The Paradigm of Modinomics

Modinomics as it emerges will set India on the path of sustainable and inclusive growth. Even during the halcyon years when India’s economy was growing at 8-9%, the number of people being lifted out of poverty was comparatively low when measured against other emerging economies (Brazil registered lower growth rates but higher reduction in percentage of people living under $1.25 during its reform period when compared to India).

The progress of living standards among common people has been terribly slow; only five countries outside Africa have a lower “youth female literacy rate” than India. Other shameful statistics include only four countries having a worse child mortality rate and none- not even in Africa- have a higher proportion of underweight children. India’s ranking among other South Asian countries is also a cause for concern. Among the six major South Asian states, India ranks second last on social indicators, down from being second best in the 1990s. This is despite having the third highest GDP per capita in South Asia.

To combat this India must try learning from some of the other major emerging economies like Brazil and China. For a long period of time, Brazil too registered high growth rates alongside widespread deprivation and as a result, the government had to adopt far more active social policies. This included free and universal healthcare along with social security and economic redistribution initiatives. India has to pursue similar active public policies to ensure the benefits of economic growth are shared evenly.

To maximise its demographic advantage, India needs to ensure it has a healthy and educated population. Public healthcare in India has been found wanting on many occasions. China, considered a competitor on the world stage by many Indians, spends nearly 4 times more on healthcare once adjusted for purchasing power parity; the difference is even larger otherwise. The argument that China has a larger population doesn’t hold as healthcare expenditure even as a percentage of GDP is 2.3% in China compared to 1.4% in India. Spending on healthcare must be increased to ensure that not only is state healthcare available to every member of the population but that it is also of good enough quality.

Education also plays a crucial role in establishing sustainable growth. Investment in education may not straightaway provide the headline growth figures the NDA government might seek, but it will ensure that in the long run, India has a productive work force. There are large shortages of skilled labour across the country and besides a few institutions at the top; the quality of higher education provided in India is still found lacking (47% of all graduates are considered unemployable for a skilled job).

The public debate between two of the most famous Indian economists; Amartya Sen and Jagdish Bhagwati, has shown that even experts in the field disagree as to the course of action the new prime minister must take. While Sen advocates an increase in social spending which will only then lead to high growth rates, Bhagwati argues that only a consistently high growth rate will allow the government to focus on improving various social indicators and other social services. While this article too has stated the importance of spending on public healthcare and education, it is not possible to ignore the merits in Bhagwati’s point. As is often the case with economists, both are partially correct.

Growth and improvement of social indicators must go hand-in-hand. Focussing too much on redistribution will do more damage in the long run; it is fair to argue that growth should be a means to an end. Growth however, is vital if a state is to acquire sufficient revenue to redistribute in the first place. Instead of just splitting the proverbial pie differently, it must be made larger. Focusing on handouts which we can’t afford will lead to inflation which hurts the average person the most, ironic if you consider these policies were made to benefit these people in the first place.

There are vast sections of the Indian economy that need to be opened up, India’s dismal ranking (134 out of 189) on the Ease of Doing Business Index of the World Bank shows how much room for improvement there is. At the same time however, certain rules need to be tightened so that firms do not take consumers for a ride. An example that springs to mind is Gurgaon, where rapid urbanisation is complemented by haphazard planning, as private developers are left to operate arbitrarily in a lot of cases. While land acquisition for firms is an issue across India, there are plenty of instances of land being acquired and just left with no work being done on them.

Basic infrastructure still remains a massive problem for India; the railways are outdated, the roads are mismanaged and public transport links are poor. Congestion on roads affects not just people commuting but also the transfer of raw materials as the majority of India’s freight (65%) still travels by road. There is a backlog for 430 infrastructure related projects worth 20 lakh crore from the previous government that needs to be addressed. India’s power sector has been struggling for years and it’s time the state-owned monopoly of Coal India is ended. The national supplier has been unable to cope with demand and it is time an ultimatum is issued, perform or perish. There is massive scope for investment in infrastructure in India and, both domestic and foreign investors will be queuing up if given the right opportunities.

Deregulation must benefit large corporations and small businesses alike. The most effective way to pursue economic growth is to make it easier to set up small and medium sized businesses. Firms should be allowed to expand and invest without fear and the abolition of some of the archaic labour laws will go a long way to addressing these apprehensions. To finance this investment however, changes need to be made in to India’s banking sector. State-owned banks operate with a disproportionately high amount of bad debts and there are not too many takers for Indian bank equities as a result. This makes it harder for borrowers to find a creditor and also puts extra pressure on the remaining banks to sanction loans.

The agriculture and manufacturing sectors’ fates are intertwined. Instead of simply ignoring agriculture, efforts must be made to streamline it and improve efficiency. Improvements in infrastructure will go a long way to addressing farmers’ concerns about power and water supply. Despite all this, there remains a disproportionately high amount workers engaged in agriculture (47% of total workforce) given its contribution to GDP is 14%. India has a demographic advantage unlike any other country on the planet and nearly 1 million jobs need to be added to the economy every year to simply keep pace with the number of people entering the workforce. 

Estimates point to nearly 100 million people being surplus or underemployed in agriculture across the country. This is where the stagnating manufacturing industry, which is labour-intensive just like agriculture, has great potential. The formation of more SEZs will further incentivise for firms the prospect of manufacturing in India. This will also help solve the problem of the country’s current account deficit and improve national productivity as a whole.

Jim O’Neill, the former Goldman Sachs Asset Management chairman who coined the term BRICs, predicts the Indian economy to grow at around 10% for 20 years if these problems are addressed. It is impractical and unrealistic to expect sweeping changes in the first few months of government but Modi has proven himself an able and efficient administrator at state level. It remains to be seen whether he can replicate this success on a national level for which he has a massive mandate.