One of the reasons for the
disillusionment of the educated middle class with the Central Government during
2010 to 2012 was the contradiction between the well-publicized turn to moral
philosophy and legal rights and the media exposure of corruption and
inefficiency. The pendulum had swung too
far to the abstract & the legal from the pragmatic and the practical. The incompetence and corruption that
intervened between philosophy and results, needed to be addressed, for the public
to see beneficial outcomes.
Has the pendulum swung too far in the other direction? Is the new government focused excessively on
lists of programs and projects and thus prone to ad hoc and inconsistent
decisions, without big picture or philosophy to guide individual ministers and
bureaucrats? Does “Modinomics” mean the
“Gujrat model”? If this State originated model is applicable only to a sub-set
of the larger set of issues dealt with by the Central government, does it mean
that “Modinomics is directionless”? Does
the Modi led government have a development philosophy or model, to guide policy
and institutional reform decisions?
We can
discern three principles underlying Shri Modi’s approach to economic
development.
1) Business is the creator of productive
jobs in the economy. All types of business (tiny, small, medium, large;
domestic, FDI; private, public sector; manufacturing, services, agriculture),
have to play their due role. Effective use of technology and skills is what
makes both employment and business, productive.
The jungle of laws, rules, controls and procedures has stifled growth of
business, productive jobs and employment. Cutting through this jungle will let
the light of the sun on to the ground where these business enterprises and
entrepreneurs operate, so that they can blossom. Many policy pronouncements,
such as on “Ease of Doing business,” are driven by this underlying approach.
2) Good Governance is the key to Government
provision of Public Goods and Services and successful Social Welfare
programs. Between the input of funds and
the achievement of desired outcomes lies the black hole of Government. Efficiency, honesty (viz corruption) and
sincerity (public service, national interest) in government functioning is
therefore a critical element in achieving any Social welfare objectives. Further, technology (e governance) can be an
effective instrument for achieving efficiency improvements. The Federal principles enshrined in the
constitution plays a much more important role in defining the areas of
responsibility of the Central & State Governments than social philosophy or
‘superior’ moral sensibility.
Government
is also seen to have an important role in creating the economic environment
(macro, infrastructure, financial systems, skills, technology development and
adoption) in which the business (mentioned in 1) can grow and produce
productive employment. However, this aspect differs from earlier governments,
only on the relative emphasis placed on different elements of the economic
environment.
3) Government
controlled Assets, infrastructure and business can be used to generate
profits for investment and growth. This reduces the need for both taxes and tax
incentives and for subsidies, all of which are distorting and usually lead to
corruption. There is also a belief that this government can manage the public
sector, honestly, sincerely and efficiently to generate larger profits and speedily
direct these into investment in sub-sectors that will accelerate economic
growth (rather than crowding out private investment as happened so often in the
past). Parts of this approach are still
evolving, particularly the identification of government owned business, assets
and financial institutions that generate losses and negate the
investment-growth objective.
The first element acknowledges the benefits of
a competitive market economy and puts the correction of “government failure” as
its central issue. The second principle acknowledges both “government failure”
and “market failure” and attempts to correct both to enhance the benefits from
both. The third element is a little schizophrenic, based as it is on a
historical legacy. It makes the optimistic assumption that a Modi government can
attain the quality of public sector governance seen in a few countries (Japan, Singapore,
S Korea, China) and mimic their relative success. However, most developing countries, including
India, have failed to maintain the quality standards needed for success.
Classic public goods like defense and
sectors with large externalities like most rural infrastructure and monopoly networks
in urban areas(sewage, water, electricity distribution, roads, public
transport), have been considered governments business in most countries.
However, this argument does not apply to business in competitive,
well-functioning markets (e.g. metals,
hotels). Thus it partially contradicts a couple of election speeches in which
it was said, that “Government has no business to be in business.”
Every economic model is constrained by
political reality. Government decisions are based not just on its economic
philosophy and beliefs but also on the political constraints it faces at any
given time. These constraints arise from pulls and pressures inside the party, from
allies, and the opposition. It is naïve to expect all actions to be consistent
with economic philosophy. One hopes that the government is able to overcome the
political constraints that keep it from acknowledging and acting on the
empirically evidence that government cannot accelerate growth through ownership
of business that operate in competitive markets.
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A version of this article appeared in Swarajya on May 21,
2015 at http://swarajyamag.com/economy/does-modi-government-have-an-economic-model/
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