Isn’t it time to minimise the government’s role in the economy?
Dhiraj Nayyar Dhiraj Nayyar | 13 Sep, 2024
(Illustration: Saurabh Singh)
AT ITS CORE, India’s political economy leans heavily towards redistribution, not growth. The decade between 2014 and 2024 was unusual because an exceptional leader seemed to have transcended India’s traditional divides and made a concerted effort to focus on expanding the pie rather than distributing its pieces. Now, as the polity reverts to a coalition era with a stronger Opposition, redistributionist tendencies are threatening to once again dominate the national agenda, whether through caste (led by the Opposition) or region (led by coalition allies). The government can continue to lay greater emphasis on growth but a change in approach may be required.
In its first two terms, backed by a solid parliamentary majority, the Modi government reoriented the role of government into a more productive force for the economy. There were three dimensions to this. First, a clear switch of public expenditure towards investment. The massive build-up of infrastructure, whether roads, railways or airports, began to cure the Achilles’ Heel of the Indian economy—poor or expensive connectivity—which greatly reduced competitiveness. Second, bringing efficiency to welfare spending by adopting the Jan Dhan-Aadhaar-Mobile trinity. This meant that those who needed state support actually received their due while keeping overall expenditure in check because leakages were cut down. Third, adopting fiscal measures to directly enhance the competitiveness of job-creating manufacturing in the private sector like much lower corporate taxes, production-linked incentives and capital subsidies. There were more new schemes for industrial growth than redistribution. All of these were a decisive break from the previous decade, and indeed, most of the decades since Independence.
Now, the political reality is different. It is unlikely to be conducive to a state-led boost to the economy’s growth. So far, despite some climbdowns, the government has resisted any radical break from its past two terms. But, as state Assembly elections come and go, and the national discourse becomes more preoccupied with redistribution, it will become harder for the government to move ahead with the same model. It may not regress but it is unlikely to be a driver.
An alternative approach can be found in the prime minister’s oft-quoted phrase on minimum government and maximum governance. His government has achieved much more on the latter than the former. Now, the time is ripe to give “minimum government” a go. It is time to make the economy government-proof.
The opportunities for India are increasing, not diminishing. China-plus-one is real. India being the fastest-growing major economy in an otherwise spluttering world is equally real. Domestically, the cycle of public expenditure-led growth has done its bit. For India to take off, what is required is an explosion of entrepreneurship. We have the talent. The world has the capital. We need to unleash the animal spirits.
There is nothing in the new political reality that prevents the government from erasing red tape—cutting is not enough. To its credit, it has set up a first-rate digital public infrastructure. Its use must be extended from just welfare to supporting entrepreneurship. Clearances of all kinds should move to self-certification with thorough audits. Land acquisition can be made completely digital, eliminating human interface and middlemen. It should take 24 hours or at most a week to set up a business.
Public expenditure-led growth has done its bit. For India to take off, what is required is an explosion of entrepreneurship. We need to unleash the animal spirits
The government continues to run more than 250 businesses. Some of these perform well. Most of them do not. The fact that they have government support of various kinds distorts the sectors in which they operate. While there may not be much appetite for privatisation, what can easily be done is reduce the government stake in all listed PSUs to below 50 per cent. They will cease to be PSUs, be free of the hanging sword of CBI, CVC and courts but still have the government as the largest shareholder. They can be run by independent boards and professional management on a level playing field with the private sector. Chronically sick and loss-making PSUs can still be sold without political backlash.
There are many other possibilities of reducing the government’s role in the economy. It will have a positive side effect—faster growth and more jobs. That may help allay some of the political pressure on redistribution.
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