Breaking vow on labour laws: The one wrong step Atal Bihari Vajpayee took

Vajpayee's government had more market-friendly ministers than any government

India’s political divides increasingly look unbridgeable. Yet, when former Prime Minister Atal Bihari Vajpayee died last Thursday, he was mourned even by those who had been his opponents in life, whether within or outside his Bharatiya Janata Party. His successor, Manmohan Singh, compared his vision to that of India’s first prime minister, Jawaharlal Nehru – the highest compliment a member of the Congress Party can give. And Narendra Modi, whom Vajpayee tried to sack in 2002 as chief minister of Gujarat after thousands died in riots there, walked behind his cortege as it rolled through quiet Delhi streets.

As the first Indian prime minister not from the Congress Party to complete a full term, Vajpayee’s place in history is assured. Behind the mourning was a certain nostalgia; many remember his time in office as an enchanted moment, the high-water mark of confidence in India’s future. The country declared itself a nuclear power and survived the sanctions that followed. It was opening itself to investment and seemed to have weathered the Asian crisis of the late 1990s. It seemed reasonable, then, to put India and China in the same basket as rising powers.

Today, a decade and a half after Vajpayee was voted out, that optimism is a thing of the past. India has moved too slowly and let too many people down too often; many here now wonder if it has missed its moment entirely. You could blame Modi for this situation, or Singh. But, in fact, the foundations for this failure were laid during Vajpayee’s administration – and by his defeat in the polls.

This isn’t to say that Vajpayee’s government wasn’t reformist: It had more market-friendly ministers than any government since. It opened up the telecommunications sector, invested in roads and highways, and defused the fiscal time bomb that India’s state pensions were becoming.

But, the one moment you can point to as emblematic of the opportunities that India missed came in early 2001. Vajpayee’s finance minister, Yashwant Sinha – now a trenchant critic of Modi – had proposed that India’s draconian labor laws be relaxed. Criticism was widespread, including from within his own party. Eventually, Vajpayee backed off and the promise to amend labor law went unkept.

Vajpayee’s decisive turn away from reform of the world’s most restrictive market for labor – not to mention land and capital – is the biggest reason India went on to lose to China the race to become the world’s manufacturing hub. In the years since 2001, world trade in goods exploded, even as India continued to de-industrialize. It was just too difficult to run a decent-sized factory in India.

Larger companies needed government permission to fire even one worker. India became an IT services superpower; trade and telecom fired up its growth rate. But the country signally failed to create the manufacturing jobs that became the foundation of the Chinese miracle. Under Vajpayee, India backed away from the only path that leads to prosperity.

At the time, this was hard to see: As I said, we all felt optimistic. Vajpayee tried to distill that energy into a single two-word slogan in his 2004 reelection campaign: “India Shining.” When he lost, many assumed it was because of a backlash to that reform-friendly rhetoric.

That was never really an accurate explanation; indeed, Vajpayee himself said after the loss that the Gujarat riots were responsible. Yet the fear that economic reforms would be electoral poison has haunted Indian politicians ever since. Even Modi, with more political capital than Vajpayee ever had, has been overly cautious. One crack from his opponents that he was running a “suit-boot” government, too close to rich businessmen, was enough for him to turn into a red-blooded economic populist.

Vajpayee’s biggest moment, perhaps, was when he took India nuclear in 1998 and tended India’s economy through the sanctions that followed. Nobody can still argue now that India shouldn’t have openly admitted to its nuclear capability; it’s shown that it can be responsible about proliferation and nuclear doctrine.

But, there’s another way of looking at it. The Chinese consciously decided to avoid rocking the geopolitical boat until they had the firepower to overturn it. Instead, they kept foreign investors and governments happy while they prioritized getting their domestic act together. When Vajpayee was giving up on fixing labor law because it was politically difficult, Chinese premier Zhu Rongji was fighting to reform state-owned enterprises, laying off millions in the process. Two decades on, it’s easy to see what India’s priorities should have been.

©2018 Bloomberg L.P.