Reform and Modi's gift of timing

There is a pattern in Prime Minister Narendra Modi, the reformer. And there is a method. Only the truly naïve would believe that economics and not politics would come first for the most talented and successful Indian politician in several decades. The Prime Minister has the right instincts on economics. His long track record in Gujarat and his speeches since he became the prime ministerial candidate of the BJP in 2013 lay out his vision quite clearly: Get the government out of areas where it is a hindrance, in business activity for example and strengthen government in spheres where it needs to deliver, in welfare for example. A vision is not, and cannot be, entirely implemented in one quarter or even four, not in a complex democracy with competing interests. When the history of his rise and tenure in government is written, perhaps what will stand out is Modi’s genius in timing.

Those who have observed Modi’s track record should not be surprised that he has started his second term in office as PM with two big bangs — the abrogation of Article 370 and a deep cut in corporate tax rates. Contrast these four months with the corresponding four months in 2014. Then, the biggest bang was the announcement to abolish the Planning Commission — not unimportant but not big bang. Like his first full term as CM of Gujarat, Modi’s first term as PM of India was about learning and consolidation of political power. It’s in the second term that he pushes the accelerator. Hence his description of what has happened so far as only a trailer of the presumably action-packed film to follow.

Cut back to the first term. Modi did take a step towards what could be called big bang reform when he tried to amend UPA’s awfully restrictive land acquisition law. He took flak for stepping back when Rahul Gandhi targeted him with the “suit-boot” jibe. A canny politician, Modi would have been acutely aware that one of the reasons for the defeat of the only previous BJP-led government was because the Opposition had successfully painted it as a pro-business and pro-rich government because of its liberal economic policies. Remember also, that in 2014-15, the public perception of India’s private sector was dominated by crony capitalism. Politically, the timing was not right for aggressive market reform.

For the rest of his first term, Modi followed a two-pronged approach to economic policy. First, to decisively act against crony capitalism, black money and corruption in order to shore up the legitimacy of a private sector-led economy. And second, to ensure efficient delivery of welfare to the most marginalised so that they became active stakeholders and supporters of his broader vision to change India. The latter is now viewed by conventional wisdom as one of the main reasons he won an even bigger majority in 2019. The former is often criticised for the disruption it caused to the economy (whether demonetisation or GST or the Insolvency and Bankruptcy Code) — and indeed the administrative machinery could have done a much better job of implementation — but without it the deep corporate tax rate cut, which is a fundamental structural reform of the economy, would never have seen the light of day.

Critics of the Modi government are wrong when they say that the economic slowdown has been caused by this government. The truth is that the slowdown began in 2011-12 by when the dividends of the Rao/Vajpayee reforms had greatly diminished and the consequences of a sustained global slowdown became apparent. The lack of substantive reform between 2004 and 2011 was biting and the nasty side effects of almost double-digit growth in the form of corruption and cronyism was causing a fever. 

Modi’s disruptions did not aid growth — a simpler GST might have — but they played their part in cleansing the economy and changing public perceptions. Now, the jibe of suit-boot will not stick. The bold corporate tax reforms can be followed with other structural reforms like the privatisation of public sector companies. Again, there will be a method. Air India, the sickest PSU may be offloaded first. Some of the more profitable PSUs, like in the oil and resources sector, may be divested by reducing the government’s stake to 49 per cent while having a diversified public ownership for the remainder. Land and labour reform will come, but given the politics, it may come in the form of pilot experiments in some BJP-ruled states.

Of course, welfare is not going to disappear. It should not. Market reforms can only succeed if the system is perceived as fair. Modi may yet succeed at doing what no Indian PM has before — subsuming good economics into successful politics but not by textbook and in his own time.  

The author is chief economist, Vedanta

 


Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel