PM Modi’s economic policy doesn’t fit into the neat categories of Left, Right, Populist Right that economists find easiest to evaluate
Eight years into Narendra Modi’s tenure as Prime Minister, it is no surprise that many economists remain unconvinced about his economics. This is largely because of the limitations of economists, not the shortcomings of Modi. Economists fancy themselves either as “scientists”, who tend to be axiomatic in their view of the world, or as “philosophers”, who demand ideological consistency. They also take rather seriously John Maynard Keynes’ maxim of “we are all dead in the long run” and judge outcomes in the short term, not always appropriate in a legacy-ridden, emerging economy context. A more nuanced view is necessary.
The fact is that there have been a number of major disruptions in the last eight years, which have perhaps dampened economic growth in the short run. In the PM’s first term, these were policy-induced—demonetisation and the introduction of Goods and Service Tax. In the second term, they have been entirely external—the Covid pandemic and the Russia-Ukraine war. Were the policy induced disruptions poor economics? No. The GST is almost universally recommended by economists as the right way to approach indirect taxation. And it is beginning to yield very positive revenue outcomes after teething problems, which are a reality of a complex political economy, absent from economics textbooks.
Demonetisation was certainly not conventional economics. It may not even have achieved its stated goal of clamping down on black money. However, it definitely pushed the envelope on digitisation (would BHIM, UPI, etc., have developed in its absence?), which will have huge positive effects on growth; and on greater tax compliance, which is also critical for the prosperity of a country which has historically had a very low tax-GDP ratio. But without a longer-term view, it is easy to damn demonetisation just as it’s easy to slam the implementation of the GST.
Beyond the short-term vs long term, there is also the challenge of understanding the direction and essence of Modi’s economic policy. It doesn’t fit into the neat categories of Left, Right, Populist Right that economists find easiest to evaluate. If one chooses to look at the focus on welfare and trade policies, the government appears on the left. If one looks at its positions on privatisaton, it appears on the right. If one looks only at the notion of Atmanirbharta combined with welfare it looks like the populist right. It’s probably just as well that Modi doesn’t take economists too seriously because then he would have found himself boxed into one of these categories and all the baggage that comes with them. Instead, his government has adopted a common-sense approach, which chooses policies which it believes will yield the best outcomes rather than looking for an ideological fit. The following are the 5 standout features of Modi’s economic philosophy. The first 3 are orthodox, from the right/conservative end of the spectrum, which promote the role of the private sector. The next 3 are heterodox, which emphasise strong government.
1. Fiscal prudence: From his days as Gujarat Chief Minister, Modi has not been a proponent of careless spending. Even during the pandemic, when most economists cutting across ideological divides were calling for a bigger fiscal stimulus, including cash transfers to the poor, Modi chose the path of relative prudence.
2. Deregulation/ease of doing business: Cutting red tape has been a priority for the Modi government. There is still some way to go in fully dismantling the overhand of the licence-raj but the direction in which Modi’s government has approached regulation is to make things simpler and more transparent.
3. Privatisation: The outcome of the privatisation drive that was restarted in 2016 after a gap of over a decade is nothing to write home about, with only Air India passing into private hands. However, rarely has a politician emphasised that the government has no business to be in business as Modi has. The hurdles to privatisation are more practical and at the level of bureaucracy.
4. Industrial policy: After India’s disastrous experience with state intervention pre-1991, industrial policy was mostly abandoned in the post 1991 era. However, Modi has revived it. The ambitious Production-Linked Incentive scheme and the massive incentive package announced for semiconductor and display fab manufacturing. In doing so, Modi has turned his back on the conventional belief that the development of industries is best left to market forces.
5. Strategic trade policy: India continuously liberalized trade between 1991 and 2014 until the Modi government started raising tariffs. Like with industrial policy, this is to give room for manufacturing to grow particularly to withstand unfair competition from China. On FTAs the government has adopted a strategic approach, going ahead with ones more likely to benefit India while opting out of potentially damaging ones.
6. Focus on welfare: This could be right out of the Left/Populist playbook. However, Modi has focused on welfare not by throwing money at it but by improving efficiency, making sure that benefits reach those they are intended for.
What underlies the economic philosophy is a desire to accelerate growth and increase job creation by unleashing the private sector, particularly in manufacturing.
At the same time, the role of the State has been reoriented, from careless populism and excessive intervention in business to efficient welfarism and strategic, productive intervention to boost business. It needs a next textbook.
The author is Chief Economist, Vedanta.