Can Narendra Modi deliver the economic freedom he has promised to India?

May 2, 2014
Obsession
Modinomics
May 2, 2014

India will certainly have a new government in place after the results of the on-going general elections are declared on May 16th, and it is nearly certain that it will be a coalition government headed by Narendra Modi of the BJP.

Many Indians desperately hope that Modi be able to bring about an improvement in India’s economic fortunes. Expectations are high—but will he be able to deliver?

The answer is a very ambiguous “it depends.”

That’s because the prime minister, as the head of the central government, has power to formulate and execute economic policies, but that power is severely limited in a coalition government.

India’s two-house parliament

To pass laws and amendments, the prime minister has to have the support of a majority of the lower house of the parliament (the Lok Sabha) which consists of 543 members. Those are the members being chosen in the current election, and here many expect the BJP and its allies to win the minimum 272 seats needed.

But the upper house of the parliament (the Rajya Sabha) with its 250 members also needs to pass any bills and amendments before they are adopted. These members sit six year terms, and right now the BJP and allies have only 61. Other parties, and particularly the Congress Party, which alone has 72 seats, have the power and the incentive to put a spanner in the works of the best laid schemes of Modi. In other words, Modi will face significant hurdles in whatever economic plan he wishes to implement.

Modi’s enemies don’t want India to work

It is an understatement to say that Modi has powerful political enemies, some within his own party. The primary reason for that is that he is an outsider: a self-made man who does not belong to the club of the elite that has been ruling India for 60-odd years. He does not have a stake in the perpetuation of the system that has kept India abjectly poor and mostly illiterate—one in which the government has near-absolute control of the economy. Those in government have the power to implement policies that are good for them, but are harmful to the people at large.

India is a cautionary tale of what happens to a country because of bad economic policies. It is not alone, of course. As Nobel prize-winning economist Douglass North observed “economic history is overwhelmingly a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth.”

But producing a set of rational economic rules is a political rather than an economic process. Frequently, basic economic truths are willfully disregarded in a myopic but cynically calculated process of short-term electoral gains. In the long run, however, the persistent practice of politically motivated economically unsound policies has the unsurprising and unfortunate effect of impoverishing the economy.

Modi is not interested in personal enrichment—something you can’t say about many of the politicians who have shaped India’s economic policies to date. Therefore if he comes to power, he will disrupt the old order and those who are flourishing in the present system will do their best to undermine any attempts he makes to bring about fundamental change.

That is probably the most significant hurdle that Modi will face.

The bureaucracy slows everything down

There is another significant barrier to any reforms: the bureaucracy. Indian bureaucracy is gloriously notorious for impeding any process, good or bad. It is a vast and implacable machinery created by the British to administer colonial India, and India inherited it lock, stock and barrel, and then has done little to change it in the years since. The bureaucracy will do its best to retard India’s progress, simply because such progress means a reduction in bureaucratic power and control.

What he can actually get done

All of that does not mean that Modi will not be able to bring about any changes. As the chief of Gujarat state over a dozen years, he has been able to manage the state bureaucratic machinery and deliver good growth in all sectors of the state economy. He did this, and what is more, he did it in the face of a politically motivated relentless witch-hunt by his many detractors.

There is hope that as the prime minister, Modi will be able to meet at least part of the expectations of renewed growth. Certainly he will not be able to make any major structural changes in the short run. For that to happen, he needs greater political support in both houses of the parliament. But in the short run, even as the leader of a coalition government, there are low-hanging fruits which can be picked profitably:

  1. Although Modi will not be able to radically reduce the bureaucracy (which would have been simply wonderful for the economy) he will be able to make it more accountable and responsive to the needs of the people. With the reduction in red tape, industrial growth will improve, and consequently increase employment in the formal sector.
  2. He could reduce the number and rationalize the number of government departments (or “ministries”) so that the government intervention and micro-management of the economy is significantly reduced. This will make government leaner and lead to more efficient use of public funds.
  3. He could restructure the way public assistance is given to the poor. Currently it is a rat’s nest of complicated schemes of subsidies, all created for the ostensible purpose of helping the poor but most of the spending ends up being siphoned away. A direct cash transfer scheme to those below the poverty line will not only reach the target but also reduce the cost to the public. This will definitely have popular support although it will not be popular with those administering the current complex system.

Socialism is not the future

In the long run, India will progress only through structural reforms. Socialism has failed in India, as it has elsewhere. It has proved to be a friend of poverty, not a friend of the poor. What India, and Indians, needs most is economic freedom. Indians are not congenitally incapable of producing wealth. In all places around the world where they have economic freedom, Indians prosper remarkably.

That Indians in India are poor is not due to some natural law. India’s poverty is unnatural, in the sense that it is an artifact of human design and action.

India is a democracy, and its government is “of the people, by the people, for the people.” Its economic policies and the consequent poverty are also of the people, by the people, and for the people. But India needs economic freedom for its political freedom to be meaningful.

Modi cannot transform India; he does not have the power. No one person does; only Indians collectively do.

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