Modi In the Marketplace

IN HIS REPLY TO THE MOTION OF THANKS TO THE President’s address in Parliament on February 10th, Prime Minister Narendra Modi said: “I would like to remind my friends in the Congress that if the public sector is critically important for the economic growth of the country, so is the robust participation of the private sector. The culture of damning businessmen and entrepreneurs as outright crooks and wringing political capital out of name-calling them in public may have served parties well at the hustings in the past. But that has to stop. Wealth creators have a crucial role to play in the economy. Fruitful employment cannot be generated in a vibrant, youthful nation unless private enterprise distributes its wealth by setting up companies and employing people.” The prime minister went on to list the achievements of the private sector in the pharmaceutical and the telecom sectors—the former instrumental in making India the key pharmacist to the world and the latter in making the country a global IT hub and backroom office.

It was the most categorical statement so far of Modi 2.0’s economic roadmap, an unabashed batting for private enterprise and a significant dialling down of the populist, socialist perspective that dominated India’s economic narrative for years. The timing of the assertion was significant, coming as it did when the roads to the national capital were sought to be choked with opposition-backed choruses against private enterprise. It was politically risky and not, by any stretch of the imagination, a time for tough pronouncements. In a society where the dominant political narrative-crafting powers have remained the domain of the entrenched Left, the premium has been on misery-mongering even decades after economic liberalisation, with slogans like “Tata, Birla ki yeh sarkar, nahin chalegi, nahin chalegi” of the 1970s replaced by rants against “crony capitalism” in current times. Far from focusing on concrete and realistic blueprints to fuel economic growth, employment and all-round prosperity, these slogans tended to fix attention on swaying popular emotions and swelling the electoral kitty of political parties in the past.

Tied to a past buried long ago, these angst-ridden soundbites of yesteryears tilt at the windmills today, in an age when a youth-driven, aspirational India demands opportunities rather than charity from a mai baap sarkar. The slogans vesting virtue to anti-private sector sentiments have been inhibiting growth and curtailing the optimum expression of entrepreneurial potential. The timing of the prime minister’s decisive pronouncements—which at once destigmatised wealth creation and celebrated private enterprise—could have been fraught with political risk but Modi, the consummate politician, was confident of his standing and political capital. The concrete foundation for the economic growth blueprint of Modi 2.0 was laid in the five years of Modi 1.0 after 2014, when the prime minister single-mindedly burnished his welfarist image with a plethora of targeted schemes, including Swachh Bharat, the Ujjwala scheme, last-mile electricity access for villages, payment of honoraria to farmers, and so on. This was followed by the successful management of the pandemic to help migrant labour, economically weaker sections and the marginalised through leak-proof schemes like Pradhan Mantri Garib Kalyan Yojana, Pradhan Mantri Garib Kalyan Anna Yojana, besides beefing up the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). Free rations to the poor for eight long months of the lockdown as well as distribution of honoraria among farmers had already cemented Modi’s standing among the poor.

The aspirational classes received Modi’s words celebrating entrepreneurship positively, the first time in modern India that the economically weaker sections and the middle class joined hands in consolidating behind the prime minister. The only other time these two sections had joined hands was during the anti-corruption movement led by Anna Hazare, which had culminated in the ousting of Congress from power and the ringing in of the Modi Government in 2014. This coalition of the two classes behind Modi is proving to be an unbeatable combination. Having already created a strong constituency of the poor in the five years that followed 2014, Modi now appears to have gathered the confidence to move decisively in the direction of full-on growth without resting solely on an overburdened government and a creaky and loss-making public sector as the fulcrum of economic progress.

For the political opposition to Modi, this coalition of classes spells doom for the desperate narrative of an ‘anti-farmer government’ that it has been crafting. Despite all the efforts to bring international attention to the ‘kisan andolan’—and to paint Modi as an autocratic, corporate-promoting, anti-poor prime minister—it is proving to be a damp squib, with the farmers’ protest itself restricted to Punjab and pockets of Haryana and western Uttar Pradesh. Moreover, the International Monetary Fund (IMF) has projected a 13 per cent growth and Christopher Wood, global head of equity strategies at Jefferies, concluded that “India looks, right now, Asia’s best post-Covid recovery story”. That means good news for the economy and, consequently, funding for new schemes. Analysts, who till recently were complaining about the lack of reforms, have begun admitting that the prime minister has created a seamless blend of targeted welfarism and free-enterprise evangelism.

TO TRULY UNDERSTAND the statements of Prime Minister Modi in favour of the private sector, one has to go back to 2014. That year, the Bharatiya Janata Party (BJP) won a clear mandate for Lok Sabha. This was in no small measure due to expectations that Modi would launch a reforms drive like the one that had made Gujarat a model investment destination and a byword for economic prowess. On July 18th, 2014—four days after presenting the Budget—then Finance Minister Arun Jaitley said in Lok Sabha: “…there is no contradiction in being pro-business and being pro-poor. In fact, if you stop business activity, then you would not have enough resources to service the poor as far as this country is concerned. So, I see no contradiction in this.” It was very clear that the Government led by Modi would do everything to revive India’s economic fortunes that had come under a cloud after the policy paralysis that had gripped the country in the last years of the United Progressive Alliance (UPA). What Jaitley said on that day was the clearest hint about the mix of policy choices the Government would follow in the years ahead.

As Jaitley promised, the Modi Government soon unleashed its first reform by a major rewriting of the 2013 land acquisition law that was widely believed to be anti-industry and a major impediment to India’s economic progress. But politics would intervene cruelly and multiple attempts to push the Bill failed in Rajya Sabha where the Government did not enjoy a majority. Soon enough, as if on cue, commentators in the national capital and elsewhere began making a distinction between a government being pro-business and being pro-poor. The veiled allegation was that Modi’s Government was pro-business and not pro-poor. In making these assertions, the role of the opposition in stalling reforms in the Upper House was conveniently forgotten.

That did not deter Modi from pursuing the other leg of his policy programme: giving the poor citizens of India the basic goods and services they had been denied for long. From LPG gas connections—which were a middle-class privilege right into the 21st century—to toilets, from low-cost housing to a government health insurance programme, and more, were unleashed in these years. This had a curious effect among economic commentators who had expected rapid-fire economic reforms: Modi was no longer hailed as a harbinger of reforms and was increasingly seen as a populist leader. Jaitley’s carefully worded statement in Lok Sabha was quickly forgotten.

It is another matter that the Government continued pushing far-reaching economic reforms during this period. The Insolvency and Bankruptcy Code (IBC), a vital financial and corporate sector reform, was passed in May 2016. Just a year later, the Goods and Services Tax (GST), an idea stuck at the drawing board and merely the subject of animated debates, became law. Independent India’s most ambitious tax reform required political heavy-lifting and certain compromises without which its fractious politics would never have allowed such a reform to proceed.

These impressive achievements were not enough for critics who had till then praised Modi for his economic performance in Gujarat. What mattered ultimately were land and labour law reforms—and unless he crossed that bar, little of what he did to help the people of India was worthy of praise. They did not cut him any slack for the fact that the opposition was united in one goal: no economic reform that hit special interests and entrenched vote banks—labour unions, rich farmers and others—would be allowed.

There was an unstated political calculation as well. In case these reforms did get through, the possibility of India getting on a high-growth trajectory was very real. The credit for that would undoubtedly go to Modi. And that eventuality was unacceptable. This aspect of politics in those years (2015-2018) is never discussed in terms of what it actually stood for. The political hope, all along, was that the failure of these reforms and the certainty of lower economic growth would hit Modi politically. None of that came to pass. Modi not only remains a popular prime minister but he has also won back-to-back victories in two General Elections.

THEN, SOMETHING CHANGED and in the most unusual fashion. 2020 turned out to be a year of very difficult challenges but also one of opportunities for India. Modi lived up to the challenge and made the most of opportunities at hand. The prime minister not only successfully addressed the problem posed by the pandemic—India flattened the curve with far fewer deaths than countries comparable with it—but also ushered in vital and much-awaited reforms during this difficult period. Labour laws were successfully bunched into a single labour code. But unexpectedly, Modi also undertook a set of reforms viewed as politically impossible: reforming India’s agricultural markets that were hostage to an unholy cabal of rich farmers, bloated intermediaries and state governments that had fattened at the cost of the Union Government’s largesse. In June, the Centre issued three ordinances offering farmers an alternative to sell their produce instead of being at the mercy of the Agricultural Produce Market Committees (APMCs).

If one cancels the white noise in the five months since the laws were finally passed by Parliament in September, one can see the same political playbook visible from late-2014 to early 2015 when efforts to change the land acquisition law were defeated. But there are two crucial differences now. For one, Modi is not hobbled by the absence of a majority in the Upper House. For another, the Indian electorate and the average Indian are now far better informed about the political machinations behind the attempts to derail economic reforms. The result is that Modi finds himself on a very strong political wicket even as attempts are made in a synchronised fashion domestically and globally to make him back off from what India needs in economic terms. The same sordid ‘denial of credit’ is at work in the case of agriculture sector laws. The Who’s Who of Indian politics that endorsed these reforms in the past now dubs these as ‘black laws’. A more venal example of politics overtaking national interest would be hard to find.

It is against this background that Modi’s stout defence of the private sector ought to be seen. There is economic logic at work here as well. After a terrible 7 per cent contraction in the economy, the Government has gone out of its way to give a spending push to revive the economy. What makes this attempt interesting in economic terms is that it is based on a large increase in capital spending instead of the usual nostrum of pushing consumption demand. This was the medicine offered by ‘respectable’ economists during the middle of the pandemic last year, ignoring the basic fact that in an event of exceptional uncertainty the recipients of cash would hoard it and not spend it. That, however, did not come in the way of the Government giving emergency cash handouts to poor citizens and essential rations to the backbone of the Indian economy—its workforce—during those terrible months of Summer 2020. What the Government did not do was splurge money in a manner that would allow its cornering by corruption. That did not go down well with critics. But it did not deter the Government from doing what was necessary.

The timing of these reforms and disinvestment is appropriate. In the years from 2014 to 2018, when the Indian economy was undergoing a painful process of fixing the ‘twin balance sheet problem’, there was little appetite for the private sector to either borrow more money or to find ways to invest using its own resources. The loss of impetus to follow through reforms in land and labour markets was in no small measure due to the absence of demand for them. To be sure, there were desultory opeds that made a case for these reforms, but it’s one thing to say these are needed and an entirely different thing in terms of necessity and timing. That 2014 moment is back again now—and at the right time.

The Budget was notable for its ambitious privatisation programme where non-tax revenue of Rs 1.75 lakh crore was sought by selling off government stake in public sector undertakings (PSUs) and financial institutions (FIs), including two public sector banks (PSBs) and one insurance company in the next fiscal. This makes immediate economic sense as well: the Government needs resources if its fiscal push is to be implemented in a meaningful manner. Then again, this is not a simple sell-off of ‘family silver’, to use a once evocative but misleading expression. The Government made it very clear that its aim was to exit business for good, except in a tightly defined set of strategic areas. Even in these areas, the number of companies operating is to be limited. Much of this is borne out by the 70-odd years of experience in running government companies as by the need to give the private sector a running chance to play the role it is best suited for: running a business.

The economic and political imperatives for reform were one matter. Modi’s statement showed a shifting of ideological gear; no Indian prime minister has come out this strongly in favour of the private sector as he did on the floor of Parliament. Even when a prime minister knew and appreciated the importance and necessity of the private sector, such was the ideological climate that he could never openly support the private sector or even control his Cabinet colleagues from demonising India’s wealth creators.

The year was 1986 and Prime Minister Rajiv Gandhi was trying a makeover by attempting an economic liberalisation of sorts. His much-vaunted drive to modernise India by use of technology had garnered headlines for a while. Then came the ‘raid raj’ at the hands of his politically ambitious finance minister, VP Singh. In a span of a few months, Singh ‘raided’ virtually the Who’s Who of Indian industry. Industrialist Rahul Bajaj’s premises were raided; SL Kirloskar was arrested by a joint team of the Enforcement Directorate and the Directorate of Revenue Intelligence; officials of a unit of the Aditya Birla group were interrogated for two days. These were just a few prominent names: Indian industry itself was subjected to fear of a kind that it had not known for a while. The damage was enough for Singh to be shifted a few months down the line to the Defence Ministry in 1987. The rest is history. Two years later, Rajiv Gandhi was out and VP Singh became prime minister. As prime minister, Singh realised the same thing as his predecessor: the importance of letting the private sector breathe and get on with its job. But the debate on the role of the private sector had been framed in zero-sum terms: if the private sector gained, India’s poor lost and if India’s poor had to get their due under the sun, the private sector had to be shown its place.

It sounds unfair to single out a particular prime minister for a trend persistent for a long time. But VP Singh was just one, perhaps extreme, example of how the private sector was vilified for a long time. This was not always the case. In the years before India gained independence, the private sector was considered an equal participant in the task of rebuilding the country once the British would leave. This was much before the advent of polarising ideological debates that votaries of an economically liberal India finally lost. At that time, these debates were framed in terms of the need for a planned economy versus the classical laissez-faire doctrine. The magnitude of the task of reconstructing the country after two centuries of colonial rule made planning a ‘common sense’ idea.

IT IS A MATTER of historical record that India’s private industry and its industrialists were never against planning. In fact, they were part of Congress’ project to imagine an independent India. The Bombay Plan, published in 1944-1945, involved the leading lights of India’s industry. JRD Tata, GD Birla, Lala Shri Ram, Kasturbhai Lalbhai, Purshottamdas Thakurdas and others fully backed the idea of planning as a necessity to overcome India’s economic stagnation.

But what transpired after 1952 was a very different version of planning, one that was based on the wartime ideas of a controlled economy geared to meet the needs of a colonial power marshalling resources to fight its rivals in war. With the ‘socialistic pattern of society’ adopted at the Avadi session of the All India Congress Committee (AICC) in 1955, Congress asserted that the public sector should occupy the commanding heights of the economy. Implicit in this was a stigmatisation of private capital and enterprise. The private sector was put at the sufferance of the ruling power and its policies. Entire swathes of economic activity were reserved for government and the public sector. Even in those areas where the private sector was allowed, there was a high level of regulation, to the point of throttling industry. A web of licences, permissions, rationing of raw material, capacity limits, etcetera, were imposed in the name of planning.

Nothing is more symbolic of this state of affairs than the much-discussed encounter between Prime Minister Jawaharlal Nehru and JRD Tata. During the discussion, when Tata mentioned the need for the public sector to make profit, Nehru testily responded, “Never talk to me about the word profit, it is a dirty word.” With that, India entered a dark age of sorts for the private sector. On the one hand, the Government literally took it to the cleaners and paved the road for the growing lack of accountability and efficiency in the public sector; on the other, a systematic leftist critique posited the private sector as the people’s biggest enemy.

In the period from 1971 to 1990, it was not that prime ministers were not aware of the need to allow the private sector to flourish. The problem was that politics in the country was carried out in the name of the poor and for the eradication of poverty. The contours of this politics and ideology had been etched so long a time ago that it became impossible for any prime minister, however powerful he or she may have been, to reverse the trend. Government was expected to do everything and it acquired a god-like set of powers and an attendant halo.

Nothing illustrates this better than the tenure of Indira Gandhi. Her political battles with her party rivals led her to ever more extreme leftist economic positions. Banks were nationalised in 1969 and finally, in 1976, even grain trade was considered for nationalisation. With each leftward turn in direction, India’s economic problems increased, instead of ushering in the utopia that intellectual backers of the project had promised.

INDIRA GANDHI’S TENURE began an era when the private sector was manipulated by government policy to the point where, the size, shape, quantity and price of every manufactured product, from pins and needles to trucks and even bread, was dictated in the name of socialism and public welfare. Over the years, governments at the Centre and states spread their tentacles cutting across sectors in finance, trading, mineral exploitation, manufacturing utilities, heavy industry, hotels, jute mills and even pesticides.

The 1960s and 1970s were an era in which a schizophrenic duplicity was institutionalised in policymaking: on the one hand, government would dictate how, what and when to sell and at what price. In Parliament, ruling party leaders would wear ‘pro-people policy’ colours loudly during debates. On the other hand, its representatives would cut mutually agreeable ‘deals’ to conveniently tailor policy with individual industrialists and members of the business fraternity based on quid pro quos. Specific party leaders were assigned for working with ‘friendlies’ in the world of business and industry: SK Patil and Atulya Ghosh played the role in the 1960s for the ruling party and were succeeded by the likes of LN Mishra and Rajni Patel in the 1970s.

The Monopolies and Restrictive Trade Practices (MRTP) Act, 1970, when enacted, sent chills down the spine of many in the private sector. It was made to control the sector stringently and suppress its natural entrepreneurial spirit. It allowed government to garner extensive information on all firms with assets exceeding Rs 200 million. Essentially, this was used to keep the private sector and its economic power on a tight leash. By the time Indira Gandhi returned to power in 1980 and sought to reverse the trend of stifling government control across every sector, it was too late and the damage could not be undone in haste. The country by then ranked among those with the highest tariff levels in the world (146.4 per cent for intermediate goods; 107.3 per cent for capital goods; 140.9 per cent for consumer goods and 137.7 per cent for manufacturing goods). The prime minister then assigned several reports to reverse the blows to the private sector. Despite that, the word ‘profit’ remained as dirty as ever and the private sector never actually managed to regain its place in the eyes of policymakers as an equal partner with the public sector in the country’s economic progress.

WHEN ECONOMIC REFORMS were finally initiated under duress during the tenure of Prime Minister PV Narasimha Rao in 1991, they were designed and sequenced in a manner that would not draw the ire of his party colleagues with socialist leanings. In effect, despite how politically astute Rao himself was considered, even the much-praised reform decisions by the Rao-Manmohan Singh duo were carried out stealthily, as if with a forked tongue. This was how: the Rao Government’s industrial policy pushed aggressively for liberalisation in the morning in Parliament. Manmohan Singh’s ‘epochal budget’, which came later, was couched in language lauding Nehruvian socialism and assertions that Nehru had batted for moving away from public-sector dependence. Rao’s industrial policy was drafted by his Principal Secretary Amar Nath Verma and Chief Economic Advisor Rakesh Mohan. The policy, among other things, dispensed with the licensing restrictions for all industries except a select few related to security, strategic concerns and safety and environmental issues. In a bid to boost foreign investment, it showcased a plan for investment up to 51 per cent foreign equity participation to be prior approved and to sell government stakes in PSUs while restricting their presence to essential areas such as infrastructure, mineral exploration and defence manufacturing. As crucially, the fearsome MRTP Act, meant basically to collect information on structures and finances of companies with assets of over Rs 200 million, was dumped.

Singh, meanwhile, presented a Budget on July 24th, 1991 that focused on fiscal deficit control by slashing PSU expense and fertiliser and sugar subsidies. It supported reforms broadly, with a new trade policy that aided exports through devaluation of the rupee against the US dollar and capped tariff rates at 150 per cent, as well as lowering rates across the board and reducing excise duties. Singh posited his measures in Nehru’s “advice” for “maximum flexibility in running the economy”. Prime Minister Rao had cleverly won the day with a finessed strategy on economic liberalisation, couched in nuanced language.

There was disquiet in Congress though, and a suave Rao quickly constituted a panel headed by former Gandhi household retainer ML Fotedar to review the Budget proposals. With some token changes and a Rs 100 crore grant to the newly formed Rajiv Gandhi Foundation, the ‘epochal’ Budget was stamped with the party’s seal of approval. Ever since Rao, reforms have been carried out with stealth: a tinkering with some specific feature here, something there, but never a thorough change in favour of the private sector.

WELL INTO THE 21st century, this lip service to ‘socialism’ has persisted. During the UPA years, the National Advisory Council, populated with leftist activists, did not allow the Manmohan Singh Government to go anywhere near land and labour reforms, the same thing that critics used to attack Modi in later years. In the UPA years, expenditures on populist schemes and ‘entitlement-based approaches’ ensured that no government after the UPA could carry out economic reforms in an open and straightforward manner. Call it a poison pill or a scorched earth approach, it was a travesty that in the second decade of the 21st century, India’s leaders still had to step very gingerly while espousing optimum growth in the country.

It is to his credit that Modi has figured that the way out of this morass of lies is not just in batting openly for the private sector but also in doing so after first ensuring those basic goods and services to the poor that they had been deprived of for the last 70 years, even as governments were formed and parties fattened themselves in their name. In the run-up to 2014, Narendra Modi had told Open in an interview: “Delhi is being controlled by a cabal that has vested interests in the status quo. I will break the status quo. The country is facing trouble on all fronts because of maximum government. It is interfering with every aspect of life; it is not for changing the lives of people, but to benefit a few rent seekers who think it is their God-ordained right to rule.” Six years down the line, the reformist in him is fully aware that the private sector is imperative to generating wealth. Just as sharply as he was aware that the first task that awaited him was to wash away the toxic ideological legacy that made reforms all but impossible. When he rose in Parliament this month to say that the private sector was welcome, it was a clear indication that India was ready to embrace its wealth creators, bringing a prolonged nightmare to an end.

Modi’s detractors may still be hoping to construct a narrative to trounce him. But in his own words, the “andolanjeevis” will no longer find it easy to survive. Modi may not be off the mark.

Economic policyNarendra ModiNirmala Sitharamanprivate sectorUnion Budget 2021