India’s Phase Transition
Prime Minister Mr Narendra Modi’s administration can be considered to be a “phase transition” for India’s economy, to borrow a concept from thermodynamics. Phase transitions are abrupt, often discontinuous changes in systems that alter the degrees of freedom available to it. A familiar example of such a transition is the change from ice to water. Under Modi’s administration, India’s phase transition is likely to be from an economically bound state to an economically free state.
The Indian economy has been noteworthy for being unable to develop despite many favorable conditions and factors. India has a deep history and a rich culture. It is fairly well-endowed with natural resources, and has adequate physical and human capital. It can profit from the accumulated understanding of what works from the experiences of other countries that developed before. Finally, it has available for its use the kind of technology that other countries did not have at the time of their development.
And yet after 67 years of becoming politically independent, India has failed to achieve the status of even a middle-income nation. The explanation for this is most likely that India has not been economically free.
The linkage between economic freedom and economic prosperity is robust and enduring. That relationship has been analytically and empirically validated. The Fraser Institute’s “Economic Freedom of the World 2013 Annual Report” ranks India’s economic freedom at 111th out of 152 countries it surveyed. It notes: “Nations that are economically free out-perform non-free nations in indicators of well-being.”
India’s colonial legacy is a key to understanding why India lacks economic freedom. Under the British Raj, India was not economically free because economic freedom is not consistent with the basic purpose of colonization: exploitation and extraction. Those who took over power after the British left found the existing system quite suitable for their own purposes. British Raj 1.0 gave way to British Raj 2.0. The relationship between the government and the people continued to be one of ruler and subject.
That relationship is now set to change because the objective of the new administration is in sharp contrast with what went before. For almost all of its post-colonial history, India’s government has been either directly or indirectly controlled by the Nehru-Gandhi family. Jawaharlal Nehru, was an ardent believer in Soviet-style socialism. India’s economy languished with GDP growth around 3 percent per year, the “Nehru rate of growth.”
Until now, India could not have followed a path of economic development through suitable non-socialist policies because it would have implied a repudiation and rejection of Nehruvian socialism — which has been the holiest of cows in a land full of holy cows.
Modi of course is not related to the Nehru-Gandhi dynasty. Not just that, he is an outsider to New Delhi and unlike those who preceded him, Modi is not beholden to anybody. He has the freedom to make different policies and thus put India on a development path that India should have taken but did not take — the path of economic development.
The broad outlines of Modi’s economic policies are easy to see. Not only has he been outspoken about it but as the chief minister of Gujarat state, he has followed them for the last dozen years. These policies are consistent with this stated objective of making India economically prosperous.
India’s biggest challenge is to free a few hundred million people from poverty. The necessary (but not sufficient) condition for that is if the economy grows rapidly at the potential 10 percent GDP growth rate per year. This growth has to be accompanied by increased employment, which can only be achieved through an expansion of the manufacturing sector. Labor will to migrate from the agricultural sector to manufacturing, raising both average productivity and aggregate production.
India’s manufacturing sector will certainly grow under Modi’s leadership. He has been remarkably successful in attracting domestic and foreign investment to Gujarat. India can become the destination for low-cost manufacturing. One can safely predict that there is going to be a manufacturing boom in India.
“Minimum government, maximum governance” and “government must not be in the business of business” are two of his favorite phrases. Over the socialist years, the government and the public sector have gotten bigger and dysfunctional. The power of those in government has grown consequently, and the inevitable outcome has been — as Lord Acton warned — corruption.
India rates as one of the most corrupt places to do business. Because Modi does not tolerate corruption, the level of public corruption will decline and in a few years, India will join the ranks of the least corrupt nations.
Objectives matter because they alone determine the outcome. The objectives of a leader translate into performance of the organization through specific policies. Because Modi’s objective is economic growth and development, and not personal enrichment, one can reasonably expect India’s economic fortunes to change.
It will be an India which is investment friendly. As he puts it, “no red tape, only red carpet.” The government will become leaner and more efficient. The public sector will shrink even as the private sector grows. Indian entrepreneurs have so far only been allowed to flourish outside India will find India a great place to do business.
Indians will have their economic freedom and with it their long-awaited economic prosperity. India’s phase transition has begun.
Atanu Dey : Life is a Random Draw 
Atanu, will you share some pointer as to what will be the next mission possible?
I mean what are the ingredients required to become a leader and not just prosperous .
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Karthik:
Indeed I will write about the mission “impossible.” But I will have to build up that case slowly since otherwise it will be met with derisive laughter. Most people will not get it. Among holy cows in India, it is the holiest. I have hinted at it from time to time on this blog, however.
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I get that. I think it has something to do with India’s majestic dharmic legacy which a lot to teach to the world and which the filth called ‘secularism’ in indian context derides.
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Actually, no. Dharma is important but applies only in the personal — as opposed to the public — realm. It applies to the cosmological beliefs rather than the material beliefs of society.
What I propose lies firmly in the public and material sphere. It has to do with governance and the relationship between the government and the citizens.
Atanu
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Atanu has always had a special interest in the constitution of India and its importance in defining the state-citizen relationship. I understand how troublesome this could get, what with all the chest thumping by haters, imagine if a move is made towards the constitution. Need to build up the case, as you say.
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VirtualPresence, you are right. It has to do with replacing the constitution.
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Phenomenal job! Atanu. Would love to meet you one day. I thought with Modi elected, it may be the right time but now you are moving on the new mission :). Good Luck!
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Manish, sure, I am happy to meet up.
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Appreciate the focus that has driven this change.
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Thanks, Shivani.
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I admire your dedication towards a better India. It has encouraged me to think what I can do for my country as well. If you don’t mind please give me your email address, I would like to share my thoughts with you on this matter. I would like to help and be a part of transforming India.
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My full name at gmail.
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Congrats to you, Atanu. I never shared your optimism of Narendrabhai becoming the Prime Minister. I am delighted the Indian voter proved me utterly wrong and feel like we’ve won a lottery! Rajesh Jain’s perspicacity is remarkable – you two make a fantastic team.
A couple of things:
1. I read this article a few days back on The Washington Post. You repeatedly talked about revamping the train system and the idea of new cities (RISC vs PURA) almost a decade ago. I couldn’t help but think that people like you influenced the ideas of Narendrabhai and co.
http://www.washingtonpost.com/world/asia_pacific/indias-likely-new-leader-narendra-modi-promises-economic-success-can-he-deliver/2014/05/14/d27864ac-daca-11e3-8009-71de85b9c527_story.html
2. Even without Modi opening his mouth on matters of bi-lateral interest, smarter folks across the border have got the memo 🙂 “Manmohan Singh completed the cycle of his misfortune in ten years, Asif Zardari in five years. Nawaz Sharif has telescoped that performance into just a year. India under lacklustre leadership was a tolerable neighbour, something we could afford. Under a dynamic Modi leadership – let not our prejudices colour our judgement on this score – the light cast on us will not be flattering. And our discomfort will grow.”
http://www.thenews.com.pk/Todays-News-9-251147-Modi-victory-a-wakeup-call-for-Pakistan
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I don’t quite like the cabinet and I wonder if Modi is going to have headaches dealing with the senior members of the cabinet who don’t seem to be all that geared towards reforms and small govt, etc.
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Atanu,
I am so glad that Modi became our PM and good days are coming. One request though, please keep spreading the idea of school vouchers to help poor kids access best ‘value for money’ education. I am hoping Smriti Irani will give you enough time and listen to you.
Cheers,
Suramya
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As another person said below, I too didn’t share your optimism that Modi would win. I was wrong. Being an investor, I had all but given up by the end of 2013 that India could rouse itself to throw off the Raj 2.0, but they did – and how! I’m far more inclined to share your optimism now.
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I truly hope this will become a catalyst for a remarkable change, bringing to forefront the tolerance, ingenuity and diversity of Indian ethos. Prosperity is the inevitable consequence of freedom to pursue our own values, an exercise of self-interest while allowing others to do the same.
We are best positioned to decide the manner in which we can employ our own unique talents to the best use of the society and a market economy is best positioned to decide the value for our particular contributions. With efficient price signals the order will emerge, freedom to pursue market defined values will bring coordination, we don’t need conceited bureaucrats and politicians.
As an primary step we could stop employing the term “socialism” to define our past because it has little to do with that concept and more to do with Stalin & Mussolini. Marx’s manifesto recommends collectivization merely as a step towards the “higher” state, our founding fathers had no such goal, their megalomania resulted in what Ludwig von Mises would call as “planned chaos”. Let’s call a spade a spade, it’s Nehruvian Stalinist Fascist Planned Chaos.
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8 months have passed since Narendra modi was elected. A lot of euphoria was built and also seen still. As a very experienced administrator he was expected to fix things. A lot of precious time lost and little has been gained. What we haven’t seen is any short term do-ables. But only plans for long term. The mandate was for fixing things and fixing it soon. Things could have been divided around what can be achieved in 3 months, 6 months and 12 months, 3 years and 5 years and beyond. As you have mentioned in one of your previous blog posts ….corruption is eating the country and it still is. A lot of( if not all) Hard decisions are being deferred.
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Good days are coming aye ?
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