A Budget for Mr. Modi - The American Spectator | USA News and Politics
A Budget for Mr. Modi

Some pundits have been quick to criticize the recently released $290 billion budget of the Government of India for the fiscal year ending March 31, 2016.

The Wall Street Journal says India needs a Margaret Thatcher. It has characterized this opus of Prime Minister Narendra Modi as mediocre and an incremental approach to economic reform, stating that entitlement subsidies for fuel, fertilizer, and food were not addressed — nor were the cumbersome procedures for land acquisition. Further, a more aggressive privatization policy was the hope of some observers. In general, critics think the budget is not radical enough.

These characterizations are certainly descriptive in large part, but they miss an essential point: navigating the Indian economy is like piloting a vessel between Scylla and Charybdis, the sea monster and whirlpool of the ancient world described in Homer’s Odyssey. On the port side, exceptionally aggressive deregulation can cause massive rural unrest when lands are appropriated for industrial development and populations are dislocated. The dangerous Naxalite rebellion in the so-called Red Corridor, particularly in the coal belt, appeals to those tribes and low castes displaced by industry. Often described as a Maoist insurgency, this conflict has continued for decades and by some estimates about one-third of India’s districts have some Naxalite element. Further, while scandals can occur during either high or low growth, there is the perception, which sells well in India, that rapid economic liberalization breeds cowboy capitalism and destructive behaviors in the private sector.

On the starboard side, an economy that placates control zealots with the mighty hand of government and attendant low single digit growth cannot meet rising expectations and foster the kind of upward social mobility that has often characterized the Indian economy in the past two decades — which have witnessed the economic rise of several hundred million people. The presence of cellular telephones and Internet access has created painful comparisons throughout the country, as workers see how their counterparts elsewhere are faring and consuming.

In India, about 24% or 300 million people live below the poverty line as defined by the World Bank: $1.25 per day. Another estimate is that 59% of the country’s population of over 1.2 billion lives on less than $2.00 per day. With this type of crushing poverty, the benefits of economic deregulation must be well-explained to an electorate. This does not seem to have been the case prior to the Modi government, although Mr. Modi was elected in some part because of his anti-corruption stance, various scandals, and a lack of vigor by the predecessor government of Manmohan Singh.

For conservatives, the idea of a Margaret Thatcher for India is emotionally and intellectually appealing. Nonetheless, the intense factionalism of the country is an immense barrier to change and an impediment that must be reckoned with — it would be a shame for a zealously conservative prime minister to bring out a tidal wave of opposing forces and be unable to serve a five-year term.

The mere election of the conservative and pro-business Bharatiya Janata Party (BJP) of Mr. Modi was a shock for India — especially for those dependent upon the left of center Indian National Congress, also known as the Congress Party, which has governed the nation often through coalitions during most of the years since independence in 1947. With an excellent record for implementation of policy and industrialization as Chief Minister in the state of Gujarat, Mr. Modi’s challenge now is whether he can govern equally well such a linguistically, religiously, and ethnically complicated nation — with an entrenched caste system in many rural areas.

The good news in Mr. Modi’s budget is an 8.0% to 8.5% annual GDP growth target with inflation at 5%. Manufacturing, which is only 26% of GDP (compared with 44% for China), receives emphasis. According to a Boston Consulting Group estimate, India needs to create 10 million jobs per year for the next ten years to keep pace with population and human expectations. It is recognized that the IT sector with skilled workers is too small to do this effectively, as much unskilled labor must become employed in an increasing manufacturing sector. Although a new VAT is proposed and some corporate and personal taxes will go up, the marginal corporate rate is being cut gradually from 30% to 25%.

While subsidies are generally not being reduced, the use of the Aadhaar national identity project is intended, among other things, to leverage technology and deliver subsidies electronically directly without loss. Remarkably, 1 billion Indians are expected to be on the biometric platform by the end of this year.

Education and public health continue to be priorities, although future solutions will likely need to involve collaborations with the private sector, and new models for education which use technology to replace brick and mortar and increase the span of control of teachers on a remote basis.

The deficit target of 3.9% seems achievable, a slight improvement over the current one, with a 3% deficit target by fiscal 2018.

With regard to privatization, it is worth noting that about ten years ago, Indian Railways performed a strategic turnaround, earning a profit after several years and recording a respectable operating ratio — without being privatized but by using modern and disciplined management techniques. To be sure, the turnaround was short-lived and later suffered from rising fuel and payroll costs, but the message was clear: a government enterprise can be well-run and disciplined, without the need to privatize it. (Dr. Desh Gupta and Dr. Milind Sathye of the University of Canberra have authored a fascinating case study on this).

The 11% increase in the defense budget bodes well for the United States, which has recently and for now become India’s leading provider, according to the U.S. Naval Institute — particularly through the sale of anti-submarine and transport aircraft, and attack helicopters. Heretofore it was Russia, although the USNI reports that the Indian armed forces still use about 70% Russian hardware. Foreign direct investment in India is expected to benefit, including in the defense sector.

It has been noted that Mr. Modi may have viewed the success of the new and populist, anti-corruption AAP Party in the Delhi state election as a warning that he is not invulnerable.

When one does not have to govern, it is easy to be passionate about the pace of change. The Modi budget is an intelligent one with some compromise that pitches to the many disparate elements of the society. Mr. Modi needs the cooperation of an enormous federal and state government bureaucracy, in which many careers were founded with a control philosophy.

Continued deregulation is obviously desirable to increase competitiveness, eliminate middlemen that do not add value, reduce unearned privilege — and unleash the full potential of the Indian economy. However, if conducted too rapidly it would be a serious miscalculation that could dilute the BJP’s presently firm control. And this would mean a setback for deregulation and free markets.

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