Squandering India’s Greatest Opportunity

“There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune . . .” Shakespeare used a sailing metaphor of tides for what in modern terminology we call “a window of opportunity” or ” an inflection point”. There are inflection points in the affairs of countries too.

India has had a number of those. One was in 1947. Then came another when Nehru died (and not a day too soon.) Then another when Indira Gandhi lost the elections following the imposition of “Emergency” and assuming dictatorial powers. Then another when she paid for her misadventures in Punjab by being shot by her bodyguards. Then another when her son Rajiv was killed by a suicide bomber. All of them were inflection points, amazing opportunities for India to change tack. All were not taken at the flood and India continued to be bound in shallows and miseries.

Two non-Nehru/Gandhi politicians did somewhat successfully make some changes: first Narasimha Rao of the Congress and later Atal Bihari Vajpayee of the BJP. But alas. It did not last. The greatest opportunity ever in the history of modern India came in mid 2014. Way back in 2010 I had sensed the coming of that tide, and I wrote about it in the first chapter of my book — Transforming India — in 2011.

Change has been postponed–indefinitely

Narendra Modi won an unparalleled mandate for the BJP in May of 2014. I was sure that he would make structural change, a break away from all that had hindered India’s prosperity. Now at last, it seemed to a lot of serious people, now India will move ahead. We were convinced that good things will happen.

But a new realization began to dawn. The hoped-for change was going to be delayed. Postponement dates were assigned: after the first budget. No, after this state elections. No, after that state elections. No, after a cabinet reshuffle. No, after this . . . or that . . . After one year, it was clear that Modi like all politicians is mostly concerned with enlarging governmental power and control of the economy, and not with actually making those changes that will most benefit the economy. There’s hardly any difference in substance between Modi and the Congress although the show is spectacularly different.

It is likely that India’s economy will be smaller than one single mega-region of China.

This was the last and final chance. And it was squandered. India is, in my considered opinion, done. In 1978, India was neck and neck with China. Today China’s GDP is around five times that of India, and it’s wealth probably 10 times that of India. Think of it this way. In terms of power, prestige and wealth, China is to India what India is to Pakistan. The gap between India and China will continue to widen and accelerate. In another 10 years, China’s economy will probably be 10 times larger than India’s and its wealth about 20 times larger. It is likely that India’s economy will be smaller than one single megaregion of China.

Modi could have changed India’s fortune and gone down in history as the man who transformed India. He has demonstrated that he cannot.

For the record, here’s an op-ed I wrote for the New Indian Express (June 14th, page 8):

India is still on same old policy path

The second anniversary of the NDA government of Prime Minister Modi is an appropriate milestone to reflect on its performance. In May 2014, the possibility that India would embark on a path to prosperity was real. The BJP led by Shri Modi was given an unprecedented mandate by the people and expectations were high that the new government would break from the dismal past. A move from what I call the PPP (perpetually planned poverty) policies of the past to policy reforms necessary for wealth creation was expected.

A politically-incorrect truth

The sad truth is that instead of change, India in essence is still on the same old path India has been on since 1947. Heavy handed and inept government interference into the economy had prevented India from reaching anywhere close to its full economic potential. Though the realization that the needed structural reforms are unlikely to happen has dawned on most serious observers, it is politically incorrect to voice that concern for fear of antagonizing the powers that be.

Governments, central and state, have immense power and control over all aspects of the economy, as is the norm for socialist countries. That leaves very little room for the expression of dissatisfaction by the people and the private sector. Industry leaders, for instance, may (and they do) privately bemoan the lack of reforms but they know that it would be foolish to say so publicly since the fate of their commercial enterprises are in government hands. They wisely choose to rate every budget a solid 11 on a 1 to 10 scale. They just grin and bear it because they have to, and if possible they vote with their feet.

An all powerful, anti-freedom, exploitative, extractive government

A powerful government is a two-edged sword. It can implement growth-inducing policies that are the engines of prosperity. But if instead the government chooses growth-retarding policies, because of its power it can also prevent any challenge to its bad policies and therefore be immune to any possibilities of reform. India’s government is unfortunately too powerful for India’s welfare. The reason is that the structure and nature of government is a continuation of the British colonial government. Although Indians democratically choose their government now, that fact is consistent with an all-powerful, anti-freedom, exploitative and extractive government like before.

Economic prosperity is built on a few basic building blocks such as good rules, urbanization of the economy, free markets, property rights, and individual freedom. Instead, the government has focused on their anti-thesis, and perpetuated poverty rather than prosperity.

Not the creation of wealth but mere redistribution

Like the previous governments, Modi’s government continues to focus on villages, which necessarily implies rural poverty and therefore the continuance of fruitless rural poverty alleviation programs like MNREGA and Jan Dhan. Those don’t create wealth but merely redistribute what little there is. The stress is always on subsidies and dole, instead of freeing people to create wealth. The poor need freedom and opportunities to use their labor to create wealth, not Rs 2 per kilo rice as handouts.

Lack of property rights, unclear land titles and regressive labor laws limit employment in urban India. Add to that the lack of investible funds. The financial institutions are in dire distress with massive non-performing assets (NPA). Estimates of stressed assets in the banking sector top 15%. Almost every public sector bank is broke multiple times over. The only avenue appears to be the injection of even more money into them. That is not the solution.

Lack of vision and commitment

In short, the government has demonstrated neither the vision nor commitment to structural changes. What kind of changes? For instance, it could have liberalized the education sector, instead of introducing even more onerous requirements.

Lack of availability of land has hamstrung industrial growth, and thus the growth of manufacturing jobs. Public sector undertakings and defense occupy prime real estate in urban areas. These could have been made available to industry for growth. Furthermore, land that the government holds is urgently needed for affordable housing. The housing sector can be another powerful engine of growth.

The government must vacate the spaces in which the private sector can and does do a much better job than the public sector can. Why must the government run Air India, BSNL and the like when the losses made by these have to be suffered by taxpayers who have no control over them?

An unaccountable bureaucracy absolutely opposed to change

There have been no administrative reforms. The British Raj-inherited bloated bureaucracy continues to thrive. It is an unaccountable mass of people absolutely resistant to change and whose main output is red tape. Another neglected area is judicial reforms. Certainly, the Modi government did not create the system but it has done nothing to address the problem of over three crore pending court cases.

Has Modi’s NDA government done anything at all? Of course it has. Any government in power, especially an all-powerful government, always does things. But did it make the right choices in doing what it did? Did the promised acche din materialize? I think the answer is no, and I believe most observers think so too but are unwilling to come out and say so.

Indians lack what creates wealth — economic freedom

With three years still to go, there is time for the Modi government to change tack. That will only happen if it understands why India has not prospered so far. No country has become rich without the right rules, without urbanizing, without economic freedom. No country has become rich without letting markets function or by pandering to special interest groups. The numbers speak for themselves that India is mired in poverty. When the realisation dawns on the Indian people and their leaders that it is possible to create wealth with the right rules and policies will India’s trajectory really change. Until then, it is futile to expect any real change.