What should be the economic agenda for Modi 3.0?
The challenges India faces as it attempts to move to a 10 trillion-dollar economy and how to reach there.
Over the past decade, the Modi government has cleaned up the bank balance sheets, created infrastructure pipelines across roads, ports, railways, power delivery, cooking gas delivery, Industry incentives like PLI, Make in India, defence, development of eNAM, JAM-UPI payment system, ONDC, and focus on GVC, etc.
Most of the criticism of the Modi Government has centred around the lack of private capex, no development on Agricultural reforms (after eNAM), no simplification of GST, no incentives for services and no schemes to boost consumption.
In light of these issues, let us examine the challenges India faces as it attempts to move to a 10 trillion-dollar economy.
The older growth models will not work
Most of the post-World War global growth has come through export-oriented models. In this model, the economy first becomes a supplier to a large consumer market and then gradually transitions to a producer-consumer role. Both post-war Europe and Japan followed this model. East Asian Tigers were moving along this same model. In all these cases, the transition from merely being a supplier to a large consumer market to a producer-consumer role happened under duress, by coercion. The dislocations caused by this forced transition left scars on these economies.
China, the last country to use this model, is at the threshold of this change. However, China is too big to be coerced into a new producer-consumer role. It so appears now that instead of shouldering the burden of consumption, China seems intent on refusing any consumption and, in fact, doubling down on a mercantilist approach.
This forced dependency has hollowed out the jobs and prospects of the middle class in the producer-consumer world - i.e. West and Japan. The West is therefore wary of accommodating another large entrant into this scheme. It is thus going to be difficult for India to pursue a mercantilist model. The only places where the West will let India be a supplier would be in products and services that affect their inflation basket. India will be forced to grow in times of increasing trade barriers, haphazard trade sanctions, and declining trade openness.
In short, India will have to grow in the age of Deglobalisation. Consequently, India will face exceptional challenges on the export side.
Modi 3.0 starts in an age of uncertainty
As if the growth in a deglobalizing world was not challenging enough, we have high levels of uncertainty.
The wars in Europe and the Middle East, geopolitical risks relating to Taiwan and North Korea, and social instability in the US and Europe have increased uncertainty.
The domestic situation, too, has its challenges. The random and irrational reactions to CAA and farm laws, the judicial resistance to reform, the inextricable food subsidy, the dragged-out post-COVID recovery, etc., remain roadblocks to revolutionary reforms.
Uncertainty is an investment killer. It is this uncertainty that has dampened the recovery of private capex and cast a long shadow over discretionary consumption.
So, what model should India pursue?
As I argued previously (link below), India will need to be super innovative, super productive, scale rapidly and seriously opportunistic.
And Modi 3.0 has to enable India to do this. Here is what is required.
Better and higher quality infrastructure improves cost competitiveness. Initiatives like eNAM, UPI-based payment system, ONDC, etc. all contribute to competitiveness. A lot more can be done on these fronts. Simplified tax systems, transparent regulatory regimes, and reliable government service delivery will contribute to efficiency gains in the economy. Actional focus on ease of doing business and ease of living may improve competitiveness. Further competitiveness will come from the three most difficult areas of reform -Land, Labour and Law. These 3Ls face twin challenges - the content of reforms and the political deftness and ingenuity to manoeuvre these to fruition.
Deep intellectual property rights, knowledge-focussed work and higher levels of skills will give us a sustainable competitive advantage. IT/ITES, healthcare delivery, pharma, capital goods, etc, are ripe for developing and building higher quality and better value products and services. It will require further investment in education and skill development. It will also require the development of innovative Intellectual Property Rights frameworks. The breadth and depth of reform in education and skill development is enormous. The education reform also takes a longer time to take root and pay dividends.
However, that does not mean India should ignore the places where temporary competitiveness can be exploited to build long-term sustainable competitive advantage or at least strategic self-reliance. Temporary or transient competitiveness will allow India to pursue opportunities in GVC. In this aspect, prudent deployment of Industrial policy may help. We should look to make India a manufacturing hub in automobiles, 2-wheelers, EVs, mobile phones, Silicon chips, Defence, AI, and space.
Parallel to skill development, we also need entrepreneurship. Modi has made enormous strides in developing grassroots entrepreneurship with Mudra loans and SVANidhi loans. The next job is to enable them to scale from small enterprises to large-scale industrial behemoths. A large number of small reforms are required if we want to go from Garage to Global.
One pet peeve of mine is compliance. I have always maintained that in India, the cost of compliance is high, and the benefits are low, whereas the cost of breaking the law is low, and the benefits are high. Whenever the policymakers realise this, they increase the fines and send random notices demanding penalties from innocent people. No one, I repeat, no one, including Modi, has worked on simplifying compliance. In fact, I challenge everyone to get any of their government office work done in one day.
Consumption has featured prominently in India's growth story. While other countries actively discouraged consumption, India, at times has encouraged it. Both approaches are flawed. While the former imposes heavier readjustment costs later, the latter impairs government finances and, hence, its ability to respond to other emerging crises. India should refrain from promoting consumption by transferring money. India has always been a consumption-driven economy. As prosperity disperses across income classes you will automatically see consumption rising.
The most critical reform will be in agriculture. Considering the amount of leakage and losses in the agricultural sector, innovation may double or even triple farm incomes. The farm laws were, in fact, a step in the right direction, though more needed to be done even then. The reform in agriculture will take all of Modi's political capital to see through.
Finally, in uncertain times, certainty is most valuable. More than the reforms themselves, it will be important for Modi 3.0 to create certainty. Modi 3.0 needs to create a well-defined path of reform and milestones. Certainty will also be critical in terms of stable international trade relations (for GVC) and stable supply chains for resources like coal, minerals, rare earth, etc. Such stability and certainty will induce private capex growth.
In Sum
There are two approaches to the stewardship of an economy. The hunter approach sends the government along, applying band-aids to everything that appears broken. The Farmer approach requires the government to create the right environment and nurture the garden.
In the past decade, the Modi government has not dragged the economy down but rather supported it in some of the most challenging times. Over the last decade, the Modi government has shown incredible talent as a farmer.
It is tempting to abandon prudence and resort to gimmicks such as government incentive-based consumption, which can lead to unsustainable growth. Alternatively, we can do the right thing and wait for the result. The farmer knows it pays to be patient.
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