market, the finance minister has been busy announcing, press conference by press conference, reversals and corrections.
The criminalisation of non-compliance with two per cent of company profits earmarked for corporate social responsibility is gone; so are tax hits on capital gains of foreign portfolio investors. Corporate tax rates are also down, the complex GST structure will be reviewed, and the finance secretary was eased out and has taken early retirement.
However, the key to the structural transformation of the economy is structural reforms. The political precondition of a commanding majority in parliament was met even in Modi’s first term, but consolidated political power is disconnected from a visionary economic strategy.
Long-term banking, land and labour reforms are urgent. That requires the investment of the PM’s political capital and powers of persuasion to get buy-in from the people and state governments. The public sector banks still account for 75 per cent of banking assets but are subject to non-market political pressures in allocating credit.
To diminish their chokehold, Modi should privatise them, along with other big loss-making state enterprises like Air India, and/or licence additional banking operators in the private sector.
The ‘Howdy, Modi’ event in Houston on 22 September was the latest overseas glitzy extravaganza designed to showcase Modi’s drawing power. He is an admirer of US dynamism but fails to appreciate how its innovation-come-productivity driven economy rests on the solid pillars of free enterprise.
It rewards entrepreneurial risk, has a meritocratic culture resting on an educated and skilled workforce, and cultural diversity is built on open immigration. On Modi’s watch, India has regressed on some of these items and been stagnant on others.
For example, when the defence minister travelled to France to take delivery of the new Rafale jets for the Indian Air Force, the CEO of the engine manufacturer behind the fighter jet told him on 9 October that India should provide an attractive business environment and not ‘terrorise us’ with complex tax and customs rules.
His complaint was validated the next day with the World Economic Forum’s Global Competitiveness Report. India ranked 68 out of 141 countries, slipping 10 places from 2018. In the report, India ranks below 100 countries in information technology adoption, health, labour market, skills, and product market.
Modi’s biggest political blunder is the failure to recognise that the best time for bold reforms is early in a term. In the immediate aftermath of a sweeping victory, there is both public goodwill and reluctance on the part of the defeated and demoralised opposition to challenge the government’s mandate.
Four years later, heading into a new election year, memories of the pain of reform will have faded and populist sops can be offered to voters. By then, the gains from these policies are also visible.