Paper No. 5745 Dated 21-Jul-2014
Guest Column by Dr Kumar David
The budget is a harbinger of state-led capitalism with Indian characteristics.
Try as they might to hide it, Finance Minister Arun Jaitley’s first Modi-BJP budget is a disappointment for local businesses panting for privatisation, and global neo-liberal think-tanks salivating for “reform”, “restructuring” and rebirth of the Washington Consensus buried a decade ago by a global populist backlash. But it comes as no surprise to this correspondent who foresaw this Modi-BJP economic policy turn in Lanka’s Sunday Island newspaper of 7 June 2014 (“How much can Modi change policy?”). This is what I said and the budget has borne it out.
“Expectations of a growth and institutional reform oriented strategy are universal, but no one has contested my suggestion that austerity for the masses, and/or concessions to Wall-Mart etc which hurt small shopkeepers, will engender a backlash. While I agree that there will be pro-business changes, I opine that a major transformation of the Indian economy is not at hand . . . Modi-BJP will retain the mixed-economy. There will be some change but a 180-degree policy reversal is impossible. Margaret Thatcher style counter-revolution is out of the question in modern India . . . Jettisoning of the mixed-economy in favour of a full-blooded turn to neoliberalism is not a course that Modi-BJP should, can, or I believe intends to take. What we will see is a more robust and muscular style of leadership, some whip cracking against big time corruption, but I expect only a carefully managed turn away from populism and subsidies towards business friendly policies and neoliberalism”.
Jaitley-Modi-BJP have steered clear of assaults on populism and retraction of concessions to low income classes even more than I had anticipated. Tax concessions have been extended to those earning below Indian rupees 250, 000 and to seniors over 65 years of age, the feared sales tax has been deferred to the end of the year, the Indian housewife has been promised relief in oil and some essential food prices. The most significant retreat is that the “Rural job-guarantee scheme, which provides 100 days of paid employment a year, will become more focused on asset creation”; a frank admission that like Lanka’s Samuradhi, once granted such handouts cannot easily be withdrawn. The intention of channelling the scheme into productive directions is good.
There is also a promise to make food and petroleum subsidies better targeted but large subsidy allocations have been set aside for 2014-15 for food (Rs 1.15 trillion), petroleum (Rs 634 billion) and fertiliser (Rs 730 billion). These three items add to Rs 2.54 trillion, nearly 2.4% of India’s GDP of US$ 1.85 trillion (Rs 111 trillion at 1$=Rs 60). Jaitley said all subsidies taken together account for 25 to 30% of fiscal expenditure of Rs 17.9 trillion. (Numbers are hard for foreigners to decipher because of so-called “Non-Plan Expenditure”, “Plan Expenditure” and Assistance to States). Revenue is estimated at Rs 11.9 trillion; the deficit of Rs 6 trillion is met mainly by incurring new debts of Rs 5.1 trillion. (For the benefit of Indian readers let me point out that one trillion is one lakh-crore or 1012).
There is hardly a whiff of neoliberalism in the sense of an attack on subsidies and welfare. Thanks to this Sensex dropped by over 500 points, Nifty was down 2% and stocks of power, real-estate and infra firms crashed as Rs 3 trillion of investor wealth was wiped out within a day of the budget. (This is a knee-jerk reaction; the bulls will be back). What Indian and international capital demanded was austerity for the masses, cuts in subsidies and pruning welfare, all of which the new government, very wisely, dared not deliver; it would have been suicidal.
Growth oriented promises
Nevertheless Modi-BJP-Jaitley economic policy is growth oriented and foreign and local investor friendly. There is a repetition of the promise oft made by Congress as well to cut corruption and tame regulation-raj. These are well intentioned and deserve support though the obstacles are enormous. There is a commitment to Public-Private-Participation (PPP) reminiscent of China’s massive use of Joint Venture Enterprises in the 1980s and 1990s. This was how China’s state-capitalist economy was constructed. Tax concessions and other lollies will be offered to investors and economic take-off relying on a state-capitalist model is possible. On the investment side, for starters, there will be big openings to foreign capital in the defence and insurance sectors as the foreign holding ceiling has been raised from 26% to 49%. A friend asked why foreign capital should be encouraged in insurance since local markets can cater to national needs; I don’t know the answer.
The budget laid focus on critical infrastructure needed to spur economic growth (roads, railways, power and airports) and made clear a commitment to attracting the private sector. However Earnest &Young, an accounting firm, in a statement said “(T)he government has to tread with caution; PPP models formulated more than 10-15 years ago have become obsolete”. India’s largest construction equipment manufacturer JCB India commented “While PPP in relation to many new projects has been announced a roadmap for execution of existing held up projects could have helped”.
Five new IITs/IIMs are to be established; Rs 70.6 billion has been set aside for the creation of “smart cities”; and four new AIIMS (All-India Institute of Medical Science) centres are to be opened. The state will assuredly be the leader in these ventures. Public hygiene needs massive investment in a country where 600 million people relieve themselves in the great outdoors; mischievous economists may claim that this outsources health hazards! Massive investment is envisaged in the railways, the need for cross-country high speed links and a colossal freight network to underpin industrial and agricultural growth has been underscored. These are ambitious and entirely appropriate targets and private investment through PPP programmes is needed if adequate capital is to be raised.
Absence of ambition, commitment and determination has dogged India’s catch up game with China and even if late in the day the bold commitments in the budget are to be applauded. India’s roadmap to fast-track growth will be different from China’s since it is a multi-party democracy, not a one-party state, but robust state intervention is unavoidable and not a contradiction of democracy. Democracy is a slow stop-go process, it must permit dissent and reversal, but it allows society to muddle through, it is not brittle. Will China survive another 1984 Tiananmen Square like uprising? Paradoxically, in the long-run, political democracy is a more secure social contract than monolithic structures; vide the Soviet Union.
The purpose of these caveats, however, is to make a contrary point. There is no royal road to rapid economic growth in poor countries (about one billion Indians live on less than $2 a day) than robust state intervention. Traditional bourgeois hacks who don’t grasp this have complained that this budget is “sending mixed signals” and it is a “missed opportunity.” A mixed signal is just what is needed! China is the prime example of a big country that achieved fast growth (with deplorable environmental recklessness and hard to contain corruption) using directive state policy – the word dirigisme is used by folks familiar with these things. A day after the World Cup finals Modi was in Brazil with Russian, Chinese and South African leaders. Each case is different, but all have one thing in common; the state must lead and direct economic growth. One sees this, albeit to a lesser degree in other developing poor economies afart from the BRICS group as well. If the Indian economy is to grow briskly it will have to be state guided or state-led capitalism. Oh yes with ‘Indian features’; funny we need to mouth these nonsense phrases for the sake of political correctness.
Yes I am reading a lot into one event, the budget. Yes I am aware that my position that the Modi-BJP government will be compelled to compromise and adopt a mixed-economic model with substantial state management and even state participation, contradicts market minded wisdom. Shallow analysts and bourgeois hacks have explained, ad nauseam, for three months, that Modi’s economic model “will be different”; that the private sector will take control, drive the process and determine the character of the economy. They fail to take account of the strength of Indian populism (and democracy) and they have ignored the reality that the BJP, no less than Congress, is through and through a populist party. You don’t agree? Let’s wait and see; how many bottles of single-malt are you prepared to wager?
Indian democracy is robust and devastation of the environment will be resisted by armies of Arundathi Roys, who will, I trust, win most of their battles. As India gets richer, say as rich as China, I am hopeful that the power of democratic polity will curb graft more effectively than in the Middle Kingdom. It is not unreasonable to be confident of India’s future. However, Indian democracy has its work cut out. Modi is already being roasted by critics for: (i) making Amit Shah BJP Chairman though his is out on bail on a murder charge, (ii) appointing Mukhul Rohtagi, the attorney for big companies in the huge telecoms scam, Attorney General, (iii) blocking the appointment of Gopal Sumbrmanium to the Supreme Court by wrongful procedures, (iv) illegally appointing Nripendra Misra as secretary in the Prime Minister’s Office, and (v) covering up for education minister Smriti Irani filing a false affidavit about her educational qualifications, a criminal offence. Modi must be restrained by public pressure before he deteriorates into another Rajapakse.
India’s long-term economic (and political) prospects are more assured than Lanka’s for the reason that political leadership, most of the time since 1948, has been serious about its business – admittedly the outgoing Congress government, Manmohan Singh notwithstanding, was a failure. Here in Lanka, at least in recent years, miserable-we have suffered a bunch of buffoons, lining their pockets, abusing the power of incumbency, and stoking base rabble passions to hang on to office. Over there they have one cabinet minister for every 52 million people, here in Lanka we groan under the yolk of some 40 political dabblers in cabinet (I have lost count) for a population of 21 million. Is this not symptomatic of waste, amateurishness and rank lack of probity?
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