The elections signal course correction

Voters have made it clear they want inclusive growth and a break from polarising politics

This election has sent two key messages: First, that divisive, polarising politics does not work—evidenced by the Bharatiya Janata Party even losing Ayodhya, where it built the much-heralded Ram Temple over the demolished Babri Masjid — and second, that a more inclusive growth model is needed. While India is growing, its growth model is lopsided with an aborted structural transformation and, therefore, not sustainable. Agriculture and manufacturing are struggling. Parts of the service sector, particularly IT-related areas, including the growing number of global capability centres (GCCs), are doing well.  However, with so few jobs, more and more people are stuck on the farm and inequality and rural distress continue to rise. India’s economy has been dubbed the Billionaire Raj. Without a course correction, India’s rising youth unemployment and rural distress, along with rising inequality, is a ticking time-bomb. I suggest three major course corrections.

First is agricultural reform. In its last term, the government promised to double farm incomes, but there was no clear plan. It tried to ram through new farm laws but had to withdraw them under determined farmer agitation — which hurt it politically. Instead, it must present a clear vision to farmers about their future. Its own Shanta Kumar commission had provided such a vision, but it was inexplicably shelved. Now, the government is stuck because it has promised free food for five years, forcing it to continue with the very costly and inefficient Food Corporation of India-based procurement system and a politically charged minimum support price (MSP) system.  India, like many middle-income countries such as Mexico and Turkey, must move away from support prices and input subsidies—fertiliser, electricity, pesticides—that have frozen its agricultural system to what was needed 50 years ago.

Instead, the government must substantially increase PM Kisan, remove all these input subsidies, and free farmers to change their crop mix and use their land more productively. India’s evolving consumption basket needs more fruit and vegetables, oilseeds, and pulses and less grains and sugarcane. The MSP system perpetuates an inefficient and unproductive crop mix, which is depleting the water table and degrading the land. A CSDS-Lokniti survey showed that only 26 per cent of farmers would prefer to remain in farming and most of them would prefer direct payments to their bank accounts instead of higher MSP.

Second, India cannot avoid what economists call factor-market reforms. India’s labour laws as former Prime Minister Atal Bihari Vajpayee once said are anti-labour as they discourage hiring. Its land zoning, with the lowest floor area ratios in the world, leads to very poor utilisation of its scarce land. To avoid complex labour laws, firms become more capital-intensive or hire more casual (daily wage) labour. India has the highest share of casual labour in the world. Additionally, a lot of land is tied up in uneconomic marginal farms.

Infrastructure has improved, but with very high petrol and diesel prices, expensive electricity for producers, and amongst the highest rail freight costs in the world, the cost of producing and moving goods remains highly uncompetitive. By bringing fuel into the goods and services tax or GST (even at the highest slab of 28 per cent), petrol and diesel prices will fall. This will allow Indian firms to better compete with China, where fuel prices are 30 per cent lower than in India. 

Rationalising electricity prices for producers—Indian prices are again about 30 per cent higher for producers, and freight prices are three times higher than in China—will make India’s manufacturing more competitive. This rationalisation of costs will do more for Indian manufacturing more broadly than the costly but highly selective production-linked incentive scheme — which helps a chosen few and does not create enough jobs. India’s demographic dividend requires building on the success it has achieved in services. However, for the vast majority of the population, it also requires a push for competitive labour-intensive manufacturing and manufacturing exports. India needs more blue-collar jobs — to get people off the farm — to complement its success in white-collar jobs.

Third, China carried out a major administrative reform in 1995, to modernise its government. Malaysia, too, did the same around 2000. India has had no such reform and still runs the economy with a colonial 19th-century administrative and legal system. E-services and Aadhaar have helped improve the delivery of some functions and subsidies, but the basic administrative structure remains problematic. It has a very large number of employees at the lower end and large discretionary powers with a very complex set of regulations and procedures that encourage corruption. This must be changed. According to Transparency International, Indian citizens paid the highest number of bribes in Asia in 2021 — even higher than all our neighbours, including Bangladesh, Nepal, and Sri Lanka. At the same time, weakening government institutions by weaponising them against political opponents does not work. The courts are also plagued by corruption, and the wheels of justice move very slowly. Justice delayed is justice denied.

The devolution of functions to the local level is also badly needed. Without greater devolution— especially to city mayors — basic services like health and education will not be effectively delivered and our urbanisation will remain haphazard.  More top-down “smart city” programmes are not the answer — better empowered governance is key to India’s cities. The 16th Finance Commission would do a great service by tackling the issue of resources for local administration boldly. Allowing cities to experiment with higher property taxes in a compact with their citizens for better services, as Chennai is trying to do, would also be a step forward. Delivering better education and health services also requires greater devolution to city governments and village sarpanchs.

Gandhiji said it best: “The future depends on what we do now.” Some will say such major reforms will not be possible in the next five years with a coalition government. However, India’s past shows, ironically, that we have only had bold reforms when we have had coalitions. India needs to tackle the trifecta of unemployment, rural distress, and fostering a more inclusive growth process that creates jobs. Addressing these issues, rather than engaging in more polarising politics and handouts, is what the vote shows that people want.  

The writer is distinguished visiting scholar, George Washington University, and co-author of  Unshackling India,  Harper-Collins India 2021,  recognised as the Best New Book in Economics for 2022 by the Financial Times