A Chal­leng­ing Model

Would Naren­dra Modi be as good as his word?

Southasia - - CONTENTS - By Hus­sain H. Zaidi

Ex­perts are skep­ti­cal about the ap­pli­ca­tion of the Modi model to solve In­dia’s eco­nomic prob­lems.

For quite some time, In­dia has been one of the fastest grow­ing economies of the world. Be­tween 2004 and 2011, the eco­nomic out­put grew on an av­er­age of more than 8 per­cent a year. In 2012, the growth rate fell to 4.5 per­cent be­fore in­creas­ing marginally to 4.7 per­cent in 2013. For the cur­rent year and 2015, the In­dian econ­omy is pro­jected to ex­pand by 5.5 and 6.3 per­cent, re­spec­tively.

Not­with­stand­ing the eco­nomic growth, In­dia re­mains mired in poverty and back­ward­ness. More than 69 per­cent of the pop­u­la­tion (842 mil­lion) earns less than $2 a day. The per capita in­come is only about $1400, mak­ing In­dia barely a lower mid­dle in­come coun­try.

Two key in­di­ca­tors of a coun­try’s eco­nomic per­for­mance are the Global Com­pet­i­tive­ness In­dex (GCI) and the Hu­man De­vel­op­ment In­dex (HDI). On both in­dices, In­dia’s rank­ing is low: 56th out of 142 coun­tries on the GCI and 135th out of 187 na­tions on the HDI. On the HDI, In­dia fares

bet­ter than only Pak­istan (146th) and Bangladesh (142nd) among South Asian coun­tries.

In­dia is also trapped in an eco­nomic du­al­ism: a highly de­vel­oped, cap­i­tal in­ten­sive ur­ban sec­tor co-ex­ist­ing with a much larger back­ward, la­bor in­ten­sive ru­ral sec­tor. Such in­di­ca­tors bring out that there is some­thing fun­da­men­tally flawed with the In­dian econ­omy as well as its growth strat­egy.

Hence, when it comes to shap­ing up the econ­omy, the chal­lenge for the Modi gov­ern­ment is two-fold: one, to sig­nif­i­cantly push up and main­tain the growth mo­men­tum; two, to en­sure that the eco­nomic ex­pan­sion is broad-based – that is, the ben­e­fits of the eco­nomic ex­pan­sion are not re­stricted to the ur­ban mid­dle class. This is pos­si­ble only if New Delhi in­vests heav­ily in hu­man re­source de­vel­op­ment, which will re­quire it to re­visit its growth strat­egy. Can the new gov­ern­ment do it?

Premier Modi has the rep­u­ta­tion of be­ing a sound eco­nomic man­ager. As the long­est serv­ing chief min­is­ter of Gu­jarat (2001-2014), he presided over a re­mark­able in­dus­trial ex­pan­sion of the state. Un­der his gov­ern­ment, Gu­jarat be­came one of the most at­trac­tive in­vest­ment des­ti­na­tions in the coun­try.

What is re­ferred to as the Modi growth model is geared to­wards cre­at­ing an en­abling en­vi­ron­ment for pro­mo­tion of busi­nesses. The model pro­vides for strength­en­ing the role of the mar­ket in re­source al­lo­ca­tion, re­mov­ing bu­reau­cratic ob­sta­cles (rather heavy in this part of the world), de­cen­tral­iza­tion of power, pro­mot­ing the role of the pri­vate sec­tor in eco­nomic decision mak­ing; and re­struc­tur­ing of the loss-mak­ing pub­lic sec­tor en­ter­prises (PSEs).

At the same time, crit­ics have found quite a few faults with the Modi model. It is al­leged that it ben­e­fits mega en­ter­prises by giv­ing them pref­er­en­tial treat­ment in re­source al­lo­ca­tion; that it dis­re­gards the role of the state in en­sur­ing eq­ui­table de­vel­op­ment; and that it pro­motes crony cap­i­tal­ism by, for in­stance, dol­ing out pub­lic re­sources, such as land, at throw­away prices and grant­ing tax ex­emp­tions. It is al­leged that the state gov­ern­ment gave short shrift to the im­ple­men­ta­tion of la­bor laws – wages in Gu­jarat re­port­edly re­mained the sec­ond low­est in In­dia. The growth model also ne­glected hu­man de­vel­op­ment which is cor­rob­o­rated by the fact that Gu­jarat is ranked 10th among 21 In­dian states on the HDI. In the words of Nobel Prize win­ning economist Amartya Sen, Gu­jarat's record in ed­u­ca­tion and health­care is “pretty bad.”

In fact, there is noth­ing new about the Modi model. It is an ex­pres­sion of the fa­mil­iar trick­le­down growth strat­egy – a man­i­fes­ta­tion of ne­olib­eral think­ing. The strat­egy puts com­plete trust in the ca­pa­bil­ity of mar­ket forces to bring about an ‘op­ti­mum’ out­come. The es­sen­tial idea is to let the pri­vate sec­tor (read big busi­nesses) serve as the en­gine of growth by giv­ing it max­i­mum pos­si­ble in­cen­tives with the state adopt­ing a largely hands-off ap­proach when it comes to business reg­u­la­tion ( easy la­bor and wage laws, for in­stance). Once the eco­nomic growth gains mo­men­tum and in­dus­trial ex­pan­sion oc­curs, its ben­e­fits au­to­mat­i­cally trickle down through em­ploy­ment gen­er­a­tion and the re­sul­tant in­crease in in­comes.

The trick­le­down ap­proach is based on some key as­sump­tions. First, it does not re­gard de­vel­op­ment as in­com­pat­i­ble with large scale poverty, in­equal­ity and un­em­ploy­ment. Se­condly, it has faith in mar­ket forces to ef­fect un­re­stricted or at least large scale trans­fers among in­come groups. Thirdly, it does not con­sider dis­tri­bu­tion of in­come as an im­por­tant part of the de­vel­op­ment prob­lem. Such as­sump­tions are se­verely con­tested by econ­o­mists of ri­val schools.

Not sur­pris­ingly, ex­perts are skep­ti­cal whether the Modi model of­fers a cred­i­ble so­lu­tion to In­dia’s eco­nomic prob­lems. Ac­cord­ing to one economist, the high rate of eco­nomic growth in Gu­jarat de­lib­er­ately ben­e­fit­ted big cor­po­ra­tions at the ex­pense of the low end sec­tions of so­ci­ety. Hence, the Modi model can­not be repli­cated on a na­tional level, as the state gov­ern­ment ac­cu­mu­lated a mas­sive pub­lic debt in the course of eco­nomic growth. Such a debt will be dif­fi­cult to sus­tain for the union gov­ern­ment, which Modi now leads, as no one will be avail­able to bail it out.

This means Modi and his team will have to mod­ify the Gu­jarat model if eco­nomic growth is to broad-based as well as rest on strong foun­da­tions. It is dif­fi­cult to pre­dict at the mo­ment whether – and how much – they are will­ing to do so.

The new union gov­ern­ment’s first bud­get has struck a mid­dle path. It did not make any rad­i­cal de­par­tures from its pre­de­ces­sor’s fis­cal poli­cies. Yet it did make, or at least hinted at, some changes. For in­stance, the re­stric­tions on for­eign di­rect in­vest­ment were not re­moved, though the cap on for­eign eq­uity was sig­nif­i­cantly raised in the de­fense and in­surance sec­tors. Nor were the sub­sidy schemes ter­mi­nated, though it was an­nounced that pro-poor pro­grams would be well tar­geted and that over­all sub­sidy regime would be re­viewed. The ex­pec­ta­tion, on the part of the busi­nesses of course, that la­bor laws would be eased was not met ei­ther. Whether this sig­ni­fies a change in the eco­nomic strat­egy; or whether the prime min­is­ter is, for the time be­ing, feel­ing the pulse of an enor­mous state ap­pa­ra­tus be­fore com­mit­ting his gov­ern­ment to some rad­i­cal de­ci­sions is any­body’s guess.

Modi has also failed to ful­fil his pre-poll prom­ise of bring­ing back the black money stashed away in off­shore banks, though the union bud­get un­der­lines the need of ad­dress­ing the prob­lem of black money. That said such prom­ises, as a rule, merely amount to play­ing to the gallery.

In­dia is a cap­i­tal scarce coun­try. So in­creased FDI in­flows should form an im­por­tant com­po­nent of the eco­nomic growth strat­egy. And the gov­ern­ment seems well on its course to at­tract­ing for­eign cap­i­tal.

Dur­ing Modi's visit to Ja­pan, Tokyo an­nounced to invest $35 bil­lion in In­dia over five years, mainly in mega in­fra­struc­ture re­lated projects. China, whose pres­i­dent vis­ited In­dia last month, also an­nounced that it would make sub­stan­tial in­vest­ments in the coun­try. In­dia is thus well placed to get heaps and heaps of for­eign fi­nanc­ing. Again, the ques­tion is who will be the prin­ci­pal ben­e­fi­ciary of such projects and at whose ex­pense?

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.