Push the envelope on market reform

There is a paradox at the heart of India’s post 1991 political economy. India has grown at its fastest (currently the world’s fastest) after it liberalised its economy. Many more people have been alleviated from absolute poverty in the last three decades than in the five preceding decades. And yet, there is no political party which is explicit or unabashed in its endorsement of a market economy. That can only be because there is no substantial constituency for market reform. Therefore, the question to ask, on the day India elects its next government, is why the apparent success of a market-led economy, in terms of both growth and poverty alleviation, has failed to create a political constituency?

Three plausible explanations stand out. First, in public perception, the market economy has been most closely associated with crony capitalism, rampant corruption and fleeing (the law) capitalists. Combined with the old socialist-era legacy of viewing all profit as vice/evil, it is a lethal cocktail which politicians unsurprisingly prefer to avoid in their public pronouncements. Perhaps, to get its moment in the sun, India’s capitalism needs saving from at least some of its capitalists. 

Second, it may be argued that the process of market reform post 1991 gave inclusion short shrift or paid only lip service to it. Here, inclusion is not defined as some form of dole but in the broader sense of participation in the mainstream economy — by being part of the banking system for example or getting a quality education or receiving first rate healthcare. Much of these are the fundamental responsibility of the State. By falling short, India’s governments have let down markets. In fact, in the lexicon of centre-left parties, government failure has been masked as market failure.

Third, it is reasonable to posit that politicians have failed to articulate the merits of the market economy in sectors where it has brought great benefit to hundreds of millions of Indian, like in telecom or in aviation. In the quest for votes, it is likely that these would be advertised as successes of government rather than of the invisible (to voters) hand.

Recently, several commentators have lamented the unwillingness of Prime Minister Narendra Modi to embrace market reform, which is indeed necessary to raise India’s growth trajectory to double digits. The reality is that Modi is too savvy a politician to push ideas or policies which do not have mass support. He realised that quickly when he tried to reform the land acquisition law in a market friendly way early in his term. Instead, Modi spent the last five years in a concerted effort to try and neutralise the adverse public perceptions around the market economy.

There was a concerted effort at cleansing the economy of rampant cronyism and corruption. A series of policy measures, from demonetisation to GST from the Indian Bankruptcy Code to the Benami Properties Act and RERA were targeted at creating a “fair” economy. Increasing tax compliance, ensuring promoters lose control of bankrupt businesses, clamping down on black money in real estate and so on would all help in restoring the faith of the people at large that the market economy is not rigged to favour a few. 

The PM Jan Dhan Yojana may yet go down in the history books as the most important reform of the Modi era because it universalised the possession of bank accounts. For the excluded and marginalised, that is the first point of entry into the mainstream economy. The decision to move to direct benefit transfers with the help of Aadhaar and mobile phones has put money into those bank accounts. Not only has leakage been cut, money in bank accounts has allowed people to access loans and purchase other financial instruments like insurance. In fact, the government’s life insurance and accident insurance schemes bolstered Jan Dhan, just like direct benefit transfer did. The attempt at inclusion subsequently moved to health care with the implementation of the Ayushman Bharat scheme. The vast improvement in the government’s ability to facilitate genuine inclusion of the poor in the mainstream is significant because eventually they will become stakeholders in the well being of the market-based system.

Modi has also tried to communicate to the public about the importance of entrepreneurs and job creators who are the fulcrum of any market economy. His emphasis on start-ups, and new technologies, will enable the creation of a new class of Indian capitalists who will have grown without any support from the government. They will be the best advertisements for free markets.

The challenge for Modi, should he win re-election today, is to build on the efforts of the last five years to push the envelope on market reform. He probably will. As should anyone who becomes India’s next Prime Minister.

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The author is chief economist, Vedanta