Will Modi shift India's economic thought rightward?

R Jagannathan
Firstpost.com

India is unique among the world's big economies where there is almost no difference between government and opposition when it comes to economic ideology. Both the main national parties, Congress and BJP, are broadly populist, though some label the Congress as broadly Centre-Left and the BJP as Centre-Right; as for the regional parties, they are even more populist, and have few ideological leanings beyond caste and community.

In fact, if there is anything that defines India's political class, it is the lack of an economic ideology. Despite their differences, both Congress and BJP tend to follow similar policies when in power; they tend to oppose the same policies when out of power. In 1991, Manmohan Singh , under the prime ministership of Narasimha Rao, was considered a reformer; once Congress was out of power, his political rhetoric shifted leftwards. And it continues in this stint as PM.

The BJP turned reformist during the NDA regime; it even went ahead and privatised many public sector companies, and opened up many sectors for FDI. In opposition today, it is opposing higher FDI in pensions and retail.

This is in contrast to the rest of the world, where usually parties differentiate themselves by situating themselves somewhere on the Left-Right spectrum. In the US, we know that the Republicans stand for less government and the Democrats want a larger role for the state. In Britain, the Conservatives are more openly pro-business than Labour. And so on.

In India, there is a marked lack of ideology beyond the obvious politically-correct belief in helping the poor. Both want to spend more on the poor, and neither of them wants to champion the cause of labour reform or open trade or markets. Reforms are spoken of in hushed terms, out of earshot of the aam aadmi.

However, 2014 might mark a shift in this state of affairs. The reason is Narendra Modi , who is widely seen as a potential Prime Minister in case the BJP-led NDA gets a significant majority. There is, of course, no guarantee of that, and the shape of political equations after the elections, but a Modi-led BJP would probably make the first tentative moves to place at least one political party distinctly to the Right of the spectrum.

(For those who would like to hear what Modi really has to offer, do listen in to Think India Dialogue , a forum launched by Raghav Bahl, founder and Managing Director of Network18, of which Firstpost is a part. The D-Day and H-Hour are 8 April, 4 pm. Watch the live streaming of the event on Firstpost and Network18 TV channels, CNN-IBN and CNBC-TV18.)

A key Modi mantra is "less government, more governance". He talked about it in his talk at the Shri Ram College of Commerce in Delhi this February. This is a clear shift in the economic debate, since so far all political parties have wanted more taxes, more government. Even governments that have carried out reforms have sought a larger role in the allocation of resources instead of letting the market do the job.

So what is Modi's real economic philosophy? In an interview to The Economic Times last year, Modi made many observations that offered clear clues to this thinking.

He said: "The government has no business to be in business. It should play the role of a facilitator. In my state, investors don't have to grease the palm of politicians or bureaucrats. There are well laid-out policies. I believe that the country can progress only if we end red tapism. No red tape, only red carpet, is my policy towards investors."

What could be clearer than this?

When Modi says that "government has no business to be in business" it is practically a Thatcherite statement. The business of government is governance, not business. Few people in the Left understand that the biggest stumbling block to growth is when the government plays both player and referee.

For example, when the government runs Air India, it cannot develop neutral policies for the aviation sector. It has to take Air India's concerns into account. And when it decides to offer a Rs 30,000 crore bailout to Air India, it is effectively using taxpayer money to tilt the playing field against private players who may not have that kind of resources.

The next significant part of the statement is red tape. When Modi says that the "country can progress only if we end red tapism. No red tape, only red carpet, is my policy towards investors", he is effectively laying the ground for a radical deregulation of the Indian economy, and especially the licence-permit raj. We thought these were removed in 1991, but they persist in other ways.

Over the last six months, P Chidambaram as finance minister has been lauded for so-called reforms, but increasing FII investment limits in debt, or allowing FDI in retail or aviation is hardly reform. They are intended to rescue bankrupt airlines and a bankrupt economy where the current account deficit (the gap between what the government earns from exports and remittances and what it spends abroad) is headed for a new record. Without these changes, the rupee will crash. So, these are survival tactics, not reforms.

Take the sugar decontrol reform announced on 4 April. It ended the concept of levy sugar, but the subsidy bloats even further. And losses shift from private sector mills to the exchequer .

Real reforms means freeing businesses from excessive regulation and, as Modi says, laying out the "red carpet" for investors.

Even more interesting is Modi's formulation that we need private initiative not only in business, but also in the social sector. He said in the same interview: "In the new economic scenario, the government can't do all that is needed to pump up growth. We have to encourage private investment, not just in infrastructure but also in the social sector. We have to open up new investment avenues for people who want to invest."

Many people have said the governments should not run business, but they also maintain that government should focus on investing in social sectors like education and health. But Modi is saying that even here we need private investment.

This is radical for India, where we have an implicit belief in government playing mai-baap to the so-called aam aadmi, by mindless spending in several areas.

Economist Bibek Debroy, who has written a book on Modi's state, says the Gujarat growth model is about "freeing up space for private initiative and enterprise and the creation of an enabling environment by the state. It is one of decentralisation of planning and empowering people. It is about targeted public expenditure through specific schemes, supplementing CSSs (central social schemes) with state-specific schemes."

In economic debates between Left and Right, it is often said that the state's big role in Kerala has given God's Own Country a head-start in human indices, but as Jagdish Bhagwati and Arvind Panagariya point out in their new book, India's Tryst With Destiny: Debunking myths that undermine progress and addressing new challenges, "It is ultimately the Gujarat model that has delivered in Kerala. Contrary to common claims, Kerala has been a rapidly growing state in the post-independence era, which is the reason it ranks fourth among the larger states, according to per-capita gross state domestic product and first according to per capita expenditure."

According to Bhagwati and Panagariya, "growth, and not redistribution, largely explains low levels of (Kerala's) poverty". Poverty is falling not because of state spending, but private spending no doubt fed by remittances from the Malayali diaspora.

Clearly, we are going to hear more about the Gujarat model of Modi in future, where the private sector gets the lead role in development and the government plays enabler and cheer-leader.

In the process, Modi may help create India's first Right-wing ideological party. Indians will finally have a choice between Right and Left, and not only between Left and More Left.

This is something business needs to cheer.

(This article is a slightly modified version of an article written for Entrepreneur magazine)