The Reform Rush

AFTER THE TRIUMPH of the temple, an interim Budget or vote on account (its blandest moniker), was never going to be a high-voltage affair. But it provided ample evidence of the crux of Modinomics: focus on infrastructure, fiscal prudence, delivery of welfare. The political genius of India’s 14th prime minister is well acknowledged. In time, his economic philosophy will also be recognised as transformative.

It is quite common to hear of an equivalence drawn between China in 1978 and India in 1991. And there is much in common, with the two most populous countries in the world changing the trajectory of their economic ideology in the respective years. In 1978, China’s leader Deng Xiaoping turned his back on Maoism/communism as an economic philosophy and embraced markets. His saying “it doesn’t matter whether the cat is black or white as long as it catches mice” summed up the U-turn. In 1991, Manmohan Singh ended India’s embrace with socialism and invoked Victor Hugo: “No one can stop an idea whose time has come.” But while change can be signalled in a moment, success is a much harder trudge.

It needs a well-thought-out strategy and immaculate execution. That is where Modinomics is different from Manmohanomics. Modi is Deng in a democracy.

For a market economy to succeed, there are certain prerequisites which may not be in place at the time of change. First, there is need for a world-class infrastructure (roads, ports, airports, power) to build a world-beating economy. Second, successful reform requires an unbundling of an entire gamut of state-controlled markets, product markets, of course, but also land, labour, and capital markets. Third, there may be a transition period required where domestic entrepreneurs get some protection from global competition while the government builds the prerequisites. Fourth, need for the state to deliver basic needs to all to build support for a free economy.

Building a world-class infrastructure finally became a top priority and the government has committed increasing amounts of expenditure to it

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Deng understood this. And China took its time. So much time, in fact, that in 1991, its per capita income was the same as India’s, around the $350-mark. So much time that its trade liberalisation on imports began in earnest only in 2001 when it acceded to the World Trade Organization, 23 years after it signalled a new path. By then, all the necessary conditions for the flourishing of the economy had been implemented and China just pulled away from India in the 2000s.

India’s reforms took a different path. Trade liberalisation took primacy in the years after 1991, along with some capital market reform on the equities side. Banking, labour and land were left as they were. The building of a world-class infrastructure never made it to the priority list except in the interregnum of the Vajpayee government when highways and rural roads got attention. India’s reforms of 1991 were important and unleashed India’s potential in several sectors, most notably, services. However, they were never planned out strategically or implemented comprehensively with the aim of replicating the earlier East Asian success stories of Japan, Korea and Taiwan. They left manufacturing, the key to catch up, languishing. China captured the entire merchandise export market vacated by the earlier industrialisers and indeed created more for itself. Today, China’s per capita income is 35x of what it was in 1991. India’s is 7x, with a considerable increase since 2014.

When Modi took over in 2014, the task of creating a globally competitive economy was harder than in 1991. But Modinomics took up the challenge. Building a world-class infrastructure finally became a top priority and the government has committed

increasing amounts of expenditure to it. Even in the interim Budget, the allocation for infrastructure went up by 11 per cent, after tripling in the last four years. At the same time, the government has reversed some of the trade liberalisation of the two decades until 2014, raising tariffs moderately to give space for domestic manufacturing to build its capacity. Realising some of the political economy challenges in land and labour reforms, the government has tried to give industry a level playing field via production-linked incentives and lower taxes. The government believes that private sector must lead. So, it has to be fiscally responsible to allow more funds to go to entrepreneurs at a lower cost and cut red tape. It has realised that a market economy cannot have legitimacy unless everyone gets a basic standard of living, which is why it has relentlessly focused on improved delivery of welfare, and not just spend more on a leaky sieve.

Modinomics is committed to building the prerequisites for the kind of economic success China and East Asia witnessed. It is bound to yield rich dividends.

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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