On the eve of independence, we, the people of India, assumed that India’s moment has arrived after centuries of colonial exploitation. We made our tryst with destiny to remove poverty, illiteracy and ignorance and to feed and clothe the naked masses. But by 1991, we reached the brink of a financial crisis with rampant poverty of 48% population below poverty line, and social strife over mandal (caste) vs kamandal (religion) polity. On the other hand, our counterparts like South Korea, Malaysia, Thailand , Taiwan, etc. who had attained its independence at the same period grew substantially.
Collective Indian society has a habit of learning from their mistakes only when we reach our tipping point. We cooperated with British for our own exploitation and later protested against them when suffering increased. Similarly, by 1991, we adopted the socialist model of development, with slogan of GARIBI HATAO, but this only led to license, quota and permit with inefficient public sector organisations, rent seeking bureaucrats, crony socialism causing economic crisis and wasteful distribution of financial resources of schemes meant for “poor”. Again, we learnt from our mistakes and led to liberalisation, globalisation and privatisation reforms, which saw rapid economic development making India the second faster growing GDP after China by 2008 , and rapid poverty reduction to 22% by 2012.
However, India again grew complacent since 2009 global financial crisis. Cases of crony capitalism replaced crony socialism as seen in scams like 2G, Coal, CWG, etc.. NPAs of banks increased to 12% of its total assets by 2016 due to political interference and favoritism to loyal business houses. However, to legitimize the loot, UPA government also gave the poor some share of its loot through free food, free wages (for inefficient work without asset creation in NREGA), loan waivers for farmers, etc. Over time, the wealth creation was forgotten and wealth redistribution was prioritised. Business were regulated by retrospective taxation and privatisation was pushed to the background. Foreign policy was complacent, so attacks from Pakistan or China were responded with requests and hollow statements. This undermined India’s capacity in the strength of its institutions to provide security, stability and transparency. Inevitably, India growth rate declined to its pre-liberalisation era of 4% in 2018 due to legacy of such policies. Thus, while China has become the 2nd largest economy with 16 trillion $ GDP, India is still lagging at 2.8 trillion $ GDP.
But the present government stands in sharp contrast to these policies discussed above. It has shown tremendous willpower and the capacity in economic, political and foreign policies provided by internal and external factors, which provide an unique opportunity for India to seize the moment and become a superpower. In the following discussion, I will highlight how India is uniquely placed in this scenario and then provide insights on how to reap the moment adequately.
These are a set of internal factors, under the guidance and decisive leadership of the Prime minister, and external factors, due to USA- China rivalry led by American President, Corona-virus pandemic and China’s own mistakes.
Internally, government has been following a pro-business policy, and has also given them respect as wealth creators, as was spoken from the Red fort address from our Prime minister. In a country, where business class vaisyas occupied the lower hierarchy than Brahmins and Kshtriyas, the society never appreciated the businessmen as wealth creators. Rather, capitalists were shunned as greedy exploiters who are looking to suck people’s blood for profits. This is changing as seen by rising number of youths, who want to become an entrepreneur, rather than government employees, with support from government under Start-Up India programme. The most celebrated example is Dr. Roman Saini, who quit IAS (most coveted government job in the country) to become an enterpreneur and created a unicorn company, Unacademy.
Further, government has reduced corruption substantially, especially at top policy and decision making level. This has promoted transparency and level-playing field for all businesses. This incentives competition and innovation to improve quality and earn profits. This is welcomed by all investors, especially foreign direct investments. This has also promoted honesty in the policy making of the state governments, as they face a tough competition to demonstrate their integrity , against Narendra Modi impeccable integrity. Thus Delhi Chief Minister recently said when his ministers were alleged to have indulged in corruption that “I don’t need to track my ministers honesty, because Modiji will do this (of upholding honesty) job for me”.
Even at the grassroots level, the benefits of government schemes were diverted by middlemen-politician-bureaucrat nexus. As 2011 CAG report and quote by former prime minister said, out of every 1 rupee spent by government, only 15 paisa reaches the poor. By using Jan Dhan–Aadhar–Mobile, government has provided direct benefits transfer to the poor beneficiaries. Thus, in-spite on lower growth rate in allocations for welfare schemes , as seen in slashing of MGNREGA funds recently or LPG subsidy, the actual money has reached the poor and led to savings of 90000 crore. This has led to good economic and good politics, which economists and opposition often fails to recognise. It has increased government acceptance in lower classes, leading to increased votes. This has provided absolute majority to ruling party and also political stability. This is sine-quo non for ease of doing business. With weak opposition, this party should and would continue to rule for at-least next 10-15 years , at the centre.
The toughest challenge any democratic government faces is in terms of labour reforms. While meeting labour demands for higher wages, safety, security, etc helps get more votes and quite lucrative for any political party, his had led to trade unionisation and frequent strikes and protests, leading to adverse business climate and fierce opposition to privatisation of PSUs. The most glaring example is West Bengal, which has turned from India’s largest industrial centre during independence, to a underdeveloped state and a hub of unemployed local youth turned goons, whose source of income is political patronage and violence. The present government argues that the strict laws prohibits business environment and thus no demand for labour is created. Thus, laws which were meant to protect the labour ends up harming their interests. Therefore, the government has shown the courage by rationalising labour regulations like scrapping minimum wages, increasing shift hours from 8 to 12, labour codes, etc. Thus, labour reforms will help provide competitive labour wages and thus, promote greater investment and employment.
Additionally, privatisation of PSUs will reduce inefficiency and fiscal support for loss making PSUs, and improve work culture of government organisations while attracting best technologies and return on assets. What most government in the past have failed to do , the present government has shown the willpower by privatizing AIR INDIA and BPCL among others, irrespective of the labour protests. Further, those sectors, which were considered to be “Holy cows” meant to be reserved only for the public sector like railways, defence and space, among others, have been opened for private sector, with FDI reforms to bring more capital and technology and boost indeginous production and exports.
Further, taxation reforms like GST has created a unified national market and reduced cascading affect of taxes, while reducing tax inspector Raj. Further, corporation tax have been reduced to 22% and angel tax has been withdrawn, which has made it among the most tax competitive regime in developing countries.
Critics point about the economic adventurism of the government over demonetisation. Among others, being that it was a wrong policy leading to economic downturn. Nevertheless, the government can be considered to have the courage and the capacity to take risks to promote economic development. This is in sharp contrast to status-quoist government in the past, who wanted to entrench their powers and positions with nexus between corrupt bureaucrats, black marketers, money hoarders, etc which this government has unsettled.
Further, infrastructure development has been expedited by the government. Land acquisition, forest clearances, single window clearances , and PPP model of financing and development has improved the incremental capital output ratio. The 100% electrification of villages, six-laning of highways, dedicated frieght corridors, improved electricity generation with increasing emphasis on renewables, logistics policy, etc. has improved India’s competitiveness and will boost exports in future. Our transport minister recently remarked “India has achieved the record of building 20 Kms of highways per day, and will strive upto 40 Kms per day”– a milestone unparalled in the world, except China, which can achieve it undemocratically, unlike democratic India.
Lastly, the recent announcement of fiscal stimulus of 20 Lakh crore, with most of the funds being allocated to provide cheap credit to small and large businesses, like MSMEs also shows the priorities of the government. While the opposition was demanding an income transfer of Rs 7000 to 12000 to poor households, the government has resisted this temptation as it would have led to increased consumption without creation of productive capacity to meet the demand. This would have increased inflation and reduced investment. Instead, the government has chosen to provide cheap loans from Rs 10000 to small vendors like vegetable and kirana stores, etc to upto Rs 10 lac loans to MSMEs and moratorium on loans for corporates. This shows that the government wants to promote investments and not fall prey to political populist measures and provide instant gratification to the masses. This will be key in further promoting economic development of India.
Thus, these factors has strengthened India’s micro-economic fundamentals, which would go a long way in promoting macro-economic growth in the long run. As Prime Minister said, India is making quantum jump , and not incremental changes, in its economic policies and therefore it has laid the RED CARPET for businesses and enterpreneurs, both domestic and international to invest in India. It can be said that government has laid the background to create an Atma Nirbhar Bharat (self reliant).
But whether India becomes Atma Nirbhar or not, depends not just on how India acts but also on global developments, especially in USA, China and Europe, and the recent global Corona-virus pandemic. So we shall discuss the global context and examine how India perfectly aligns itself in the global scenario to become the next economic powerhouse. This shall be discussed in the next article.