New Delhi: During the past decade the Congress-led government presided over unprecedented growth of the Indian economy, at times more than 7.8 percent. It has only dipped in the last two years mostly due to the global financial slowdown, and the huge shift of capital in India from investment to subsidies due to a rash of populist policies adopted domestically.
Considering that the Indian GDP expanded from $700 billion to about $2 trillion during this period, people were still very clearly dissatisfied, either with the pace of economic development or the values of the regime? They registered their dissatisfaction in the polling booths and gave Narendra Modi’s Bharatiya Janata Party a historic victory.
What happened? Governments in a democracy are thrown out from time to time. People vote on “Valence” issues or bread-and-butter issues. Valence is where basic values are involved. The Congress Party and its allies were perceived to be corrupt and serving only a few and for considerations other than the common good. The 2G deal, Coalgate, Robert Vadra’s business dealings -- these were seen as manifestations of endemic corruption. The fact that Mr. Vadra is married to Congress President Sonia Gandhi’s daughter, Priyanka, aggravated people’s sense of outrage.
Moreover, since the economy was booming and incomes were rising fast there was a demand-side pull on food prices. This is unavoidable. The terms of trade between urban and rural economies cannot remain one-sided. If factory goods cost more and people are clearly enjoying higher living standards, food producers and sellers sense a higher ability to pay. You cannot have a system where incomes grow and tomato prices remain fixed. The Indian middle class has long got used to a subsidized existence. LPG, electricity, sugar, water, petrol, diesel, public services and various commodities are hugely subsidized. Then there are power sector losses, PSU losses, bad debt losses and so many other forms of direct and indirect, merited and unmerited and known and hidden subsidies. Any attempt to wean away any of the stakeholders from this exorbitant subsidization is seen as inimical. Yet the economy cannot bear this huge burden, now estimated to be almost a fifth of the GDP, is expended in subsidies.
Even though the subsidies to ostensibly help the poor grew, the middle classes felt excluded. India has seen a huge expansion of the middle class in the past decade: various estimates suggest the cohort to be around 300 million of India’s 1.3 billion people. To sum up, the Congress got caught in a double whammy. People lost trust in terms of its perceived values, and inflation hurt.
The new government of Mr. Modi has huge challenges before it. India needs to create 12 million jobs a year. This means a huge expansion of the industrial sector. To incentivize investment in industries, labor policies, land acquisition and land-use policies need to become favorable to investors. To speed up industrial expansion and to create the millions of new jobs needed each year, India has to boost its Savings/GDP ratio and then its Investment/GDP ratio. But subsidies effectively swallow the money that should go into investment. You just cant have plenty of both. This is a real one or the other dilemma that needs to be confronted. But how can he do it? The people who clamored for him most will be the first to take to the streets. It happened when Manmohan Singh tried to rein in LPG subsidy, now over Rs.500 per cylinder.
The RSS controls the biggest trade union in India, the Bharatiya Mazdoor Sangh (BMS). The BMS is very averse to labor reforms, and change of the status quo. This has resulted in low productivity and indiscipline on the shop floor. This is similar to all other trade unions catering to the organized sectors of the national economy.
These are tall orders.
Industry now accounts for only 23 percent of GDP, and India's GDP profile looks very post-industrial with services now accounting for about 60 percent of GDP. How to get industry a bigger share of GDP and in the process create the millions of new jobs needed each year is clearly the Number One macro challenge for Prime Minister Modi.
How does one reform government? Public administration now accounts for almost 8 percent of the GDP. Instead of being the beast of burden to take the country forward it has now become a burdensome beast. The incidence of petty corruption is almost universal. Everyday peoples’ interface with government is mostly at the lower tiers and at the local government levels.
This is where corruption is most endemic. This level has mostly become extortionate. You need to pay to get a complaint registered with the police. You need to pay to get a sewer line fixed. Services are tardy. Clearly, people are not served well. Good government means to make government more citizen friendly and service oriented. To initiate reforms that will lead to a more disciplined and responsive government is not at all easy. It calls for skill sets that are not easy to acquire.
With such a huge mandate and an absolute majority for the BJP, it will now come under pressure from the Rashtriya Seva Sangh (RSS) and other hardliners to implement the RSS manifesto. This manifesto calls for the establishment of a Hindu Rashtra with an implicit Uniform Civil Code, as well as the construction of the Ram Temple at Ayodhya, and abrogation of Article 370 of the Constitution, which gives special status Jammu and Kashmir.
The hardliners will constantly insist on their implementation and the BJP will not have the alibi of a coalition government to trot out as an excuse. Already M. G. Vaidya, a top RSS leader and ideologue, has rallied for all these objectives. The end of the coalitional era in Indian politics has other implications, which might permanently affect the notion of India as a benignly tolerant society.
To a government committed to industrial growth, environmental issues are always seen as a hindrance. But it is a serious issue in India. The rebuilding of the existing infrastructure and building of a new one to ensure water conservation and cleaning of rivers will be hugely expensive.
Where is the money going to come for this? Mr. Modi has sworn to clean up the Ganges. But that implies more than building new Ghats around Mr. Modi’s new constituency of Varanasi. Every city, town and village in the Indo-Gangetic basin pollutes the Ganges system. Sewage and industrial effluents have mostly destroyed it. It will not be easy to save it, but it must be done. Air quality issues are more easily tackled but are equally urgent and expensive. More public transportation systems are needed.
Then there is the issue of capital. India cannot play much of a role in the world sustainable dialogue, in light of donations received from Western organizations and governments and NGOs. We need to temper their concerns with our economic concerns.
One might envy Narendra Modi his awesome electoral victory yesterday. But the challenges he faces as India’s 17th prime minister are scarcely enviable.
