The Indian Rate of Reform

IMAGINE THE YEAR is 1952. It is not difficult to visualise Jawaharlal Nehru standing on the ramparts of North Block looking at the vast open space towards Kingsway. One can also imagine Nehru brooding about the economic fate of his newly independent nation. Just a year ago, the National Income Committee had laid bare the economic structure of India. Agriculture was its mainstay with services and industry coming a close second and third respectively in terms of output. Given its size, its huge mass of poor people and very low productivity, India was unique among decolonised countries.

Nehru and his band of economists devised a plan that was as audacious as it was hopeful: India would not pursue the standard course of exporting agricultural and other raw materials and then slowly industrialise. Instead, India would focus on heavy industries right at the start. The hope being that at some point in the future, the strategy would lead to better incomes and higher consumption.

In doing so, India was upending another trend observed in history, one that would come to haunt it decades later. The state acquired vast powers of managing the economy. In most countries that moved away from poverty, the trend was for the state to let individuals take the economic initiative and intervene only lightly where there were pervasive market failures. At that time this was accepted as a necessity even if there were voices that cautioned against throttling economic freedom. Whatever the shortcomings of the Nehruvian strategy, it was programmatic in nature: investment priorities determined allocation of resources. The poor remained poor for a long time, at times generations of poverty haunted entire regions in the country. But slowly, even painfully slowly, India gained economic strength.
The strategy did not do as well as expected for a number of reasons. The first steps in abandoning the socialist experiment were taken in the late 1970s. By 1991, India had shifted gears significantly. But by then something perverse had set in. The socialism of production—the heavy industries strategy and the public sector at the “commanding heights”—was dismantled but the socialism of redistribution was strengthened with a vengeance that has not gone away till today.

The dates—especially 1979—are worth noting. For the prototypical means of redistribution, the Maharashtra Employment Guarantee Scheme was established that year. It was to serve as a model for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) nearly three decades later in 2007. The Nehruvian programme, whatever its shortcomings, had a rational economic element—high industrial production and, in due course, higher national income—the later socialism was only about redistribution. It took economic growth for granted. In fact, if any observer pointed out that huge expenditures on social welfare—fuelled by borrowing—would have a detrimental effect on growth, the expression “growth wallah” was spat at that person. Those years—from 2004 to 2008—were the high tide of globalisation. India grew at a rapid pace and money flowed into the country as it was expected to be the next success story after China. The expression “India Story” was used to the point of making it a cliché. Then suddenly, things fell apart. After the global economic crisis of 2009—whose aftershocks have only magnified since then—India’s growth entered a downward trajectory.

It is worth summing up the story in terms of economic freedom. The original impetus to ensure rapid development necessitated the state reserving entire sectors of economic activity for itself, leaving the private sector only at the margins. The later socialism turned predatory: the private sector was of use only for garnering tax revenues but ideologically it was to be kept a pariah. The masses were poor and until they ceased to be poor, no one—repeat, no one—could earn profits without a moral taint being associated with the idea of profit. Economic freedom—understood as pursuing profitable economic activities—was nurtured as a hen that laid the golden egg but one whose neck could be twisted at any time. Attempts to undo this damage, something only possible at the hands of ‘conservative’ ruling dispensations, have proved to be very difficult. The idea that economic freedom is perverse and that it is the preserve of the rich, now runs through the veins of India’s politics.

In May 2014, India looked a very different place. When Narendra Modi came to power, he did so to a great extent on the back of the promise of better economic performance. In the years preceding his spectacular victory, India’s growth had been faltering. The promise behind Modi’s ascendency—in plain economic terms—was that he would clear all encumbrances on the path to a sustained capital accumulation. Analysts of recent years somehow want to bring Hindutva into his rise but anyone who remembers the debates of 2013 will mostly recall one word: development.

It is not as if Modi did not try and fulfil this key promise. From mid-2014 until mid-2015, his Government tried to do away with the worst features of the new land acquisition law passed in 2013. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, was in many ways designed to ensure that land for industrial and other projects could not be acquired. The same set of intellectuals who backed many of the ‘social justice’ projects of the United Progressive Alliance (UPA) years had backed this law as well. Under the combined weight of environmental clearances, social impact assessments and the onerous conditions attached to land acquisition, industrialisation virtually ground to a halt. Ultimately, the lack of a workable majority in Rajya Sabha ensured that the necessary amendments remained stillborn. By May 2015, that project was given up.

It is important to point out here that industrialisation, especially in the hands of the private sector, was not just a question of economic freedom but promised to increase employment and raise incomes, an essential condition for people to live reasonable lives with ‘capabilities’ instead of dependence on government for help in one way or another.

One can always ask why these amendments were not reintroduced in Parliament when the Modi Government acquired the right numbers in the Upper House. It is a good question. After all, the constitutional amendment necessary to usher in the Goods and Service Tax (GST), the Insolvency and Bankruptcy Code and other legislation were passed by the same Government. It is hard to guess an answer as the Government never disclosed why it gave up on the amendments. The closest one can come to an answer is the received wisdom that a new government has at most a 16-18-month window for politically difficult reforms. Once that time passes, the electoral cycle makes reforms politically expensive. Whatever be the reasons, its consequences are evident today. For one, Modi shrewdly guessed that while a section of the country—the middle class and some economists—may have supported economic reforms that could propel higher growth, this message would be lost on others who would lose out in the short run. His ‘pragmatic turn’—a mix of populist and reformist steps—can be dated from 2015.

The bitter lesson for the champion of the Gujarat Model was that the opposition would never let him have a shot at the growth-jobs-development variety of politics. That is also roughly the time when Modi learnt another lesson: to change the stonewalling politics in Rajya Sabha he had to win as many state elections as he could. Then began a ‘give no inch’ style of electioneering that appeared more like a military campaign than the colourful electoral festivals India had been used to till then.

It paid off spectacularly. Not only did Modi and his Government gain an upper hand in Parliament, they also managed to pass legislation once in the realm of lost causes. In 2019, Parliament passed a resolution that enabled the abrogation of Article 370 and amendment of the Citizenship Act. These effectively ended the pristine developmental politics Modi had envisioned back in 2013.

A famous Indian public intellectual once described how the art of winning power and maintaining power are two very different matters. In Modi, however, populist economic measures and feasible reforms have been combined to win and maintain power at the same time. Ideologically, this leaves no intellectual room to oppose him on economic grounds: in his expansion of MGNREGA, the adroit use of the National Food Security Law—the last populist arrow in UPA’s quiver—and the launch of the PM-Kisan scheme, Modi is probably more left than what the National Advisory Council (NAC) intellectuals could have hoped for. This has left no space for them or their political backers to corner the Government on the ground that it is ‘anti-poor’. Their occasional noises notwithstanding, these intellectuals now focus their energies on non-economic issues to oppose Modi. Sometimes they decry “mass surveillance” and on other occasions they bemoan the judicial stamp of approval for Aadhaar thus “weakening” individual privacy in India. On yet other occasions they cry against Foreign Contribution Act (FCRA) regulations being used to “throttle” NGOs. “Neoliberalism and its perverse economic logic” have been given a quiet burial as only a badly informed person would describe the Modi Government as neoliberal.

THE COST TO THE idea of economic freedom is, of course, substantial. The prime minister has defended the private sector on the floor of Parliament but India is now a more protectionist country than it was in 2014. Schemes like Performance Linked Incentives (PLI) for select industries come close in spirit to industrial policy ideas of the past. But whereas the earlier industrial policy under Nehru was programmatic, under Modi it is plainly pragmatic. There is a case for refurbishing the idea of industrial policy, for example, in encouraging new areas like robotics, Artificial Intelligence and emerging defence technologies. But PLIs don’t come close to what is needed.

There is an even bigger problem on the horizon. We are now in the “age of diminished expectations” (to borrow a Paul Krugman expression). With successive economic shocks, even pre-2016 growth rates look tantalising. The middle class is probably shrinking even as there are unmistakable signs that inequality is rising. Some economists have even speculated that poverty is going up and that may well turn out to be true. Structurally, this opens the space for further squeezing economic freedom. In the 1970s, the rate of taxation was extortionate. On the one hand, there were ever rising demands for redistribution—garibi hatao and the like—and on the other hand, the middle class was like a tiny reef in a vast ocean of poverty. The condition allowed for an “extortionate equilibrium”—the middle class was numerically insignificant to demand lower taxes while the huge mass of poor allowed for populist politics. The “2000s equilibrium” of lower taxes and a relatively rising middle class became possible only at the beginning of the 21st century. Now, two decades later, as the middle class is on the verge of shrinking, the “extortionate equilibrium” is feasible once again. The class of intellectuals disempowered and de-legitimised in 2014 is waiting in the wings to begin justifying higher taxes as a necessity to help the poor. A sense of déjà vu is hard to shake off.

Modi is unlikely to tax the middle class further even as he will continue with economic populism: the former because the middle class backs him and the latter for maintaining political power. In this, the iron law of Indian political economy—redistribution trumps everything—has caught up with him. Perhaps, this is too pessimistic an appraisal. The lowering of corporate tax rates, the possibility of rising exports and newer sectors (start-ups, tech firms and others) picking up may ensure that India remains in the “2000s equilibrium.”

As India enters its 75th year, one must ask: What does economic freedom mean? If the answer is freedom to establish new businesses with relative ease, run them without too great an intervention from government, exit with equal ease, choose what one wants to consume, and relatively lower taxes, then economic freedom will be an imperilled reality and ideologically suspect in the eyes of the vast majority of have-nots. A Government like Modi’s may allow this; the left-of-centre formations that are always just an election away will have none of it. To that extent, India is unlikely to resemble Western democracies.

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