A Little This & Lots of That

Post-Gujarat, PM Modi will opt for incrementalism and populism in his final year

The BJP’s sixth successive victory in the Gujarat election has been called a ‘semifinal’, a prelude to the general election in 2019. What does the victory portend for economic policy in the last 17 months of Narendra Modi’s rule?

The BJP will not celebrate by going for radical economic reform. It had a scare in Gujarat, with its tally coming down from 116 seats to just 99. Modi will, therefore, become cautious, avoiding any adventurism before the 2019 election.

Maximum Support Price

He will probably switch to populism in his final year. A prime candidate for populism will be a significant rise in Minimum Support Prices (MSP) for various crops, to assuage rural distress. He moderated MSP in his initial years to tame inflation. But the Gujarat vote will push him to be more generous to farmers, without getting so populist that high food prices stoke high inflation, the surest vote-killer.

Radical reforms produce strong outcomes, but also produce many losers who scream immediately, while the winners are less vocal and organised. Incremental change produces relatively few losers and little uproar, even if it takes longer to achieve results. Modi is in no hurry. He believes he will rule for at least 10 years, maybe 15.

Besides, he is an incrementalist by instinct. As a successful chief minister of Gujarat, he tweaked — rather than overhauled — the Gujarat model he inherited. He refrained from privatising Gujarat’s state enterprises. He preferred to improve their running and make them profitable.

He has shown the same reluctance to privatise in New Delhi. Four mothballed bankrupt public sector fertiliser plants at Barauni in Bihar, Gorakhpur in Uttar Pradesh, Sindri in Jharkhand and Talcher in Orissa are being revived, not liquidated.

Sick public sector banks (PSBs) are being recapitalised, not privatised. In his first year, Modi promised to corporatise the railways and port trusts. He has funked implementation.

NITI (National Institution for Transforming India) Aayog has produced along list of dud government companies needing privatisation.

Of these, only one, Air India, is being prepared for privatisation. It will be broken up into bits, and bidders are looking only at profitable bits like international routes and gateway rights — the big domestic chunk with an army of surplus workers seems unlikely to attract any bids.

During the 2014 election campaign, Modi promised ‘minimum government, maximum governance’. Naïve liberalisers thought he was a desi version of Ronald Reagan or Margaret Thatcher. In fact, Modi has expanded welfarism aimed at the poor, including Swachh Bharat, Jan Dhan Yojana and Ujjwala Yojana. In a poor country, the needs of the needy cannot, and should not, be ignored.

An attempt by Modi to radically dilute the stiff land acquisition law failed to get the support of regional parties and was quietly shelved, with the states being left to take the initiative. The same strategy was followed for labour reforms.

Modi was lucky with a collapse in oil prices after assuming office. This enabled him to phase out the subsidy on diesel through a series of small price increases that raised no hackles. He has adopted a similar strategy for reducing the LPG (liquefied petroleum gas) subsidy, and some states have extended this to kerosene.

The fertiliser subsidy is being replaced by direct cash transfers into the bank accounts of farmers. A similar scheme for subsidised food was tried, but aborted when the digital infrastructure proved insufficient. All these underline Modi’s fundamental incrementalism.

No Subsiding Subsidy

Such reforms have helped curb the fiscal deficit, a process that has been very gradual, and far slower than initially promised.

Modi’s final year will probably see the fiscal deficit down at last to the targeted 3% of GDP. To woo voters, Modi will focus on new schemes that do not require enormous subsidies (such as a National Employment Scheme to tackle the sore deficit of formal sector jobs).

He is certainly not a gung-ho populist like the Congress, but will go populist if that seems critical. In the UP election, his party promised a total farm loan waiver. Later, the BJP Maharashtra government followed suit. Modi resisted the temptation to do the same in the Gujarat election, although his Congress rivals dangled this very carrot in front of voters.

Will Modi announce a national farm loan waiver before the 2019 election, to forestall a similar Congress promise? Unlikely. But he might waive interest on farm loans, as the Gujarat government has done.

A Bill is being discussed in a parliamentary Standing Committee for a national minimum wage. This would be the very opposite of labour law liberalisation. Given huge variations between states and industries, asingle national minimum wage is a faulty concept. Each state should decide on its own. Modi must resist such populism.

He treasures his reputation for honesty, and for attacking black money. Demonetisation, for all its bungling, became a vote winner because it was seen as an attack on black money. The benami assets law, the new resolution law to auction the assets of bank defaulters, the tougher real estate law and other such initiatives are welcome reforms that also buttress Modi’s image. More such reforms will be the populism India needs right now.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top