The post-May 2024 dilemma

Even if we have a majority government, economic performance will be sub-optimal without political consensus on reforms

The one big lesson we can learn after a decade of United Progressive Alliance (UPA) coalition rule and another with a majority government is this: Timely and well-thought-out economic reform is challenging in both situations. While it would be churlish to deny that more reforms have been undertaken during the last 10 years under Narendra Modi than in the previous 10 under Manmohan Singh,  this comes with a rider. Even under majority rule, some very important reforms are difficult to legislate and implement.

In the case of the reforms already implemented — the Jan Dhan, Aadhaar and mobile-based subsidy reforms (JAM), the goods and services tax (GST) and the insolvency and bankruptcy code (IBC), for example — these were achieved either through legal workarounds, or still remain far from complete. As for agriculture, labour, land and other reforms, the less said the better. Even basic initiatives like privatisation and asset sales have stalled after Air India was handed over to the Tatas. Grand plans for privatising “non-strategic” banks have been put on the back burner, and asset sales have done reasonably well only in the roads sector.

Assuming we still have a Modi-led majority government after May 2024, there is no guarantee that reforms will move at anything more than a snail’s pace, though we must be thankful even for that. Huge political challenges will complicate the scenario after 2024 as the delimitation exercise and the women’s reservation loom. Neither of these can be done merely through legislation. They have to involve deep political negotiations over months, and with parties that are not well-disposed to the Modi government, and significant political give-and-take, something that the Modi government has been unable to do so far.

This is not because the government has been unwilling to make deals, but Mr Modi’s popularity makes it tougher for the Opposition to agree even to reasonable compromises. The fear is that anything done in national interest will end up politically benefiting Mr Modi, not them. This became clear when GST was implemented, and more specifically in the Ram Mandir case. In the latter, almost all mainstream parties were theoretically okay with the temple, but ended up boycotting the January 22 inauguration, fearing that it would give Mr Modi even more political advantage.

The Opposition is dishing out unaffordable freebies in some states precisely because it fears that it cannot otherwise overcome the Modi charisma. One unexpected consequence of JAM-based reform is that subsidies can now be guaranteed to reach the intended beneficiary. The obverse side of the subsidy reform coin is that voters now believe that politicians will indeed deliver on their electoral promises. There is thus nothing that prevents any party from promising the moon, since it is the taxpayer who will bear the cost.

So, the first priority of the Modi government, assuming it wins in May 2024, is to build trust with the Opposition. It has to assure them that it will seek their cooperation at every turn, and must designate senior ministers who can continuously negotiate and get things done in a multi-partisan manner. This should be the norm even if the National Democratic Alliance (NDA) gets a majority in the Rajya Sabha and does not need the Opposition for key legislation, including constitutional amendments.

Consider the primary economic challenge of jobs. The Modi government, and some state governments, are trying to overcome the youth unemployment problem by recruiting more people in government services before election time. This is unsustainable, and hence not a solution. Though there is scope for more government recruitment, even this is becoming impossible when the bulk of state resources is being used for election-oriented “revadis”.

The jobs problem is structural in nature. The factors inhibiting jobs growth, despite strong gross domestic product (GDP) increases over the last 20 years, are the following.  One is the poor sequencing of factor market reforms. In 1991, we liberalised the capital market, but not land and labour. Net result: The corporate sector replaced labour with capital. China’s massive growth surge was because it allowed foreign companies to set up shop using dirt-cheap labour, which got no legal protection till recently.

Two, over the last 15-20 years, technology has begun replacing labour even in some segments of the services sector— from banking to telecom and even software. The entire middle sector — which is where good quality, stable jobs are to be had — will shrink relative to the available labour force in the coming decade. Consider how many of us still need to go to a branch for banking services.

The point is this: We did not reform labour laws when we should have (in the 1990s), and even now we are scared to do it, though it is still worth doing. The production-linked incentive scheme could improve manufacturing’s share of GDP, but it won’t create commensurate jobs growth.

A few reform ideas are worth considering — but none will deliver in spades without multi-party consensus. For creating more jobs, the apprentice scheme should be pushed hard by both the Centre and states, for real skilling happens in real jobs, not skilling centres alone. Apprenticeships provide cheap labour and skilling opportunities, but the unions may see it as a ploy to gradually reduce regular labour recruitment. The unions have to be politically won over.

Given that most jobs are becoming contractual and gig-oriented, we can assume that most additional jobs will be created by new companies and small and micro businesses. Schemes to make credit available (already underway) to them, and providing some form of social security for temporary workers, which may need government subsidies, are vital.

Most jobs will come up in urban centres, which is why a new Centre-state deal must involve the transfer of more power to municipalities and local bodies. Just as states complain that the Centre has too much fiscal power, the same applies to them as their urban centres are over-dependent on them for resources. If most new jobs are going to be generated in urban centres, this can’t happen without states sharing more of their resources with urban areas, and additionally giving them fiscal room to raise additional resources.

The ideal political situation is one where fiscal resources are devolved from the Centre to states and further to urban and rural communities. The bottom line is a multi-party political deal and this needs the next Union government to make this the focal area for reform. If this transformation does not happen after May 2024, India will continue to deliver sub-optimal economic results, especially on jobs.

The writer is editorial director, Swarajya magazine