Does Modi Government Have An Economic Model?

by Dr Arvind Virmani - May 22, 2015 03:49 PM
Does Modi Government Have An Economic Model?

Can the government’s current economic model accelerate growth in India? 

One of the reasons for the disillusionment of the educated middle class with the Central Government during 2010 to 2012 was the contradiction between the well-publicized turn to moral philosophy and legal rights and the media exposure of corruption and inefficiency. The pendulum had swung too far to the abstract & the legal from the pragmatic and the practical. The incompetence and corruption that intervened between philosophy and results, needed to be addressed, for the public to see beneficial outcomes.

Has the pendulum swung too far in the other direction? Is the new government focused excessively on lists of programs and projects and thus prone to ad hoc and inconsistent decisions, without big picture or philosophy to guide individual ministers and bureaucrats? Does “Modinomics” mean the “Gujarat model”? If this State originated model is applicable only to a sub-set of the larger set of issues dealt with by the Central government, does it mean that “Modinomics is directionless”?  Does the Modi led government have a development philosophy or model, to guide policy and institutional reform decisions?

(Credits: AFP PHOTO/Prakash SINGH/FILES)
(Credits: AFP PHOTO/Prakash SINGH/FILES)

We can discern three principles underlying Shri Modi’s approach to economic development.

1)  Business is the creator of productive jobs in the economy. All types of business (tiny, small, medium, large; domestic, FDI; private, public sector; manufacturing, services, agriculture), have to play their due role. Effective use of technology and skills is what makes both employment and business, productive. The jungle of laws, rules, controls and procedures has stifled growth of business, productive jobs and employment. Cutting through this jungle will let the light of the sun on to the ground where these business enterprises and entrepreneurs operate, so that they can blossom. Many policy pronouncements, such as on “Ease of Doing business,” are driven by this underlying approach.

2)  Good Governance is the key to Government provision of Public Goods and Services and successful Social Welfare programs. Between the input of funds and the achievement of desired outcomes lies the black hole of Government.  Efficiency, honesty (viz corruption) and sincerity (public service, national interest) in government functioning is therefore a critical element in achieving any Social welfare objectives.  Further, technology (e-governance) can be an effective instrument for achieving efficiency improvements.  The Federal principles enshrined in the constitution plays a much more important role in defining the areas of responsibility of the Central & State Governments than social philosophy or ‘superior’ moral sensibility.

Government is also seen to have an important role in creating the economic environment (macro, infrastructure, financial systems, skills, technology development and adoption) in which the business (mentioned in 1) can grow and produce productive employment. However, this aspect differs from earlier governments, only on the relative emphasis placed on different elements of the economic environment.

3)  Government controlled Assets, infrastructure and business can be used to generate profits for investment and growth. This reduces the need for both taxes and tax incentives and for subsidies, all of which are distorting and usually lead to corruption. There is also a belief that this government can manage the public sector, honestly, sincerely and efficiently to generate larger profits and direct these into investment in sub-sectors that will accelerate economic growth (rather than crowding out private investment as happened so often in the past).  Parts of this approach are still evolving, particularly the identification of government-owned business, assets and financial institutions that generate losses and negate the investment-growth objective.

Prime Minister Narendra Modi (L) and Finance Minister, Arun Jaitley (Credits: AFP PHOTO/RAVEENDRAN)
Prime Minister Narendra Modi (L) and Finance Minister, Arun Jaitley (Credits: AFP PHOTO/RAVEENDRAN)

The first element acknowledges the benefits of a competitive market economy and puts the correction of “government failure” as its central issue. The second principle acknowledges both “government failure” and “market failure” and attempts to correct both to enhance the benefits from both. The third element is a little schizophrenic, based as it is on a historical legacy. It makes the optimistic assumption that a Modi government can attain the quality of public sector governance seen in a few countries (Japan, Singapore, S Korea, China) and mimic their relative success.  However, most developing countries, including India, have failed to maintain the quality standards needed for success.

Classic public goods like defense and sectors with large externalities like most rural infrastructure and monopoly networks in urban areas(sewage, water, electricity distribution, roads, public transport), have been considered government’s business in most countries. However, this argument does not apply to business in competitive, well-functioning markets (e.g.  metals, hotels). Thus it partially contradicts a couple of election speeches in which it was said, that “Government has no business to be in business.”

Does Modi Government Have An Economic Model?

This article is part of our special series on Modi government’s first anniversary in power.

Every economic model is constrained by political reality. Government decisions are based not just on its economic philosophy and beliefs but also on the political constraints it faces at any given time. These constraints arise from pulls and pressures inside the party, from allies, and the opposition. It is naïve to expect all actions to be consistent with economic philosophy. One hopes that the government is able to overcome the political constraints that keep it from acknowledging and acting on the empirical evidence that the government cannot accelerate growth through ownership of business that operate in competitive markets.

Arvind Virmani is president of the non-profit organization Chintan and nonresident senior fellow in the Global Economy and Development program. Previously, he served as chief economic advisor to the Indian government and executive director of the International Monetary Fund. His research focuses on the Indian economy, policies for growth, economic development and global governance
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