Mix and match

Modi’s economic knowledge may be written on the back of a postage stamp but Chidambaram’s knowledge appears to be no better.

The differences between economic thinking of Modi and Chidam baram are getting pushed into the background in the spat over Modi’s economic knowledge being written on the back of a postage stamp, and Chidambaram being the know-all Guru merely due to his Harvard education. The differences between their thinking is not so clearly visible. There is a large degree of convergence. Both embrace the free market and are inclined to roll out the red carpet for big companies. Difference arises on two counts. One, Modi is more focused on domestic big companies; while Chidambaram is more favourably inclined towards MNCs. Two, Modi wants to jumpstart the grassroots developmental activities by providing good governance and infrastructure while Chidambaram wants to distribute relief to them directly through programs such as MNREGA.

Modi relies more on domestic big companies. He opposed MNC entry into FDI in retail. True, his opposition was not so much to MNCs but the way the Central government tried to push the idea without consultation with the states. Chidambaram, on the other hand, believes that MNCs have better managerial and technological skills and the country will lose out in their absence. The real reason, however, may be leakages. The UPA government has taken no effective steps in the last ten years to bring back Indian wealth stashed away in Swiss Banks; or to stem the outflow through hawala taking place continuously. Anecdotal evidence indicates a huge increase in illegal outflows from India during the last 10 years. Modi has lesser need of FDI because he does not look away from leakage.

The second difference between the two is on how to reach fruits of development to the common man. Modi is a votary of ‘development.’ He is focused on providing good governance and also increasing public investment on infrastructure. He believes that the common man will be spontaneously able to engage in business and other activities and improve his standard of life. This is very uncertain in my assessment. Problem is that capital is cheap. Companies can borrow at near zero rates of interest in the US, Japan and Europe. It is profitable for big companies to use automatic machines.

Result is increase in unemployment. Large numbers of weavers have lost their livelihood because textile mills of Surat are producing cheap cloth. Entry of big companies leads to loss of employment while provision of good governance and infrastructure leads to increase in the same. The net impact is not necessarily positive. A study by V V Giri Institute of Lucknow has brought to light the fact that nearly one-fourth of all youth are unemployed presently. They are so dejected that most have stopped looking for work. Thus Modi’s approach may fail to deliver. This would be a replay of ‘India Shining’ of 2004.

Direct approach

Chidambaram’s approach is more direct. He wants to impose taxes on the big businesses and use the revenue to directly provide relief to the common man through programmes like MNREGA, loan waiver and Indira Awaas. There are two problems here. One is that energy of the recipient is turned towards begging instead of ‘developing.’ Thus a virtuous cycle of grassroots production and consumption is not triggered. A Chinese saying goes that it is better to teach a man to fish instead of giving him fish to eat.

Chidambaram wants to give fish to eat. The second problem is at the level of economics. The ability to raise revenues for programs like MNREGA depends upon the profits made; and tax revenues collected from big businesses. This, in turn, depends upon the demand in the market. Difficulty is that automated production by big companies leads to job losses and, therefore, to lesser demand for goods in the market. A classic example is failure of the small car Nano. Users are quite happy with the vehicle yet there is less demand because people do not have income. Big companies cannot make huge profits in absence of sales, the tax revenues are less. No wonder Chidambaram has to take recourse to increased borrowing. The Reserve Bank prints notes in larger numbers to make it possible for the government to borrow. This printing of notes leads to inflation.

Chidambaram does not appear to recognise that there is no such thing as a free lunch. He believes that he can spend tax monies to provide relief without working on raising the necessary revenues. I think both Modi and Chidambaram models need to be reworked. The common problem is that automated production by big companies is throttling the opportunities for small businesses and also numbers employed. It appears to me this can be managed by segregating the economy into two sectors -- an ‘employment’ sector; and a ‘profit’ sector.

Certain manufacturing activities like weaving have a large employment potential and a not-so-large profit margin. These activities should be encouraged only in the labour-intensive small scale sector. Large textile mills should be taxed heavily. Then alone will it be possible to increase productive employment opportunities for the common man.

The Modi model needs to be reworked to ensure speedy and certain reaching of benefits to the common man. It will not do to rely on the infamous ‘trickle down’ theory which lies at the back of Modi model. The Chidambaram model needs to be reworked to prevent leakage of national wealth so as to reduce the need to invite MNCs. Modi’s economic knowledge may indeed be written on the back of a postage stamp but Chidambaram’s knowledge appears to be no better despite his Harvard credentials.

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