If the pandemic enables a course correction, India will emerge stronger, not weaker.
Is the India story over? Has Covid-19’s second coming irreparably damaged the rise of what was, until recently, the fastest growing economy in the world? These are not unreasonable questions to ask, and amidst the gloom and unprecedented suffering, many are answering them in the affirmative. But, in fact, Covid-19 is only reinforcing what a lot of people have known all along. The Government, in its entire machinery and layers, is India’s Achilles Heel. The India story is scripted by the country’s entrepreneurs, big and small, and that enterprise will not disappear in the face of a pandemic. But it needs to be supported by a Government whose role is reimagined. Indeed, the India story can flourish if the right lessons are learnt from the crisis.
Prime Minister Narendra Modi knows the limitations of Government. After all, he was the first mainstream Indian politician to publicly proclaim the mantra of “Minimum Government, Maximum Governance” and to repeatedly assert that “Government has no business to be in business.” Not every action of his Government over the last seven years has conformed to these mantras. But if India is to come out strongly from the setback of Covid-19, the Prime Minister must ensure that Government continues to withdraw from its domineering role in the economy (minimum government) while sharpening focus, and improving efficiency, in the domains where its presence is still required: security/defence and physical and social infrastructure (maximum governance).
It is easier said than done because India’s political economy, since Independence, has centred around the redistribution of resources with competing special interests demanding their pound of flesh (usually for votes). There have never been large constituencies which support growth or investment. This is not just about giving free rein to the private sector or admiring wealth generation. Equally, it is about the role of the Government.
Covid-19 has brutally exposed the inadequacy of India’s healthcare system and a heavy price is being paid. The fact is that no government since Independence, irrespective of ideology, has invested in building a comprehensive healthcare system. It is often claimed India is a welfare state. It is not. It is a subsidy state. The demand from government of the most powerful interest groups has always been for freebies which do not offer any returns for the nation as a whole. Every government spends more on its revenue account, which is largely unproductive than on capital expenditure, which is productive. Sure, some corrections happen from time to time. The Modi Government is spending more on investment than before, but it is still a tiny fraction of total spend and concentrated in select sectors like roads and highways and drinking water/sanitation. The pattern in state governments, which have prime responsibility for health and education, is even more skewed towards revenue expenditure than capital expenditure.
It isn’t healthcare alone which has suffered. India has also under-invested in education. All it has achieved is creating a large cadre of teachers who act either as bureaucrats or trade unionists, constantly demanding (and getting) pay rises without actually bothering to perform their job. Unsurprisingly, spending in sectors like health and education gets frittered away in revenue expenditure like salaries. Even in defence, a completely different domain, government spending focuses on revenue expenditure (salaries, pensions) and very little actually goes into investment in new equipment and state of the art technology. Just like Covid-19 has exposed India’s inadequate health infrastructure, a full-scale war (may it never happen) will likely expose the lack of investment in defence equipment and technology over the long term. We cannot let resilience (of which we have plenty fortunately) alone fight all our battles.
Public sector companies have also been victims of the same political economy. Instead of being vehicles for investment, most of them have been used to meet redistributionist goals whether doling out jobs, without any consideration for efficiency, or being forced to “invest” in unprofitable but politically expedient projects/locations.
Something drastic is required to break this vicious cycle of seven decades. Maximum governance requires getting the role of Government right. The State needs to become investment oriented while limiting its unproductive spending. That is the only way it can be ready to take on massive challenges effectively, whether a pandemic, war or a major industrial/technological disruption. Subsidies can at best be a palliative.
Prime Minister Modi has a chance to truly disrupt the way Government is imagined in India. It cannot be business as usual after the scale of misery that has been experienced by the people of India.
Indeed, if the crisis of Covid-19 forces politicians and voters across the board to rethink priorities, then India could well embark on a new path to prosperity, in which the private sector is allowed to invest and run business freely while the Government invests in sectors where the private sector cannot/will not. There will be much more to redistribute if India gets rich quickly.
Dhiraj Nayyar is Chief Economist, Vedanta.