Three Years Of Modi Govt: Modinomics At Year Three
There are risks in inviting foreign investment into a distorted domestic economy
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Economic and political goals are closely linked in all nations. Leaders in today’s emerging economies are obliged to articulate a transformational vision to guide their societies. Ever since he took office three years ago, it has become clear that Prime Minister Narendra Modi has thought deeply about the kind of society that India should strive to become. He also has the ability, the desire, and the energy, to communicate this to the country through his oratory.
Prime Minister Modi’s vision for a modern India in the 21st century integrates views of India as a society and culture with India’s rightful place in the world. Like his predecessors, Prime Minister Modi has a deep belief in what Americans call ‘manifest destiny’: the inevitability of India being a key global player. This reflects India’s success in its global integration in the last 25 years, the global influence and reach of its diaspora, and general global goodwill towards India’s rise. Modi exudes confidence that with the right economic policies and appropriate diplomacy India can win on the global stage.
The domestic counterpart of this vision came into sharp focus at the time of demonetisation. Modi stressed two pathologies in India’s economic life that retarded its progress and prevented it from breaking through to true modernity. These were the limited reach of the direct tax system, and the scale of ‘informal’ employment across the non-agricultural labour force.
Through Jan-Dhan accounts, Aadhaar and greater transparency of cash payments, Modi has signaled the importance he personally attaches to this agenda. This framework can be used both to assess progress made and distance yet to be travelled. Many observers, including me, have been favourably surprised by Modi’s appetite and skill at personal diplomacy, usually with a strong focus on trade, technology or resource security. A breakthrough moment was Modi’s commitment in Paris in 2015 to the global effort to contain emissions of greenhouse gases, despite India’s low levels of industrialisation, urbanisation or per capita emissions. Equally visible has been his government’s commitment to attracting foreign direct investment.
The picture is less clear and indeed, somewhat puzzling when one looks at trade policy. In the persons of the Chief Economic Advisor (CEA) to the Government of India and Vice-Chairman NITI Aayog, the government has two world-renowned authorities on international trade policy. They must surely have made the case internally that export-led manufacturing requires not just technology and investment, but also competition from imported inputs. There are risks in inviting foreign investment into a distorted domestic economy. There are many worrying signs that the mindset of many sections of government are not fully aligned with the bold confidence of the Prime Minister.
As to the domestic agenda, the direction of travel has in most cases been broadly correct, though the pace has been cautious. As a macroeconomist, I applaud the stress on fiscal consolidation as a necessary, much-delayed move towards sustainably low inflation, although the progress has been hesitant. It is also too early to judge whether the aftermath of demonetisation will move the country decisively towards improved compliance, and whether a revolution in political finance is needed for that to be achieved.
As three years have passed, it has become clearer that there is deep consensus on the main elements of economic policy among the main political parties despite the inevitable urge to magnify differences. There are sound reasons for this consensus: it has delivered a steady, largely inclusive, growth for over two decades.
Yet, in areas such as labour reform, administrative reform and privatisation, a more dramatic move may be necessary for India to unleash its full potential. It will be fascinating to see if these nettles are grasped in the remaining life of this government.
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