A Challenging Model
Would Narendra Modi be as good as his word?
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?