Narendra Modi has been Prime Minister for more than nine years. And he recently told us all about his government’s achievements.
That’s fine. But what about the failures? I think these are two. One is the failure to control bureaucratic corruption. The other is the inability, despite early hopes, to revive private investment which has never crossed 27.5 per cent of GDP and is right now around 15 per cent of it. That’s low, very low for a country like India.
Modi started off as an admirer of China and wanted to emulate where it is at least 50 per cent. Most datasets say it’s 60 per cent. Private firms are also said to contribute 90 per cent of new jobs. Eighty per cent of this is in urban areas.
We can quibble over the exact numbers but the broad picture is clear: the private sector in China has, since 1980, done all the heavy lifting. In India it hasn’t. That’s about the size of it. There’s no getting away from it. The usual reasons are all very widely known.
Land is hard to acquire. Now, thanks to the new law of 2013, it is also very expensive.
India’s labour laws are a huge problem because even though we are a manufacturing dwarf, we have always had First World labour laws.
And finance, of course, is neither easy to get nor is it cheap. This is because of the system comprises huge cross-subsidies.
To top it all, once you get a business going, there are hundreds of rules and complying with them is a massive problem. And there is the army of inspectors that imposes a huge cost by demanding bribes.
There is the bureaucracy, too, that, despite recent minor improvements in its conduct, remains a major inhibitor. Last but not least are the police powers that hang like a sword over every business man’s or woman’s head.
All things considered India is a very unfriendly place to do business in. The Modi government has been trying to fix these problems but not very successfully.
There’s a reason for this. Its approach has been altogether too political.
Conceptual confusion
The real economic problem for the next 20 years is how to take the level of private investment up to at least 40 per cent of GDP, if not higher. But given the highly competitive nature of our politics, is that going to be impossible?
Let’s not overlook or ignore one important fact: no country has industrialised rapidly via private investment with an economic framework as liberal as ours. This is because in the aftermath of British rule, we have conflated political liberties with economic ones.
Just look at the sequence. Political liberty means the right to assembly. The right to assembly means the right to form trade unions. The right to form trade unions means industrial disputes. This means the creation of dispute resolution laws and administrative mechanisms.
Enter government and politics — and that’s it. The game is over even before it’s started because guided by political liberalism which focuses on rights, we have created a system of economic liberalism in resource use — land, labour and capital — that has stifled efficiency.
This wasn’t the case in countries that industrialised quickly with the private sector in the lead. Not just recently but ever since the Industrial Revolution began in the mid-18th century. They had neither political nor economic liberalism.
Actually, the reverse is also true. We can see how even industrialised countries that came late to this conceptual confusion of looking at economic policies through politically liberal prisms have slowly de-industrialised. The EU and the US illustrate this perfectly.
Equity vs efficiency
At the heart of this confusion lies a peculiar historical context. The West started moving in the direction of increasingly equitable outcomes because it could. It was already well off because efficiency came from the colonies where equity was never a consideration even remotely.
After 200 years, India responded to this imbalance by emphasising equity over efficiency. Gradually, thanks to competitive politics, this bias has become permanent.
Our country is so driven by the need for equity that no one even mentions efficiency. Politically, the distinction between economic left and right has been obliterated.
Even the reforms of 1991 which were intended to emphasise efficiency gave way quickly to equity. The result was the huge growth of finance where political competition is low and where economic efficiency is the only thing that matters.
All this has led to Indian politics being driven by considerations of efficiency and Indian economy being driven by considerations of equity. It should be the other way around.
Modi, if he manages to form a government with a full majority, has to extend the financial sector’s success to the manufacturing sector. For that he has to put economic equity on the back burner. It means new land and labour laws.
The trick will lie in doing it without compromising political liberties. Can he do it?