View: Why Modi needs to return to his old slogan
After his return, Modi now has the political capital to risk short-term costs to reap long-term gains.
In 2014, some expected Modi to be a radical reformer like Ronald Reagan. Alas, his limited reforms and fast-expanding welfarism made him look more like Bernie Sanders. Rahul Gandhi accused him of running a “suited, booted government.” Sorry, but the 2019 Index of Economic Freedom of the Heritage Foundation ranks India a lowly 129th of 186 countries, and places it in the category “mostly unfree.” India fares better in World Bank’s ‘Doing Business’ rankings. But overall controls remain so pervasive that few businessmen dare criticise Modi for fear of retribution.
India has a cornucopia of freebies and subsidies. Subsidies are warranted for merit goods like basic education, health and safety nets. But 6% of GDP goes to non-merit subsidies, leaving not remotely enough for other key areas. Fiscal deficits have been kept low on paper by accounting tricks. But the total public sector borrowing requirement exceeds 8% of GDP, among the highest in the world. This is one reason for high interest rates that hamper economic growth and exports. Modi should prune non-merit freebies, and shift from leaky, corruption-ridden subsidies on goods to targeted cash transfers to the needy.
BJP flunked privatisation in its first term, although Niti Aayog prepared a long list of over 40-public sector candidates. An attempt to privatise Air India failed because too many conditions were attached. Modi’s first budget promised corporatisation of the Railways and port trusts, but this never happened. He now needs to go boldly for privatisation and corporatisation to finance urgently needed infrastructure, education and health.
Product markets have been liberalised since 1991, but not the markets for land, labour and capital. Indian exports have stagnated for five years since land, labour and capital are more expensive in India than in Asian rivals. Modi needs to make land acquisition quick and fair, and end political discretion (and corruption) in rezoning agricultural land as non-agricultural land. The leasing of agricultural land must be liberalised to enable the land of hundreds of small farmers to be pooled into large, competitive farms.
US sanctions against China have induced global companies to move out of China, but hardly any are relocating to India, thanks to its restrictive labour laws. That needs to change. Public sector banks still account for 70%of all bank loans and maybe 85% of dud loans. Lending standards must be improved. The Insolvency and Bankruptcy Code is a good idea but requires reforms to get much faster results. GST, another good idea, should be simplified by having just two or three rates with no ambiguities.
Protectionism rose sharply in NDA-1. India was penalised for this by the US withdrawal of GSP benefits covering $5.6 billion of Indian exports. NDA-2 must quickly negotiate a new tariff deal that facilitates the restoration of GSP.
Governance cries out for improvement. The police-judicial system lacks speed, competence and integrity. The backlog of 33 million legal cases will take over 300 years to clear. This denies justice to millions and gives law-breakers a huge advantage over law-abiders. Enforcement of contract is fundamental for a market system, but takes forever in India. This erodes efficiency and integrity.
Despite high GDP growth, India’s education and health indicators are dismal by Asian standards. Unsackable, unmotivated government teachers often do not teach. District panchayats must be allowed to hire and fire teachers, and introduce education vouchers on a large scale.
Indian minorities are insecure. On the positive side, communal riots have declined in NDA-1. Yet mob lynchings of Muslim transporters and attacks on Christians have hit social harmony. Modi has castigated Sadhvi Pragya for praising Nathuram Godse. If he can ingrain that attitude in his colleagues, especially in state governments, communal harmony will improve.
Nobel Laureate Douglas North and other economic historians have shown that strong, independent institutions are essential for long-run growth and prosperity. Congress historically interfered with many institutions and BJP is doing the same. The independence of the RBI, Election Commission, CBI, state police and the national statistical system is constrained. This may be politically convenient in the short run. But Modi should focus on the long run.