Modi and the Supremacy of Law

SEVERAL YEARS AGO, when I was a graduate student in Economics at the University of Cambridge, I recall participating in a discussion about the rise of East Asia’s Tiger Economies, still a fashionable subject in the early 2000s. One participant made an unusual point while comparing Singapore and Hong Kong (already at per capita income levels of advanced economies) with China (which was only beginning to shine). All three were populated largely by Han Chinese and none was a democracy in a true sense; all variations of authoritarian regimes. However, according to the participant, the reason Singapore and Hong Kong had thrived and China would continue as before was that the former had inherited the concept of ‘rule of law’ from the British, something which was alien to mainland Chinese more than a decade after their shift to capitalism. For the uninitiated, he gave a simple example to illustrate the difference. In mainland China, if an individual violated a traffic law and was flagged down by a policeman, an argument would ensue, followed by a gathering of a mob, followed by the hasty departure of the policeman. The offender was right, not the law. In contrast, in Hong Kong and Singapore, traffic rules were generally obeyed and offenders punished. His argument applied to the law in general.

Most countries that have advanced economies adhere to the rule of law, which means that the law of the land is supreme and no individual, government or judge is above it. Indeed, everyone is subservient to it, particularly government officials. This creates a predictable, conducive and trouble-free environment for all manner of activity, including economic. I was reminded of that discussion at Cambridge 15 years ago in recent weeks. In India, just about everyone encroaches on the law. Most recently, the honourable judges of the Supreme Court decided to curb drunken driving by imposing a ban on the sale of liquor within 500 metres of a National Highway. But drunken driving is already against the law and if its rule were supreme, no further intervention would be necessary. Ordinary Indian citizens think nothing of trampling on the law. Few have any fear of the consequences. Being inebriated at the wheel is just one example. Vigilante action taken by groups of various hues is another. If there is a law that exists, it should be enough to either deter violaters or punish them. Citizens do not need to enforce justice. People could argue that it is decades of poor governance which has created a culture and incentive system where the rule of law doesn’t matter. If a bribe or a connection with someone powerful is enough to sidestep the law with impunity, most individuals would brazenly violate it. Ultimately, it is the pernicious influence of a corrupt, self-enriching, above-the-law executive over a long period that made a mockery of the rule of law even though India, unlike China, did inherit the principle from the British.

But why is it so important to India if China seems to have prospered with scant regard for it? Two reasons. China has an extraordinary state capacity which has delivered high-quality public goods and simultaneously succeeded in suppressing wages and labour. The combination provided an attractive destination for investment, particularly of the global kind, which was looking for alternatives to high-cost advanced economies and rising-wage East Asian Tigers. India does not have a great deal of state capacity, as is evident in the relatively poor state of infrastructure and public goods. India’s democracy would not allow an artificial suppression of workers or their wages (note how difficult it is to even mention labour law reforms) and open competition between diverse interest groups in a country that is so heterogenous (unlike Han-dominated China). The Indian state has thus leant towards uninhibited populism, which tends to destroy rather than foster economic growth.

In India, given the deterioration in institutions that safeguard the rule of law, only strong and decisive leadership can reverse the trend

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The second reason is equally important. While China has achieved much, its per capita income at about $6,000 is still a fraction of what it is in the West, Singapore and Hong Kong. As the steam runs out of its low-wage, export-based model and China looks to move into higher value-added goods and services, its lack of respect for the rule of law may hurt its prospects: poor protection of intellectual property rights, weak contract enforcement, an opaque financial system and a corrupt political establishment may yet trip or stall China’s rise. India, with an income per head that’s not even 30 per cent of China’s, cannot afford to stumble at all. The country has already witnessed what a breakdown in governance—the kind that happened during the UPA-II regime when laws and rules lost their sanctity, can do to economic growth.

It will take a massive effort to transform India into a country where the rule of law is supreme. But there are hopeful signs under the leadership of Prime Minister Narendra Modi. It may seem contradictory to expect so much of an individual when the entire point is to ensure that individuals in government and the judiciary do not acquire ‘larger than law’ roles. However, in India, given the deterioration in institutions that safeguard the rule of law, only strong and decisive leadership can reverse the trend. The Prime Minister has special moral authority because of his personal integrity. Unlike a lot of politicians, he doesn’t view himself or his ministerial colleagues as above the law, as shown by his decision to stamp out VIP culture by abolishing the use of red beacons. They must play by the rules. His wider drive against entrenched corruption, including the drastic step of demonetisation, is a radical effort to get all Indians—particularly the non-salaried—to play by the rules. Early evidence suggests that a reasonable number have been nudged to come clean. The rest will be made to face the law. Even a campaign like Swachh Bharat is nudging citizens to take their duties as seriously as their rights and to respect the rule of law.

Fighting and eliminating corruption or exhorting people to do their duty are important steps in restoring the rule of law, but not the only ones. In the end, the Government must withdraw from the plethora of interventions it makes, particularly in the economy, many with the noblest of intentions but disastrous in outcomes. Prime Minister Modi is the first leader who has openly committed himself to the maxim of ‘Minimum Government, Maximum Governance’. Minimum government would have the state withdraw from unnecessary activity in the regulatory space, the kind which tends to result in violations of the law. The Government’s commitment to the ‘ease of doing business’ is essentially about creating a conducive environment for investors.

All the government has to do is ensure a level playing field by letting the rule of law prevail without distortionary interventions. The damage that was done by the UPA enacting a retrospective amendment of tax laws in the Vodafone case would never happen in an economy governed this way. In the end, state capacity to deliver public goods, still an important goal for India (the maximum governance bit) will be achieved when bureaucrats focus on doing their real jobs—of drafting sound legislation and implementing Parliamentary enactments—and not meddling needlessly in spheres which do not require their attention. The same applies to judges, who must interpret the law to uphold its supremacy instead of turning legislative themselves (even with the best of intentions).

Prime Minister Modi’s lasting legacy to India’s economy and indeed polity should be an assurance that it never needs another Modi to rescue it from the abyss. In countries where the rule of law prevails, individual politicians, bureaucrats and judges can do only limited damage. Modi, with his personal integrity, commitment to minimum government, aversion to careless populism, and vision of all-inclusive growth is best positioned to make the rule of law supreme. India needs Sabka saath, Sabka vikaas and Sabka Kaanoon

About The Author

Dhiraj Nayyar

Dhiraj Nayyar is chief economist, Vedanta Ltd, and the author of Modi and Markets: Arguments for Transformation

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