India's Man of the Future Must Break With Past
When he was elected as India’s Prime Minister one year ago, Narendra Modi earned a handsome mandate for one task above all else: to revive the economy and deliver jobs and prosperity to India’s 1.25 billion people. The good news is that Modi remains committed to his vision for India's future -- a country with world-class infrastructure, factories, new cities and skilled workers. In India’s political economy, it takes some courage to stick to such a modernizing vision even as the opposition tries to paint the agenda as pro-rich.
The mixed news comes on the policy front. Modi’s approach to economic reform--dubbed "creative incrementalism" by his government’s chief economic adviser -- may not be radical enough to achieve a modern, prosperous India within any reasonable time frame.
Many of the policy steps taken by Modi’s administration are leading in the right direction, which in itself is a welcome correction from the wayward years of the previous Congress-led government. Eventually if not immediately, they should start to attract the billions in investment needed to kickstart growth. The government has displayed a clear commitment to fiscal discipline, inflation management, land and labor reform and improving conditions for doing business in India.
The trouble with incremental reform is that it doesn’t do away firmly enough with the bad policy and practices that continue to burden India. Half-measures can backfire, as Modi discovered last month when his own tax officials used old laws, which Modi had chosen not to abolish, to penalize foreign institutional investors and multinational corporations. For investors, those acts of “tax terrorism” at least temporarily relegated all the other good work done by Modi's government to the background. It would have been much better to remove this weapon from the hands of the taxmen completely.
Modi's attempt to amend India's land acquisition law, which has been blocked by the opposition in the upper house of Parliament, has also suffered from legacy issues. The bad law was only passed in 2013 and had the full support of Modi’s party. The opposition can reasonably ask why it needs to be amended so soon. Modi could instead have chosen a more radical approach, abolishing the law altogether and asking each of India’s 29 states to formulate their own land policies. Similarly, rather than doing anything dramatic to revamp India's stifling labor regulations, he's tinkering with some provisions of laws that were drafted 60 years ago, when India was heading down a socialist path.
But perhaps the most telling criticism of Modi’s incremental approach is the way he's dealt with India’s public-sector companies. For a man who promised minimum government, Modi seems only too keen to let the largely inefficient public sector be. The two state-owned telecom companies, BSNL and MTNL, haven’t been able to compete with their private-sector counterparts in the last decade and a half. Loss-making Air India is no better off. While Modi has promised to instill better management, that isn’t likely to transform companies burdened by decades of socialist dogma. The real problem is that management has to contend with over-staffed organizations, low skills, and the specter of an employees’ strike should they try to restructure. Nothing suggests even the remotest turnaround in these companies in the last year.
Modi missed an especially fine opportunity to rationalize the government's coal-mining monopoly, Coal India. While his supporters hail his successful and apparently corruption-free auctions of captive coal mines (those allotted to companies to operate for their own use rather than sale), the sector is unlikely to take off until the monopoly is ended completely. Modi's other plans may stall if demand for coal-fired power grows over the next four years and an unreformed Coal India isn't able to step up.
The real challenge before the Prime Minister for the rest of his term is this: A majority of India’s laws and regulations (particularly those which concern the economy) were written for a system very different from the more modern, market-oriented India that Modi claims to want. So far, he seems to believe that he can use the same system, with minor tinkering, to transform India. He'll soon realize he cannot. The country's legacy of bureaucracy, red tape and obscurantism is brutal. It needs to be done away with altogether.
If Modi chooses not to do so, he may be able to deliver a government better than its predecessor -- one marked by far less corruption and far superior economic management. What he won’t do is meet the sky-high expectations of a radical and quick transformation that he seemed to promise in his campaign. The country may be moving in the right direction. But the journey is going to be longer than many Indians thought 12 months ago.
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