Thursday, April 10, 2014

What difference can a Modi government make to economy?

People have been analysing the Congress and BJP manifestos to see what the key differences are. Broadly, both are for growth and equity. Writing in BS, economist Arvind Panagariya suggests that a Modi government would put growth first, with greater emphasis on the first:

Mr Modi firmly believes in building highways, railways, cities and universities to modernise India and to create jobs that would empower people to access housing, education and health. In assessing schools for recognition, he emphasises performance outcomes instead of inputs norms. In the provision of health, he gives wellness priority over illness and hence seeks enhanced public health measures.

The difficulty with the above formulation is that the manifesto does not spell out how these ambitious programmes are to be funded. Government does not have the funds and the PPP model is broken and needs serious rectification. In general, the institutional shortcomings are so acute that a recovery in growth, as I have argued earlier, is unlikely to emanate from any domestic initiatives. It's hard to believe that any new government has a magic wand with which it can accelerate growth.

The real difference with a Modi government, as Pangariya suggests, could lie elsewhere- in greater decentralisation of economic decison-making:

In the last decade, one-size-fits-all central schemes have proliferated in the health, education, agriculture, skill development, employment, urban development and rural infrastructure sectors. These schemes require states to contribute significant proportions of expenditures and have progressively shrunk their fiscal space while absorbing the states' scarce human resources.
Having been the victim of this "tyranny" of the central government during the last decade as the chief minister of Gujarat, Mr Modi will likely help the states recover some of this lost fiscal space. He will perhaps redesign the schemes in ways that give states greater flexibility and arrest their future proliferation. In contrast, under a Gandhi administration, the "rights" will expand and so will the central schemes, further shrinking the states' fiscal space.

A Modi administration is also likely to give greater legislative flexibility to states in subject areas included in the concurrent list such as criminal and civil procedure codes, labour, bankruptcy, legal and medical professions, education, acquisition of property, factories and boilers. Under Mr Gandhi, the legal grip of the Centre on the states will continue to tighten unabated.

If Mr Modi can do this, it will indeed be a significant change. What we have had under the UPA government is an attempt at economic centralisation as a means of countering the decentralisation brought about by democratic politics. Even as non-Congress governments have assumed power in many states, the Congress has sought to wield power and influence through centrally-sponsored schemes under the aegis of the Planning Commission.

Will Mr Modi be willing to reverse this trend? It's difficult for anybody holding the reins at the centre to let go. And Mr Modi's style in Gujarat has been concentrate power in his office. At the same time, he has declared time and again his opposition to the Congress way of running the country. It could well be that he will see a decisive shift towards decentralisation as one of the hallmarks of his regime. Let us hope he does.

1 comment:

Anonymous said...


I will just zoom-out and focus on theoretical debate of what is better - Centralization or De-centralization. Are they mutually exclusive or is it that both are appropriate in a given set of circumstances.

According to me, de-centralization (and we can talk about businesses as well) enables to give a thrust in growth process - it gives a much required momentum. But, it is not so sustainable, as in long run, things start going out of control and operational management cost increases and wipes-off the benefits coming from greater flexibility. Also, one tends to oversee the benefit of Economies of Scale.

De-centralization should be accompanied with more stringent regulations, checks & balances. In simple words - "I give you more power but I will also oversee you operations more often and review your performance more rigorously. This will tend to balance between Autonomy & Control'.

Coming back to BJP vs Congress manifesto and zooming-in again - India today needs that "Push" or "Thrust" in growth process. And that can rightly come through de-centralization. So marks to BJP's manifesto, if it proposes to focus on making states more resilient. Will Modi be able to deliver - I would say "Yes". We should not be oblivion every time by the fact that because he did XYZ in Gujarat, he will tend to do the 'same' in Central. If that was the case, the manisfesto wouldn't be the way it is today.

So best luck to Modi.