13 September 2013, 07:03 PM IST
Following his nomination as the BJP's Prime Ministerial candidate, Narendra Modi – while continuing to attack the UPA government's misgovernance and corruption – must now also articulate policies he would follow if elected to office in 2014.
What might these policies be? Consider the basics first. India's GDP grew at around 8% between 2004 and 2011 because services – especially information technology – were buoyed by a global liquidity bubble.
Services account for 59% of India's GDP. Industry comprises 27% and agriculture 14%. (These numbers can vary with fungible definitions for each sector.) Services grew at over 10% annually in 2004-11, giving GDP growth an arithmetically-weighted assured base of nearly 6%. With industry growing at a steady 5-7% over this period and agriculture at 3%, their weighted contribution to GDP was around 1.5% and 0.5% respectively. Total GDP growth was thus a stable 8% a year (6% + 1.5% + 0.5%) over nearly a decade.
The collapse of GDP growth to 4.5% is largely due to a steep decline in the growth rate of services. If services growth halves, GDP dips by 3% annually because of its high weightage in the economy. Industry, which comprises manufacturing and sectors like mining and electricity, has also declined during this period and dragged GDP growth down another 1%. The likely uptick in agricultural growth to 5% after a good monsoon this year is simply not enough to make a difference on account of its low (one-seventh) weightage in India's overall GDP. The latest numbers on industrial production suggest the economy has bottomed out but recovery will be slow and halting.
The solution to India's economic downturn lies on the supply, not demand, side. Policymakers, especially D. Subbarao, the former RBI governor, erred grievously when they tried to strangle demand in order to tame inflation. It is far more important to boost supply by investing in productive infrastructure: roads, housing, refineries and power plants.
The PMO has, belatedly recognizing this, restarted infrastructure projects worth Rs. 1.40 lakh crore blocked by environmental and other lobbies. Infrastructure projects valued at another Rs. 9 lakh crore, however, remain blocked.
Economic growth is the only long-term panacea to reduce poverty. Poverty fell from 37% to 22% in 2004-11 because annual GDP growth averaged 8% during this period. At 4% annual GDP growth, that trend could well reverse in future.
In this context, some of the provisions of the Land Acquisition Act are regressive. They will make acquiring land more difficult, more expensive and more time-consuming. Infrastructure will be a casualty, jobs a collateral victim. The farmer, whom the Land Act is ostensibly meant to protect, will not find ready buyers, narrowing his options.
The intent of the Land Act is good – ensuring fairness to small landowners. The outcome, however, is likely to be damaging – lowering productive asset-building and GDP growth and slowing the decline in poverty.
Indian and foreign investors seek three things: one, transparent contractual laws and swift, fair implementation of those laws; two, certitude in tax legislation with no retrospective fiddles; and three, single-window clearance for projects which minimise bureaucracy and bribes.
All of this needs a change in basic mindset in a government steeped in a licence raj culture, now replaced by an environmental raj culture.
What then are Modi's economic ideas? In a recent interview he said: "I suggested to the Prime Minister sometime back that, were MGNREGS to be linked to asset creation, the country would have been strengthened by the scheme. If the deepening of the village ponds under MGNREGS would have been followed up by fisheries development through a cooperative of the same poor families, the scheme becomes that much more sustainable and meaningful."
Other reforms Modi should now consider include new labour laws which are fair to employees and employers alike. This government is capable of sensible legislation as we saw in the excellent new Companies Act. RBI Governor Raghuram Rajan has shown how a firm hand and innovative thinking can restore confidence in domestic and foreign investors.
It is a lesson Modi will take on board as he builds his own technocratic team.
The new government must make FDI attractive by trusting foreigners and not imposing usurious conditions. That is why FDI in retail remains largely dead 18 months after it was allowed and why the excellent decision to allow foreign universities to set up campuses in India could remain moribund too. (The condition of no profits being repatriated will not attract the best players – MIT, Harvard, Berkeley, Yale, Cambridge. Private Indian universities and professional colleges, which are run by profitable "trusts", need global competition to improve infrastructure, faculty and original research.)
Regulation is another area Modi should turn his attention too. TRAI, for example, has been far too heavy-handed, SEBI far too lenient, and RBI – till recently – far too didactic. The role of a modern regulator is to be a tough enforcer of sensible regulations, not a lenient enforcer of rigid regulations.
India's huge consumer market makes it a magnet for the world. Bad governance and retrospective legislation in recent years have led investors to lose faith in the India story. Credibility, like reputation, takes long to build, little to lose.
For centuries, India was exploited by foreigners. Indian resources were used for Western benefit. It is time to use Western money for Indian benefit. An open economy with firm, fair and fast law enforcement, a reliable tax regime and a sensible regulatory framework could attract well over $100 billion in FDI annually.
The collapse of the savings rate and therefore of investment – public, corporate and consumer – is largely responsible for the current account deficit (CAD). The new prime minister's first task will be to bring the savings rate back up to 37%, still far lower than China's savings rate – a major reason for its robust investment in infrastructure (though some of it is excessive construction fuelled by China's notoriously over-leveraged banks).
India's annual crude oil import bill is over $160 billion. In the 1970s, when ONGC's Bombay High was in full flow, India imported around 60% of its crude. Today, we import 80% – an indictment of failed oil exploration policies, stymied by crony capitalism.
Gold imports are another drain: over $55 billion annually. It is estimated that 30,000-35,000 tonnes of gold are held in private Indian hands. This is worth over $1.50 trillion at current prices – five times our forex reserves. Is there a way the new Prime Minister can innovate to monetise this asset? Of that more in a future article.
For a new government led by Modi, the key issue is to re-liberate an economy swathed (once again) in red tape. Simultaneously, it must rescue our institutions from the damage they have suffered over the past nine years. Police, administrative and judicial reforms will give the economy the steel grid it needs to allow India to grow into a modern world-class nation.
We'll flesh out these governance reforms in a new series outlining the agenda for a new government.
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