An economic blueprint

Previous year has altered the political picture in striking ways. The most conspicuous change is in prime ministers: reclusive, modest, uncommunicative Manmohan Singh has given way to vocal, expressive, dramatic Narendra Modi. A less noticed change is in the government: Manmohan Singh had 77 ministers; Modi’s cabinet has 44, and the average experience of his ministers is far briefer. This is only partly because the Congress stayed in power for a decade; Modi has also brought in much fresh blood. His ministers talk less – they may have been told to, they may be in awe of him, they may be more self-contained, or they may not have the self-confidence. That is a pity, since some of them are capable of such wonderful faux pas. Manmohan Singh’s ministers had no compunction about accepting invitations to speak, inaugurating events and displaying themselves; Modi’s ministers are more circumspect. The result is that although Modi gives fewer public speeches than his predecessor, his sound bites dominate official noise, and addicts as well as connoisseurs of politics hang on his words.

It is not just words people hang on. The people who elected him have great hopes of him. “Intuitively, I feel we are sitting at the cusp of one of the biggest changes since 1850,” said a director of TCS. His optimism is shared by the 17 crore voters who brought the Bharatiya Janata Party to power. Expectations are high; it will no doubt want to exceed them.

That would mean bettering the performance of the preceding UPA government. It was by no means insignificant. The UPA period saw the highest GDP growth rates in India’s history. The annual growth rates of close to 9 per cent between 2005-06 and 2007-08 have been exceeded only once – in 1987-88, when growth shot up because the previous year had seen an unprecedented drought. In UPA’s decade in power, national income almost doubled; income per head went up 69 per cent. These figures are supported by the rise in consumer durable ownership shown by National Sample Survey.

The UPA boom has ended; growth in the past two years has been under 5 per cent a year. Industrial growth has collapsed. Even to achieve respectable growth, the DNA government will have to do something, which politicians like to call reforms. But they will be nothing like the reforms of 1991-93. The economy was hobbled with such controls then that all Narasimha Rao had to do was to remove them. Nara-indra Modi has no such easy option.  He needs to think out of the box.

One idea he had was “Make in India’. Make what? There is an excellent new website; the government certainly knows how to make them. It opens with a contrived lion made of racks and pinions. It lists 25 sectors – 14 in industry, five in services, four in transport, and two vague ones, namely space and biotechnology – which are little different from what the old government would have prioritized. It gives pride of place to the Delhi-Mumbai industrial corridor. For the rest, it summarizes industrial policy, which repeats all the convolutions of the UPA era. It is remarkable how little it has changed. There is a longing for revolution, but there is no idea of where to go next and how.

To begin with, is manufacturing worth bothering about? Before the industrial revolution, India was the world’s most industrialized nation; after the revolution, it fell far behind. That has left a longing for lost glory. But the share of manufacturing in GDP has been falling everywhere. The only exception is China, which achieved outstanding growth in the past quarter century by industrializing.  The Chinese story is complex, but some of its components are well known. Beginning in the 1970s, China set up an efficient steel industry, which has kept its costs of engineering and construction low. It built world-class railways, highways and ports, which took its manufactures cheaply across the country and the world. Its banks gave cheap loans to industry. It kept its exchange rate competitive. Such closely coordinated policies were possible in China; they have not been in our federal democracy.

India has had its own successes, though not on China’s scale. After the desktop was invented in the late 1970s, demand for packaged, small-scale software boomed in the US. It ran short of programmers, and took away all whom it could find in India. That led to mass training of programmers in corner shops across South India, where people still knew some English. They were first exported to the US, and later, manned the software industry that emerged in South India, where costs were lower than in the US.  That was India’s last growth story. Where might the next one come from? There must be a number of options; every economist can choose his. Mine goes something like this.

India’s Achilles’ heel is electricity: it is expensive and uncertain. My solution for it is twofold. First, the centre owns a quarter of power generation capacity, and supplies fuel for over two-thirds of the power. It should give power only to state electricity boards that charge a single price for their power, which must cover long-term costs of generation. State governments must corporatize state electricity boards; if they want to give any consumer subsidies, they must finance them from state budgets. The same principle of long-term viability pricing must be applied to the centre’s coal, oil and power enterprises. Second, the centre must buy floating thermal power plants like those in the West Indies, anchor them in ports, and use them to supply power to those states whose governments corporatize their electricity boards. Finally, the centre must abolish all imposts on coal and oil products, and create a national energy exchange where they are freely bought and sold; that will minimize the costs of energy. If it must impose taxes, they must be the same per Btu for all forms of energy and only on energy consumed by final users.

As with power, the centre must create an integrated, efficient transport industry. The railways must offer door-to-door delivery services to every factory, mandi, and port, and give free access to road transport companies. The centre must build a dozen new medium ports with a draft of 15 meters, and finance the creation of a commercial fleet of sub-Panamax vessels up to 50,000 tons to provide freight and passenger service along the coast as well as with our neighbouring countries. Sea transport will develop our coastline, move traffic away from crowded and expensive onland routes, and promote our links with the Indian Ocean area.

The financial industry is overregulated, and consequently underdeveloped. Financial institutions are poorly designed. As a result, there is too little capital for small producers and traders, and too little risk capital in general. SEBI’s enormous rulebook and its partiality towards the so-called qualified institutional investors have turned the capital market into an oligopoly; and restrictions on entry into banking and competition have led to collusion between banks and their larger clients. The underdeveloped mutual fund industry must be merged with the banking industry. Banks must give their clients both loans and equity, in varying combinations; and offer similar hybrid investments to their depositors. In every major city, banks must together create an exchange, trade the equity and loans of their larger and more solid clients on it, and thereby bring knowledge about the clients’ financial worth into the market. The clients should equally be able to borrow or raise equity directly from the market.

This is my initial list of reforms. An economist can theorize and imagine endlessly. But policy is not a product of dreams; it emerges from a bargaining process in which an economist is only one participant.  My list would give an idea of how one starts with a problem and applies economic principles to it to draw policy conclusions. Policy is made by policy makers, brought into the public sphere by media, administered by civil servants, enjoyed or suffered by common people and reshaped by democratic processes. Those who are elected may think they have arrived and only have to wave a magic wand; those who have elected them may soar with hope. But good policy requires a robust process of which elections are a small part. The new government still has to design the process, let alone implement it.