Modinomics vs Manmohanomics: Right, wrong, and the in-between

Mr Chidambaram makes some good points about the state of the economy, but some of his criticism is political and sometimes off the mark

When politicians make comments about the economic achievements of governments, you must read the politics in them as much as the economics. In an interview to this newspaper, P Chidambaram, who served three stints as finance minister in two different governments with distinction, was strongly critical of the Modi government’s economic record. He made some strong arguments to buttress his claims, but he did not fail to resort to political point-scoring that does not serve as useful criticism.

 

Mr Chidambaram made some valuable observations, but others were off the mark. Among other things, he said that the Modi government’s big problem was that it could not find a worthy economist to succeed Manmohan Singh. Two, he criticised the government for not sequencing its reforms like the Congress and the United Progressive Alliance (UPA) governments did after 1991 and 2004. Three, the current government has centralised too many decisions, and there are bureaucratic hurdles everywhere. Four, central agencies are creating new regulations, and launching investigations and enforcement decisions that may be scaring off capital. Five, he alleged that several sectors had oligopolies or monopolies, including airlines, ports, and petroleum — which is an indirect attempt to buttress Rahul Gandhi’s Adani-Ambani theme.

 

The first point is debatable. One does not have to question Manmohan Singh’s economic credentials to counter the assumption that having a good economist running the government or playing finance minister is vital to economic performance. It is not a sufficient condition for ensuring good economic outcomes. With top-notch economic advice, the Manmohan Singh government landed the economy in the ditch, and saddled it with high inflation. Two of the sectors that Mr Chidambaram mentions as oligopolies, and another that is less of an oligopoly (banking), were failing badly when the UPA government demitted office.

 

The fiscal deficit was left in a mess, and inflation was running riot for most of the UPA’s tenure. With celebrated economist Raghuram Rajan as the chief economic advisor, and later the Reserve Bank of India Governor, the country saw the largest accumulation of bad loans in its history. In contrast, the Modi government has not just maintained a strong macroeconomy, but also kept inflation mostly in check. Banks are in rude health. The short point: It does not matter how good an economist is at the helm. Ultimately we live in a political economy, and it is the interaction between politics and economics that determines outcomes. Under Prime Minister Narendra Modi, the friction between economics and politics is less.

 

Two, I would readily concede the point about centralisation as the hallmark of the Modi government. But centralisation is not an unmixed evil. It was what enabled a coherent and conservative fiscal and monetary response when everyone and his aunt was asking for endless central payouts during Covid. It was centralisation that enabled the Modi government to implement direct benefits transfers, implement the goods and services tax, the Insolvency and Bankruptcy Code (IBC), and the deregulatory reforms now underway. It does not make sense for a former finance minister, under whom banks saw an unprecedented rise in bad debt, to pretend that cronyism did not exist earlier. Banks were being ordered to make loans they would otherwise have refused. The IBC, for the first time, ensured that businessmen making bad decisions using public money were forced to let go of their companies. Earlier, governments nationalised bad debt, and allowed private businessmen to retain their profitable companies. Centralisation may be good when the policy is directionally right. It may be bad when it isn’t — as was the case with demonetisation.

 

Three, Mr Chidambaram makes a good point about sequencing of reforms. But he did not point out where the Modi government did not sequence reforms properly. Perhaps, he could elaborate on this. But even in 1991, the massive reforms were not sequenced properly: When capital was freed, labour continued to operate under the rigid old codes, where firing excess labour was near impossible. Labour codes are only now being implemented. The Congress-UPA failure to sequence labour and land reforms after the capital market was freed made India Inc choose more automation over labour expansion. Land is expensive even when required for productive purposes. Under the UPA, land laws were tilted in favour of landowners. But while this was needed to prevent expropriation by the state, it has also made land one of the most expensive factors in production.

 

Four, Mr Chidambaram is right to point out that excessive deregulation and enforcement action are scaring away investors, and the Modi government has indirectly acknowledged this reality by appointing several panels to ensure steady deregulation. States are following suit. Also, the Modi government has chosen to decriminalise many corporate infringements of the law, making them less onerous. But the government would do well to reduce its focus on ham-handed enforcement, which could be frightening to many investors.

 

Five, and this is where Mr Chidambaram is largely wrong. The truth is some sectors with huge network effects tend to move towards duopolies or oligopolies. In no country is telecom not an oligopoly. Airlines, given their low operating margins, tend to compete everywhere on product differentiation, not price. Of course, there are low-fare-no-frills airlines aplenty in America and Europe, but this is directly related to two other Indian realities: The absence of low-cost airports and high fuel prices. Unless we create cheaper airport infrastructure, which means cheaper land costs and cheaper fuel (which no government, whether at the Centre or state level, is willing to forgo), we will have high-cost airlines and the resultant oligopolies.

 

The same goes for airports and ports, which require large amounts of initial capital investment, but the creation of more ports and airports outside current oligopolies will gradually reduce this trend. It is worth noting that while the Adani Group and GMR dominate the airport scene by ownership of the Mumbai/Navi Mumbai and Delhi/Hyderabad airports, the biggest airport coming up in India (Jewar in Uttar Pradesh) is not owned by them, nor is Bengaluru. The privatisation of future airports will include a clause to exclude investors with large market shares.

 

Cement is one sector where there could be more competition, but a commodity that costs a lot to transport will always enjoy some degree of local monopoly; economies of scale in branding and other marketing costs make smaller companies less viable at the national level.

 

As for technology, the norm is monopoly due to network effects, and India is nowhere near the top in cutting-edge areas such as artificial intelligence and robotics. Our banks missed the bus in digital payments by ceding market share to the likes of GPay and PhonePe, but there is still time to claw back market shares.

 

A point worth noting is this: When you are up against giants with billions of dollars in profits, it is only domestic champs and oligopolies that can hope to compete with them. Can anyone other than Reliance compete with Amazon?

 

Mr Chidambaram makes some good points, but a lot of his criticism is also political, and sometimes off the mark.

 

The writer is a senior journalist