The immediate signals for the Indian economy are mixed. The most recent quarterly GDP growth rate looked good. Inflation looks bad, thanks to oil price rise. Now RBI has raised rates. This will add to middle-class misery. But this is temporary and, ultimately, the middle-class may be noisy, but it is still a minority. The bigger challenges the government faces are structural. These challenges will have to be faced by any government of any party. If India is to aspire to rise from being a low-income to a middle-income country, it will have to pursue deep reforms.
The biggest change is one of the basic economic philosophy. At Independence, India adopted a statist approach to economic management. This was because of the then prevalent ideology of socialism. The main planks were state ownership and state regulation. In the decades since, state ownership has lost ground almost everywhere else in the world. It has never been synonymous with socialism. Fascist regimes have always preferred state-ownership. Apartheid South Africa had a lot of state ownership, but was a racist, oppressive regime.
In India, state ownership still commands respect, but it is lazy thinking. By the same token, private business has been held in a sort of contempt. The political parties never praise business for creating jobs. Tax harassment is routine, which requires bribery of tax collectors to escape from. Wealth creation is suspected to be done by fraud or exploitation. Politicians would be surprised if told that agriculture is the largest private sector activity, and farmers are business-people. There is, of course, a lot of fraud as the NPA scandal shows. But, that is as much a result of the crony-capitalism nexus between the Congress and its favourite business entrepreneurs. We saw the signs of this nexus during the Niira Radia scandal.
The PSU banks are the perfect instrument, under the sway of political leaders who could direct loans to their favourite capitalists. Absent nationalised banks, the NPAs would be smaller, at the very least, and markets could punish the bank management for NPAs. As it is, no PSU bank management has been prosecuted yet. The cost to the depositors and the tax-payers of the trillion-rupee scam is yet to be calculated.
After the Rao-Singh reforms enhanced the value of publicly-owned assets, we had the phenomenon of scams under UPA. State assets were sold away by ministers to their favourites at below market price. The nexus of state ownership and corruption leads to a huge loss of efficiency as well as of exchequer revenue, and to illicit wealth creation.
The ultimate reason for the corruption is that state ownership sounds good as if run by Platonic Guardians and thus above suspicion. But it is, in fact, governments manned by politicians who administer state property. They are human, aware of their short tenure, and seek ATM ministries. Then, they have to work fast to profit during their tenure. No wonder, data on assets of legislators reveal huge increases during each five-year period between elections. The rate of return to a political career is very high.
The normal response to these facts has been political mudslinging between parties. Yet, no party has looked at the root cause of this corruption. It is not more regulation or legislation. The cure is rethinking state ownership itself. There has to be serious search for a philosophy which minimises state-ownership and enhances economic efficiency.
A radical transition was made by the UK under prime minister Margaret Thatcher. As the Fabian model that the post-War UK had used was copied in India, it may be worth examining how India can follow the UK’s example of radical reforms and accelerate its growth and eliminate poverty faster. France offers an example of how difficult reform becomes the longer you delay and the softer your approach. French president Emmanuel Macron seems to have finally taken up the task of challenging the domination of trade unions to initiate reforms.
There was an expectation that Narendra Modi would initiate such deep reform when he came to power. But, there is a deadly consensus among all political parties about statism. The reforms he has undertaken in consolidation of the State Bank, insolvency legislation and the final implementation of GST give the hope that more reforms may come in the second term of Modi if he was to repeat his single-party majority.
Privatisation of Air India was a welcome decision though its implementation has been mismanaged. All government-owned hotels should go next, followed by all but the small number of navaratnas. A bonfire of state ownership will raise money to retire public debt, reduce corruption and enhance efficiency. These reforms are overdue.