Mindset change essential

Modi government has not declared its economic vision nor has it retracted from Nehruvian socialism, state ownership and controls.

Fundamental changes in economic policies require changing ideas and people to execute the details: Of procedures, processes, paper work, approval authorities. Indian reforms have tried to change from state control to a market economy without other concurrent changes.

India’s leaders, led by Jawaharlal Ne-hru, were enamoured by the Soviet model of central planning, state ownership and control. Ideas and policies for a welfare state of the Labour Party in the UK added welfare to state control in Indian policies. India was to be a centrally planned welfare state in a parliamentary federal democracy with universal sufferage. Almost every Indian accepted a centrally planned welfare state.

Industrialists accepted that in a very poor India, the government alone could put together the resources required for development and for looking after the poor and marginalised. Over the years, the structure of a bureaucracy, procedures and information, developed into a vast superstructure in governance. Only in 1959, when the scope and scale of government intervention and control over the economy had become apparent, did Rajaji and others find the Swatantra Party to oppose it.

Indira Gandhi as prime minister was no ideologue. Her obsession was to command power. She broke the Congress by becoming anti-West, pro-poor, and making people believe that the government would play a very central role in the economy. The private sector was stifled by stringent controls. State ownership of enterprises in key areas and of most financial institutions by government, confiscatory tax rates, free or heavily subsidised (by government) items for the “poor” (rice, wheat, sugar, cooking oil, janata cloth, etc), were national economic policies.

Every transient prime minister before and after her (Charan Singh 1979-80, V P Singh 1989-90, Chandrasekhar 1990-91, Deve Gowda 1996-97, I K Gujral (1997-98) was a Nehruvian socialist. Indira Gandhi was a paranoid centralist. For her, the Green Revolution was to help escape the influence of foreign powers, especially the US. Socialism was her means for control over the country. Lal Bahadur Shastri showed signs of being more of a pragmatist but died without achieving much for the economy.

Rajiv Gandhi had travelled the world and had a passion for technology. He relaxed some of the rigidity in controlling the economy. He did not disband them because, despite his large parliamentary majority, he knew that his Congress party would not accept it. But he made licensing less onerous and narrow. He enabled India’s beginnings in ICT (information and communications technology) industries where it is now a world leader. However, the administrative mechanism and its methods remained the same.

Rajiv Gandhi was succeeded by miscellaneous prime ministers with neither the time, knowledge nor inclination to strengthen the economy through reform. The pressures of a fragile global economy and internal unrest finally led to the re-emergence of the Congress Party under Narasimha Rao heading a coalition government.

He seized the opportunity to depict a far graver crisis, and used crisis as a reason to dismantle the rigid framework of controls and regulation over the economy. Industrial licensing was abolished; so was the most import licensing and restraints on technology imports. Tax rates were slashed and foreign investment encouraged. All this certainly released the exuberance of entrepreneurship and led to faster growth.

What Narasimha Rao did not do was at the same time to change the bureaucratic (procedures, processes, administrative rules) mindsets developed over 40 years of a rigidly controlled economy. Nor did the educational system quickly recognise that individual enterprise was at the core of economic development. Private enterprise should not be allowed to exploit the consumer and the country but should have the maximum freedom to innovate and create new production apparatuses.  

The Vajpayee government followed the path of previous government’s economic reforms. It added major infrastructure expenditures and large social welfare schemes in education and health. It adhered to the macroeconomic policies that left a small deficit and low inflation, with decent growth.

Economy under UPA

Manmohan Singh in his first term continued like his predecessors and the booming global economy further helped growth. Towards the end of the first term, his government introduced generous schemes like the rural employment guarantee scheme and others. All this increased the deficit and added to purchasing power. The attempt to combat the effects of global slowdown in 2008 further added to the economy’s woes. The second term of the UPA was beset with economic pressures.

The system of government controls, licensing, state taxation, etc, required a huge superstructure of administrators and others whose minds had been influenced by years of such control. Education in colleges and beyond taught the conceptual basis on which these policies were based. Most Indians (academics, media persons, business executives) had imbibed these ideas. Hence a reversal of these policies (modestly by Rajiv Gandhi, more deeply by Narasimha Rao, and transformatively by Modi) demanded not only their announcement but basic changes in peoples' ways of thinking and in governance and its procedures.

No reforming government dealt with the problems of doing business in India because of huge government delays in various approvals, and poor implementation of all programmes. In addition, corruption arising out of huge discretionary powers with politicians and bureaucrats added to the difficulties.

The Modi government has not declared its economic vision nor has it retracted from Nehruvian socialism, state controls and state ownership. It has begun simplification of systems and procedures. Sustained reform demands mindset changes of politicians, administrators and the intelligentsia.