A Missed Opportunity

Liberalisation. Its original parent, the Congress, has disowned it. The present government, despite promising minimum government, has abandoned it

“I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, ‘no power on earth can stop an idea whose time has come’. I suggest…that the emergence of India as a major economic power in the world happens to be one such idea.”

With these powerful words, the then Union minister for finance Manmohan Singh closed one of the most famous budget speeches in Indian history on July 24, 1991. The life of Indians would never be the same.

With economic liberalisation in 1991 and beyond, the scope of economic freedom for Indians expanded exponentially from what it had been under the LicencePermit-Quota Raj that had choked economic freedom for decades following independence in 1947.

The transformation from a state-led economy to a market-led one happened before our eyes. From a few mediocre local brands to global brands on your shelf, from Doordarshan in black-and-white for a few hours a day to a proliferation of cable channels, and on and on, India finally stepped into the globalised world.

On the other side of the market, entrepreneurs who had been choked by red tape, regulation and corruption now had some relief and a hope of making it in a capitalist market system. The only beneficiaries of the Licence Raj had been big businesses which functioned basically as monopolies protected by the government. Now, at least in theory, everyone had a shot.

More generally, improving the ease of doing business is very much part of what expanded economic freedom brings, but there is much more than that. With an economy governed more by the free market and less regulated by the state, economic activity will pick up pace and the growth rate of Gross Domestic Product (GDP) will go up. It is remarkable that with its inbuilt potential, including with the right demographic structure, India has thus far failed to break into the double digit GDP growth club.

Growth works like compound interest, so sustained and rapid economic growth raises living standards exponentially years into the future. An economy whose GDP grows at 2 per cent requires 35 years for the average person’s income to double. But for an economy growing at 10 percent per year, income doubles every seven years.

The life of the average Indian shortly after independence was truly bleak, characterised by hunger, poverty, disease and deprivation. Today, after sustained growth following the economic liberalisation of 1991, extreme poverty is on track to be wiped out completely in India. According to the Tendulkar Poverty Line, the poverty rate in India in 1993-94 was 45.3 per cent. In 2003-04, a decade into liberalisation, the poverty rate had fallen markedly to 37.2 per cent. And by 2011-2012, poverty had dropped dramatically to 21.9 per cent.

The realisation that economic freedom is as important as political freedom came belatedly in India. In his famous speech on Independence Day, August 15, 1947, Prime Minister Jawaharlal Nehru asserted that “India awakes to life and freedom”. What he

IT’S REMARKABLE THAT WITH ITS IMMENSE POTENTIAL, INCLUDING THE RIGHT DEMOGRAPHIC STRUCTURE, INDIA HAS FAILED TO HIT DOUBLE DIGIT GROWTH

FAR FROM MINIMUM GOVERNMENT, THE MODI REGIME IS EXHIBITING ALL THE COMMAND AND CONTROL INSTINCTS OF THE SOCIALIST GOVERNMENTS BEFORE HIM

meant was political freedom, and on that score, he was right, but independence did not give Indians very much economic freedom up until 1991 and beyond.

This brings us to May 16, 2014, when the Bharatiya Janata Party (BJP), led by Narendra Modi, won a landslide victory, bringing to an end the decade-old rule of a Congress-led government that had forgotten it was the originator of liberalisation and had fallen back on its old socialist playbook under Prime Minister Manmohan Singh and party chief Sonia Gandhi.

Modi’s campaign was premised on expanding the scope of economic freedom. He often repeated the mantra: “I feel government has no business to be in business. I believe in minimum government, maximum governance.” It was such statements throughout the campaign that energised people across the socio-economic spectrum. Giving Indians the maximum level of economic freedom consistent with the norms of India’s constitutional democracy remained one of the great unfinished projects of the Indian Republic and there was hope that Modi would finally finish the job.

A PROMISE BELIED

For a charismatic leader commanding a parliamentary majority who could have chosen to rewrite India’s laws to reduce the power of the state and increase the power of the market, we have seen no such reforms. In particular, what has gone begging are badly-needed transformational reforms to India’s factor markets where economic freedom is still stifled, in particular, the markets for labour and land. These still languish under conditions not that different from the Licence Raj.

While India rose in the rankings of the World Bank’s controversial Ease of Doing Business survey in 2017, a survey all but disavowed by the World Bank’s then chief economist, the more granular and survey-based study conducted jointly by NITI Aayog and IDFC Institute, a Mumbai-based think-tank, revealed the many hurdles businesses outside of Delhi and Mumbai actually face on the ground, including on key constraints on land and labour.

A poorly-executed Goods and Services Tax (GST) has increased the compliance burden on Indian businesses, now facing more-complexthan-ever paperwork and long delays in refunds and export credits that are key elements of a well-functioning GST. Making matters worse, the government took the very ill-advised step of creating an anti-profiteering authority to ensure that any tax cuts compared to the old excise tax system were in fact passed on to consumers. This is nothing other than the Licence Raj now morphed into an Inspector Raj.

And on taxes, rather than the tax cuts a slogan like minimum government would have suggested, there has been no abatement, possibly even an upswing in tax terrorism. More broadly, far from being a move toward minimum government, the Modi government seems to exhibit all of the command and control instincts that best characterise the socialist governments that ruled India for much of its independent history, such as price caps on coronary stents.

Likewise, one might have thought a government premised on

minimum government would have revisited Minimum Support Prices (MSPs) paid to farmers, which heavily distort agricultural markets and carry a heavy fiscal burden. But instead the government has raised MSPs across the board. Reversing a quarter century trend on trade liberalisation, the Modi government has reversed course and raised tariffs across the board in an ill-conceived effort to try to salvage the failing Make In India programme and engaging in the dubious task of government bureaucrats picking winners rather than allowing entrepreneurs to compete on a level playing field. Not only does this restrict the economic freedom of entrepreneurs, it limits choice and raises prices paid by consumers, further reducing their economic freedom.

On the subject of free choice, not just bad economics but ideological impulses have conditioned the choices of the Modi government and other BJP-led state governments. Whether it is a beef ban across a range of states or ideologically motivated cattle trade rules that crippled the entire sector for a year or more until they were quietly withdrawn, one sees little, if any, signs of Modi’s pre-election rhetoric actually being put into action.

Lastly, demonetisation, Modi’s biggest and boldest policy experiment. Overnight, cash-based supply chains and credit relations were disrupted and took months to recover, if they even did, severely impinging on the economic freedom of the millions of Indian households and businesses reliant on cash. Their economic freedom was sacrificed in a quixotic attempt to purge black money, an attempt that ultimately failed.

What ties all these strands together is the basic and undeniable reality that, like the Congress-led governments that preceded him, Modi is not really interested or is unwilling to dismantle the edifice of a still largely socialist state, a structure only partially demolished in 1991 but whose foundations remained. If anything, he has added to that old socialist structure rather than working to unleash animal spirits by getting the government off the back of private business and consumers.

The cause of economic freedom in India has been orphaned. Its original parent, the Congress, has disowned it and, despite what he said in the campaign, Prime Minister Modi has abandoned it. For two centuries before independence, Indians were enslaved by foreign rule. Today, seven decades after independence, the economic freedom of Indians remains enslaved and their potential yet to realised.