Making a ‘supply side’ revolution4 min read . Updated: 23 Jun 2014, 07:21 PM IST
If Modi accomplishes what the President's speech hints at, the results will be nothing less than revolutionary
Commentators, including this one, sympathetic to the possibility that a Narendra Modi-led government will be better for the economy than the United Progressive Alliance (UPA), have at the same time been reluctant to endorse the tempting but tricky comparisons to Margaret Thatcher and Ronald Reagan. The contemporary Indian political economy is so much further to the left than that of Great Britain or the US, the argument goes, that it is highly unlikely that Modi will emerge as a bold economic reformer, rather than merely a good economic manager.
In light of what we have learned about “Modinomics" from the President’s speech to Parliament, however, the analogies may have more merit than many of us had given them credit for.
The Wall Street Journal, reacting to the speech in an unsigned leader, went so far as to argue: “Mr. Modi is suggesting that he wants to lead nothing less than a supply-side revolution." I am in sympathy with this view for three major reasons, which I had first mooted on an NDTV panel debate on the evening of the speech, and which are fleshed out here.
First, it was striking that Modi, through the mouthpiece of the President, argued explicitly for a “supply side" solution to the problem of food price inflation.
While the speech did not go into details, if one unpacks it, the potential implications are hugely important. Raising agricultural production to bring food prices down signals at once that the government is going to allow Raghuram Rajan and the Reserve Bank of India (RBI) to continue their hawkish anti-inflationary policies, rather than leaning on the central bank to loosen the monetary spigot, and give the economy a demand-side fillip—which would worsen inflation. That Modi’s government is avoiding this temptation—which will only exacerbate our “stagflation" problem—signals an economic policy that takes the long view and shuns short-term opportunism.
Further, raising agricultural output—or, to be more precise, the quantity (and quality) of food that travels from the farm to the table—will necessarily require technological innovations to boost agricultural productivity, as well as improve the creaky supply chain, which at present condemns much of the food supply to rot before it ever reaches the consumer. This, inevitably, will require not only rationalizing domestic distribution and retail but also reconsidering the Bharatiya Janata Party’s (BJP’s) stated commitment to rolling back foreign direct investment (FDI) in multi-brand retail as well as committing more broadly to the benefits of globalization.
Second, it is noteworthy that the speech argues for promoting labour-intensive manufacturing. Again, while not going into details, the implications, if the agenda is carried through, are profound. Modi and his team of economic advisors know full well that the only way to create a large-scale, labour-intensive manufacturing base to the economy—the only sure route to sustainable, rapid economic growth—is going to, inevitably, involve liberalizing our arcane labour laws, which have retarded the growth of a healthy manufacturing sector.
Indeed, Modi has already signalled the road ahead on this: as labour is on the “concurrent" list, with both the centre and states sharing jurisdiction, the centre in the first instance need only acquiesce to labour law reforms occurring at the level of the states, rather than pushing right away for politically difficult reforms to labour laws at the centre. Reports suggest that Rajasthan has already mooted some fairly radical reforms, freeing the hand of industry to hire and fire workers flexibly, and these will stand if they receive assent from the centre.
Experience in other federal states has taught us the vital lesson that reforms which at first are too radical or politically fraught at the centre may, nonetheless, bubble up from sub-national jurisdictions, if those are given the freedom to innovate. Such a “federalist" approach further fosters competition among states, the emulation of best practice, and is a proven “bottom up", rather than “top down", way to accomplish difficult reform over the long run.
Third, while the speech at the outset flags the government’s commitment to the poor, and to “poverty elimination", this is not, as some have suggested, a harking back to Indira Gandhi’s “garibi hatao", nor, indeed, to the poverty alleviation focus of the UPA. What such facile comparisons miss is that the sequel to the speech nowhere signals that large-scale, redistributive welfare schemes will be the path forward for combating poverty. Crucially, there are no proposals for mega-schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS); at best, existing schemes will be made to operate with more efficiency and hopefully lead to asset creation rather than represent merely transitory income in the hands of the poor.
Again, if one unpacks the thrust of the speech, it is clear that Modi intends to address poverty through policies that unleash rapid growth, with its attendant boost to economic opportunities—both in the form of employment generation and new entrepreneurial possibilities. This is a far cry from the UPA, where growth was paid lip service to, while the emphasis was on “inclusion" and the creation of a panoply of welfarist programmes.
If Modi succeeds, and his government accomplishes the decisive transformation of the Indian economy that the President’s speech hints at, the results will, truly, be nothing less than revolutionary.
Vivek Dehejia is a professor of economics at Carleton University, Ottawa, Canada.
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