Modi must reclaim economic policy from North Block babus (Sunday Guardian)
Since coming to office last year, there has been a visible duality about the Narendra Modi government. This is the difference between foreign policy and economic management. In the first, it is clearly Modi who is driving the process, willing to take risks and to brave criticism from the usual talking heads. Under the hyper-cautious Manmohan Singh, relations with Bangladesh, Pakistan, Nepal, the Maldives and Sri Lanka worsened, while today, each is not merely on the mend, but significantly better. Even Pakistan has altered its approach, such that there is finally some expectation that the men in khaki will accept that only good relations with India can rescue their country from the abyss into which adventurous policies have pushed it. Regrettably, it is now Turkey, which is following the same course as has been adopted since the time General Zia-ul-Haq took over as the Chief Martial Law Administrator, and it is a certainty that a country seeking to be fully European will, in coming years, follow the same dismal trajectory of India’s western neighbour, only worse. Turkey is headed towards the same civil war which Recip Tayyip Erdogan has fuelled in Syria, as well as the societal chaos of Iraq because of its involvement in ethnic and sectarian divisions within the Arab world. Should Pakistan follow the policy of Bangladesh and follow a policy of partnership, rather than hostility with India, its economy would once again cross into the high growth range that was the norm till Zia took office.
These days, even cartoonists in major global publications add Narendra Modi to their images while sketching the major global players. The Prime Minister of India figures along with such fixtures as Barack Obama, Xi Jinping and Angela Merkel, in a sign that India under Modi has been accepted as part of the High Table of international diplomacy in a way not seen since the days of Jawaharlal Nehru. Chronic Modi-baiters (or closet Modi-haters) may dismiss as theatre his NRI excursions, but it cannot be denied that since 26 May 2014, whether in the US or in China, in Japan or in the UK, there is a buzz and a momentum around India that can translate into huge investments of capital, but only provided the economic part of the Modi agenda exhibit the same drive and innovative spirit that the foreign policy component shows in such profusion. Although North Block babus claim otherwise, to those outside the portals of government, the last two budgets have seemed more Manmohanish than Modi-fied. Narasimha Rao pushed through a raft of reforms during the first hundred days of his term, although Finance Minister Manmohan Singh diluted the effect by ensuring lower taxes on imports and on foreign companies while keeping rates high for domestic taxpayers and industry. Manmohan Singh, in common with the babus of North Block, has an intense dislike of alleviating the pain felt by Indian taxpayers, and this bias was visible in each of his budgets, as well as in those presented during his ten years as Prime Minister. It was only Narasimha Rao’s command that taxpayers should be treated “gently and fairly” that ensured that he did not enter upon the regressive “Police Constable” approach of P. Chidambaram, who, in the guise of going after unaccounted income, instituted a reign of terror that has resulted in tens of thousands of India’s most productive prospective entrepreneurs migrating to Singapore and other offshore locations, rather than continue in a location where they were harassed as criminals for the crime of running successful enterprises which challenged international competitors.
It was this columnist who first described Narendra Modi (during his visit to China as Chief Minister of Gujarat) as India’s answer to Deng Xiaoping. From almost the start of his ascension to leadership in the PRC, Deng ensured a rate of growth double that of India’s in the present. Those who complacently — even boastfully — talk of the current 7% growth rate as proof of excellence need to know that the Modi Standard mandates double digit growth, and that anything below that is simply not enough. For this to happen, what is needed is to eliminate a boatload of restrictions created only for the purpose of extracting bribes, and which collectively make India a country where only masochists enjoy setting up a business. Taxes need to be reduced, so that the economy can expand and thereby fill coffers in a more plentiful way than higher imposts on an inadequately rising base of services and manufacturing. And as for black money, Deng’s words (“it does not matter if a cat is black or white, so long as it catches mice”) need to be remembered in a context where the generation of black money remains high, but its expenditure on taxed items is falling rather than rising.
Raghuram Rajan and Arvind Subramanian clearly believe that within a year, all of India will embrace credit cards in place of cash, preferably those originating in the US.
Certainly, innovations such as the Jan Dhan Yojana will speed up the role of banks and credit cards, but in the meantime, the domestic consumption vital for job creation should not be stifled by edicts such as making PAN cards compulsory for a range of transactions in a country where less than a tenth of the population have these bits of plastic.
Just as he has so visibly shown in the field of foreign policy, Narendra Modi needs to take command of economic policy away from the babus of North Block into his own hands and his own genius. The next budget needs to reflect the reality of economic life in India, not the US, for a failure to do so would cast a shadow over expectations of performance for the remaining three years of the BJP’s term in office.
Fiscal consolidation can only happen in a climate where growth becomes the driver of policy, and for this to happen, Prime Minister Modi needs to imprint his personal stamp on economic policy the way he has in foreign affairs.