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Section : Economics
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More Reforms In Two Years Of Modi Govt Than In Previous Twenty-Two
 
The fact that China changed its tune, and the LIs did not, proves that it was not democracy that delayed economic reforms in India, but LI ideology — a feudal mindset

By Surjit S Bhalla




 

Surjit Bhalla: More Reforms In Two Years Of Modi Govt Than In Previous Twenty-Two

SNAPSHOT

No matter how you slice it, you have to agree there have been more economic reforms in the last two years than all of the previous 22.

As we celebrate 25 years of reforms, we should remember that the journey has not been without various hurdles. And while there are signs that the reform process is accelerating, there are pitfalls which remain. Hence, it is important to discuss the forest of the political economy of India before delving into the trees of specific policies.

It has only been 25 years since that that fateful summer of 1991, when India started in earnest on its quest for its manifest tryst with destiny—a destiny that includes the transformation from a very poor country to a bustling, middle-income nation. This journey has not been smooth and been fought all the way by the BLIPs—Bureaucrats, Left intellectuals, (major) Industrialists, and Politicians. One of the most basic lessons, even premise, of the study of political economy is that the losers will fight to retain their unfair privileges, their feudal standing. And it is this fight that we need to chronicle, to understand, in order to appreciate the challenges which remain.

Theory suggests that if the winners were to compensate the losers, the transformation process will be faster. But even with compensation, the losers want to fight on because there is another element that is not sufficiently appreciated by the reformers—the feudal power that comes with being a BLIP.

The influence of the left intellectuals (LIs) should not be underestimated. I do not bring this up in order to present a red rag, or be polemical, or even argumentative. Because while not necessary, the LI is in the anti-reform business because of ideology. Take the recent controversy over the use of a biometric card, Aadhaar, in order to effectively identify the poor and transfer benefits to them. It is being fought by the LIs (that the word LIs sounds exactly like “lies” is purely coincidental). India spends more than 1 per cent of GDP on income transfers via in-kind transfers of food. 

 

One would think that because of umpteen studies documenting the corruption involved that there will be a universal demand to try out cash transfers. There is—but there are two sets of people opposing this reform—the bureaucrats who stand to lose a lot of corruption money and the LIs who stand to lose their “influence” in policy making.

It is not a coincidence that economic reforms started in earnest once the feudal and communist baggage was aggressively shed by China in 1978. There was no more ideological anchor for the LIs. The LIs could no longer point to China for their feudal recommendations. The fact that China changed its tune, and the LIs did not, proves that it was not democracy that delayed economic reforms in India, but LI ideology — a feudal mindset. 

What do these two words (feudal mindset) joined together at birth mean? Feudal means the “traditional” way of conducting life. Khap panchayats, honour killings, etc. are part of the mindset of a feudal. Labour laws, rules for licensing, lack of bankruptcy laws (until a few months ago), laws on reservations in jobs and education, very high relative wages in the public sector, rules on what crops you can grow, and what prices you will obtain- how can any of this be justified? 

Reforms and progress should not be thought of in purely economic terms; rather, they should be thought of in terms of freedom. Why should anyone tell me about what I should eat, why should anyone tell me what religion I should or should not follow, why should anyone tell me what I can, or cannot, see—and what jokes I do, or do not, find funny? 

All the LIs I know of (and I know plenty) believe, like I do, in the above mentioned freedoms. Then, paraphrasing Shakespeare, what meat have the LIs eaten that they can dictate who, or what caste, I should hire for my firm, and who I should fire? 

Why is it that when it comes to agriculture, subsidies and labour laws, the LIs are on the same side as the NAIRs (Non- and Anti-Intellectual Right). Why are LIs always with outfits like the antediluvian NAIRs headquartered in the Swadeshi Jagran Manch?

One must recognise that the economic reform process is a battle of ideas, it is a battle for freedom, it is a battle for dismantling inherited privileges, it is a battle for mindsets. All indications are that with the decline of the Congress, in parallel will be a decline of the LI—and that with the recognition of freedom, the future will be on a fairer, and more equitable, basis. We are in that sweet spot (which can last a few decades) where the emerging middle class transits to a middle-middle class; where concerns about freedom (social, economic, and political) dominate discussion and policy. 

It Started In 1991

When Finance Minister Dr Manmohan Singh started the reform process in 1991, he had the full support of the ruling political class i.e. P.V. Narasimha Rao. India was a very closed economy in 1991, and the initial thrust of the reforms was to integrate India into the world economy and to unshackle domestic industrialists from the fetters of bureaucrats and politicians. The reforms were large and big bang. Scrapping of industrial controls, removal of banned items for imports, huge reduction in tariff rates, reduction in income and corporate tax rates, opening up Indian production to foreign investment and a large depreciation of the heavily overvalued exchange rate—21 percent over two consecutive days. 

Those born after the 1980s cannot even begin to appreciate the massive transformation of India that the Rao-Singh team engineered. It would be unfair to accuse the team of neglecting agriculture in their plans. But it is not unfair to accuse subsequent governments of neglecting agricultural reforms. They did and only now, under Narendra Modi’s BJP, is agriculture beginning to get its due place in the reform sun.

Economic Reforms: 1993-2013


There were to be few economic reforms over the next 20 years and, unfortunately, these were significantly “balanced” by the anti-reforms introduced by Sonia Gandhi’s UPA government. In 1997-98, working with the United Front government, Finance Minister P. Chidambaram took income tax reforms a significant step forward by rationalising tax rates and reducing the peak rate to a reformist 30 percent. Corporate tax rates were also reduced, but kept at high levels—the effective corporate tax rate in India, around 25 percent, is one of the highest in the world! 

With the stable Vajpayee government coming to power in 1999, privatisation with management transfer started, euphemistically described as strategic disinvestment. “Disinvestment”, by the way, is a word which does not find any mention in the English dictionary. 

There is one reform introduced by the Vajpayee government which, unfortunately, is not recognised as a major economic reform. This was the freeing up of the financial markets, in particular the unholy nexus between state and central fiscal deficits and the means of financing them. Interest rates for savings (and investment) should be determined by the laws of supply and demand. But not in a country like India in 1999. Small savings depositors were rewarded with a guaranteed 12.5 percent return when the prevailing inflation rate was 4 percent! Starting in 1999, and proceeding over the next four years, Finance Minister Yashwant Sinha brought down small savings rates to 8 percent; with inflation staying constant at around 4 percent, this meant a real interest rate decline of 450 basis points. Investors followed, and the boom in investment rates (from around 24 percent of GDP to around 36 percent of GDP) is the policy responsible for accelerating India’s GDP growth from around 5.5 per cent to around 8.5 percent in the initial UPA years. 

Revenge of the Anti-Reformers: 2004-2013


The Vajpayee government lost the 2004 national election. The Congress achieved the same number of seats—between 140 to 145—which they had obtained in 1996 and 1998. The first casualty of reforms was disinvestment when A.B. Bardhan of the CPI, a constituent of the UPA, said “Bhaad mein jaaye disinvestment (Disinvestment can go to hell)”.

The strong growth enjoyed by India in the 2003 period onwards owes much to improved weather, improved international climate, and higher savings and higher investment. There is not a single policy that one can point to, under the UPA, which helped cause the growth acceleration. 

Both UPA I and II were marked by populism, and the Amartya Sen-led policy initiatives pertaining to “entitlements”—jobs, food, education, energy, etc. Indeed, the realistic expectation was that if the UPA had won in 2014, they would have introduced an entitlement-to-happiness law! 

What was remarkable was that the BJP was hand-in-hand with the Congress in all these ventures. But the BJP either blocked meaningful reforms like the GST, legislative backing to Aadhaar and privatisation of public sector undertakings, or its support was opportunistic. 

It is fair to conclude that the BJP supported all the UPA laws that should not have been supported, and blocked all the UPA laws that should have been passed.

Reforms under Modi: 2014

Expectations were high soon after Narendra Modi’s large, and unexpected, victory in 2014, that his government would bring in big bang reforms.


The big bang reform that did not happen was large-scale privatisation. Modi’s own record rule as Chief Minister of Gujarat would suggest that expecting privatisation in his first term was a mistake. 

Agriculture, almost always the first sector reformed in most economies, had remained untouched in India, from 1950 to 2014. Indeed, agriculture had witnessed the largest set of anti-reforms during this period: e.g. minimum support prices for agriculture; government pricing of inputs like water, fertiliser, and power; lack of any crop insurance for farmers; and complete bureaucratic control of the inefficient delivery of food to the poor consumer (from procurement to storage to corrupt distribution). Most developing countries, when they initiate economic reforms, start with the agricultural sector. This did not happen in India—until now.

The Modi government has allocated higher budgets for the agriculture—rural roads and irrigation projects (almost triple if compared with the UPA years), removal of intermediaries from the marketing chain and introduction of schemes like national e-mandi for the marketing of agricultural produce, introduction of a heavily subsidised crop insurance scheme and rationalising of fertiliser price, and provision of fertiliser subsidies via Aadhaar. Contrast these reforms with previous policies—providing doles to (big) farmers through artificially high farm support prices and crop loan waivers instead of meaningful actuarial-based insurance schemes. 

There could also be a phase-out of the Food Corporation of India, maybe over the next three years. This will be a major reform because subsidies will be substituted by income transfers, and prices will be allowed to fluctuate according to conditions in the domestic and international market.

Land

The UPA government had passed a non-functional land acquisition bill (with full support of the BJP). This required the consent of 80 percent of farmers before land could be sold to the government-there are laws prohibiting the sale of agricultural land to private parties. This bill was amended by the present government in 2015 and passed in the Lok Sabha. Because of the Congress bottleneck in the Rajya Sabha, it was put in cold storage.

It is expected that the bill will be revived, but most likely after the 2017 state elections in Punjab and Uttar Pradesh.The Real Estate Bill, passed in the Lok Sabha in March 2016, establishes state-level regulators to end the malpractices rampant in this sector by increasing transparency and accountability.

Labour

Modern labour laws have already been passed in the BJP-ruled states of Rajasthan, Madhya Pradesh and Haryana. Under this law, firms can hire and fire workers if total employee strength in the firm is less than 300 workers (95 percent of all firms in India). State laws can diverge from national laws because labour (and land) is a concurrent subject. A national law, based on the Rajasthan state law, is expected to be introduced in the Lok Sabha this year.

Capital

Reforms have been undertaken with full consultation and partnership with the RBI. This close coordination of monetary and fiscal policy in itself is a first and a major policy reform.

Non-performing assets of banks

Recognition, cleaning up and financial support to asset-challenged public sector banks- this includes pursuit of crony capitalists for payment of bank dues.

Financial inclusion

The solution to India’s subsidy economy is through the trinity of Jan Dhan-Aadhaar-Mobile (JAM), primarily aimed at financial inclusion. Almost 220 million new bank accounts have been opened in the last year and a half. Once fully operational, regular cash transfers through Aadhaar into the Jan Dhan accounts would help in both efficiency of transfer of subsidies and in financial inclusion.

This reform provides a great opportunity for channelling the savings of the poor into the formal financial economy, taxation and finance. A phased implementation of reduction of corporate tax rates to East Asian levels of 25 percent has already started. In the 2016-17 Budget, there was a 1 percent reduction to 29 percent from 30 percent, with all indications that the target of 25 percent level will be achieved by 2019.

Ease of doing business

This is a catch-all term for signifying the dismal state of the “environment” faced by Indian industry. One important legislation in this regard is the passage of a modern Insolvency and a Bankruptcy Code, which ensures a time-bound process for insolvency resolution. The target for the government has been to improve India’s rank on the World Bank’s Ease of Doing Business Index from the current 130 to below 50 in the next three years.

The Bankruptcy Code will automatically improve India’s index by close to 10 percentage points.

Through the Make in India campaign, Modi has focused on the means to redress the anomaly that persists for a large developing country like India—a very low share of manufacturing in GDP (around 17 percent). To put it in perspective, in 2011, China’s share was 32 percent. The list of reforms in the short period of two years is long, and this list does not include the likely passage of the GST law in the 2016 monsoon session of Parliament. No matter how you slice it, there have been more economic reforms in the last two years than all of the previous 22.

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