The caveats are many. But there are compelling reasons to believe that the economy will slowly but surely pick up momentum writes Vikram Mehta
There have been a spate of meetings to discuss two years of the Modi government and I have attended several of them. One question that has been asked at all of these meetings has been — will the PM implement the economic reforms required to bridge the gap between the potential and reality of economic performance? There have, of course, been other questions — will Hindutva nationalism lead to protectionism? To what extent is the PM shackled by the RSS? Has crony capitalism been brought to an end? Will Raghuram Rajan be given a second term? But all of these supplementary queries have been driven by the broader interest in India’s economic prospects.
In listening to the responses and in reflecting on my own position, I am persuaded that the economy will slowly but surely pick up momentum. This is not because the PM will now take the bit of second-generation reform between his teeth, but because of the underlying fundamentals.
The caveats are many. A third consecutive failure of the monsoon will throw growth off the rails. There is the matter of stressed assets. Many numbers have been thrown about, but all point to the reality that unless and until the balance sheets of the public sector banks are cleansed, credit flows will be choked and private sector investment will remain lagging. Then, there is the issue of the social consequence of un- and under-employment. A million people enter the labour market every month, and the current growth model is not creating sufficient jobs to absorb these newcomers. All of these caveats can throw a monkey wrench into hopes of strong and sustainable growth. But these are caveats that can be handled through statesmanlike leadership. Other than the Monsoon, which is an externality beyond the government’s control, there are no politically systemic blockades to removing them.
What gives rise to optimism are the fundamentals of the economy, the dynamism of our society and the federalisation of our polity. The economy slowed in the last few years of the UPA government. This was because of policy mistakes, bureaucratic inertia, delayed approvals, crony capitalism and market distortions. The Modi government has cleared some of these cobwebs. Public sector infrastructure investments in railways, roads and highways and energy are now acquiring traction, the bureaucracy is less fearful of action, the “gotcha” press has not reported any incidents of major corruption and international confidence has picked up, as is evident from the increasing flow of FDI. They should have done much more. The GST has not been implemented; the factor market reforms related to land and labour have made little headway and taxation issues continue to bedevil the finance and legal departments of companies. But these shortfalls should not detract from the fact that the macro fundamentals are strong. Thus, inflation is under check, the fiscal deficit is trending down, household savings are moving up, the investment rate is 30 per cent, notwithstanding the choke on credit. A large slice of the corporate sector remains globally competitive, there is a strong reservoir of technical talent (though there is increasing disquiet about the quality of engineering graduates) and rural demand is picking up on the back of MGNREGA and rising rural wages. All these factors point to renewed economic momentum.
Society is winning its battle with the state. The dividing lines are clear: On one side, there is a burgeoning youthful population, connected, aspirational, entrepreneurial, individualistic and striving to create a future that is better than their parents’ past. On the other, there are the institutions of governance — the executive, legislature and judiciary — bound by procedure and precedent; votaries of change in rhetoric, but cautious in practice; advocates of the market and competition in public, but reluctant to dilute regulatory control in office. The battle is ongoing, and on the face of it, the state has overwhelming powers. But, in reality, this power is weakening. The success of new anti-establishment political groupings like the AAP and the growing influence of economic interest groups and the media are evidence of the shifting battle lines. The state will not, of course, eviscerate, but in the face of the demands of an aspiring middle class, it will be less ideologically hidebound and more responsive to economic pragmatism.
Finally, it is clear that India is not run out of Delhi. Call it “cooperative federalism” or simply “federalisation”, the fact is, governance is now increasingly shifting into the hands of regional and local leaders. This is a positive for several reasons. It allows for a more nuanced approach to economic policy. Delhi will always find it difficult to implement the second-generation factor reforms because of “tit for tat” politics, vested interests and a siloed bureaucracy. However, state leadership, with more decisive mandates, may not find it so problematic. Rajasthan, for instance, has already relaxed some of the rules relating to the labour market. Second, it will spur competition, and, in turn, stimulate creativity and innovation. Finally, it will enable the political leadership to manage better the challenges of poverty, urbanisation, unemployment and pollution. Anand Mahindra, chairman of Mahindra and Mahindra, wrote in his book, Reimagining India, that decentralisation would allow India to “break problems into manageable pieces and to weave together an urban web that is the equivalent of a thousand Singapores.” If one adds to this image a comparably decentralised model for addressing the problems of rural poverty, one can conceptualise the base on which to build a developed, just and smart country.
This article first appeared in The Financial Express and The Indian Express on June 6, 2016. Like other products of the Brookings Institution India Center, this is intended to contribute to discussion and stimulate debate on important issues. The views are those of the author.