Under Modi, India is following 1980s LatAm

To understand the ‘cyclical’ and ‘structural’ reasons responsible for the current economic slowdown, it is vital to see these as products of the current political-economic governance framework, especially of the Narendra Modi-I and Modi-II years.

If we wind the clock back to 2014, the Modi-I regime came to power promising millions of new and higher-paying jobs, greater business investment opportunities, privatization and less corruption. The alluring political slogan of the Modi campaign was ‘minimum government, maximum governance.’

What we subsequently saw was bigger (not smaller) government trying to be more efficient, that is, in terms of increasing relative access to some public goods at local levels. We have actually seen the Modi government function as a large monopolistic corporation, spending more on public relations campaigns and marketing, with a bureaucracy tailored to serve in its distributive capacity.

The political-economic framework of the current government has further institutionalized a practice of over-centralization of economic and political power, creating policies that continue to be based on non-market or non-commercial principles, presenting no sustained growth possibilities.

So, while one can see many toilets built across rural and urban spaces as part of Swachh Bharat, but there is no underlying program strategy to see this step as part of some cohesive plan to improve sanitation nor do we see a mechanism of effective evaluation put in place for assessing the failures/success of such measures.

Under the Jan Dhan Yojana, too, the opening of bank accounts for a significant population who didn’t have an account before happened, but then one saw a widespread problem of either having no deposited money from the end of the government or account-holders hardly using these accounts for their financial needs which, in the absence of frequent transactions, offer little to either them or to the banks.

One key reason for the inability of government functionaries to do an effective follow-up on some of these national, PMO-driven programs owes to how the bureaucracy’s own functioning has been structurally altered under Modi-I and Modi-II.

Most bureaucrats (if not all) are simply expected to be involved solely in the implementation of programs like Swachh Bharat, Ujjwala, Jan Dhan, etc., and thus to be remain in conformity with the central government’s dictates. The same applies to those within ‘autonomous’, even constitutional, institutions such as the Reserve Bank of India, the Election Commission, etc.

This allows existing bureaucrats or other bodies no agency to either share new ideas or conduct independent and fair program evaluations (say, after the implementation cycle), or even give effective feedback on improving such programs.

Fiscal dynamics

Recently, an internal assessment by the Union government suggests that gross tax revenue for 2019-20 may fall short by around Rs 2 lakh crore from the budgeted estimate of Rs 24.6 lakh crore. This assessment has been shared by the finance ministry with the 15th Finance Commission.

A recent RBI report estimates that states in India employ five times more people and spend about one-and-a-half times more than the Centre. With a high fiscal deficit that is combined with a weak Centre-State fiscal relationship, we are likely to witness a gradual reversing of trends in the revenue-sharing contract between the two.

This will have structural effects on not only the growth of states but on their ability to finance welfare expenditure, that is, in education, healthcare, job-creating plans, infrastructure, etc.

Where are we headed?

A cautious reading of economic history may help us understand the trajectory in which India seems headed.

Some might argue that an over-centralized, authoritarian governance model in India may seemed justified in comparison to the contextual cases of high-growth East Asian economies like South Korea (in 1960s, 70s), Singapore (under Lee Kuan Yew) etc., that suppressed consumption growth to increase investment and export-led production capacity for higher economic growth and then later felt the need to ‘democratize’ for civic and other political freedoms once they became middle-income economies.

However, it seems that India’s political economy landscape resembles less the East Asian model and bears rather greater resonance with the Latin America of the 1970s and 80s. Despite having a relatively more favourable high-growth environment as compared to other developing nations (being a major exporter for over two centuries), Latin America’s politics in its post-independence years and especially during the late 1970s and 1980s, generated strong impediments to its economic development and in its inability to invest sufficiently in areas of human capital development for sustained economic growth.

On the one hand, higher fiscal deficit numbers and ever-rising government borrowing levels (as a percentage of GDP) made most Latin American countries in the 1980s and 1990s to be crisis-hit, and the pressure on political parties to follow populist economic policies remained very high in these nations, further reflecting a greater popular demand for redistribution than in more egalitarian societies. Public expenditure as a percentage of GDP was high despite low nominal growth rates, which made countries like Argentina, Mexico and Venezuela to borrow extensively from external sources.

On the other hand, the power of elites to thwart this demand has been manifested in the way in which even ‘populist’ policies appear to end up being distorted so as to benefit only powerful vested interests in the government and select business groups. Such rent-seeking behaviour saw a deeper allegiance between the ‘big state’ and ‘big corporate’ classes, narrowing market forces of competition without a market-oriented mechanism of growth.

India seems to be moving in a similar political and economic trajectory. What is needed is for a consistent, coherent set of measures guided by market-oriented democratic principles, as against majoritarian political principles per se, to become the basis of government action and revive India’s growth engine.

(The writer is Director, Centre for New Economic Studies, OP Jindal Global University, Sonepat, Haryana)