Usual Suspects

The Arun Jaitley Budget, which also marks the 25th anniversary of the landmark Manmohan Singh Budget of 1991, envisions an India sustained by an enlightened state and a less skewed market.

By Swapan Dasgupta

There were a lot of things that the Finance Minister Arun Jaitley got right in his 2016 Union Budget. The greatest achievement lay undoubtedly in the Finance Ministry’s adherence to fiscal deficit target that, apart from boosting India’s credibility in the troubled world of global capitalism, has put intense pressure on the Reserve Bank of India Governor Raghuram Rajan to bring down interest rates further and make the cost of money more competitive. 

To my mind, the 2016 Budget suffered from two significant shortcomings. The first, which has already kicked up a political storm and may even lead to a rollback, was the tax imposed on lump-sum withdrawals from the Employees Provident Scheme. The proposal to synchronise the different post-retirement schemes may well have precedents in the West. However, the belief that a privilege once given to the workforce of the organised sector can be peremptorily withdrawn indicated an astonishing measure of political naiveté. In the past, Jaitley has been accused of being too trusting of his bureaucrats, many of whom were positively hostile to the Narendra Modi Government, and not even kindly disposed towards the Finance Minister personally. In endorsing the EPF changes in the name of ‘reform’, he was guilty of accepting the wisdom of economists without political filtration. A Budget that had otherwise secured the approval of the political class, investors and even voters, was quite needlessly dragged into controversy for no apparent gain to the state exchequer. The obvious lesson of this EPF storm is obvious: the economy is too serious a business to be left to the economists. 

The second big shortcoming of a Budget that has otherwise brought a sense of relief in globally uncertain times may not actually even qualify as a shortcoming in India. Indeed, it has neither been noticed nor will it be acknowledged even if it is brought to the public notice.

In his post-Budget commentary, the more-feared-than-respected former Finance Minister P. Chidambaram dubbed Jaitley’s Budgets a set of missed opportunities. The Congress stalwart’s displeasure was, among other nit-picking items, based on Jaitley’s failure to announce a formal repudiation of the retrospective tax—a self-defeating measure of the UPA-II Government headed by a Prime Minister whose academic accomplishments as an economic pundit are truly enviable. 

I think that it was truly astonishing that neither Chidambaram nor the incumbent Finance Minister deemed it relevant to make any mention of the fact that the 2016 Budget marked the 25^th anniversary of the landmark Manmohan Singh Budget that began the process of bringing down the curtain on the over-regulated, control-permit raj—the ‘socialism’ that Indira Gandhi had injected into the Preamble of the Constitution in 1976, and which ingloriously remain in the statutes. 

There is a prevailing debate on the origins of the controlled economy that the P.V. Narasimha Rao Government began demolishing in 1991. Some trace the disfigurement of the post-Independence economy to Jawaharlal Nehru’s genuflections before the Soviet Union; and others trace it to Indira Gandhi’s radical posturing after the Congress split of 1969. 

Whatever the point of embarkation, there is little that can contest the horrible outcome: perennial shortages, public sector incompetence, the smugness of cronyism and soaring sales of one-way tickets out of India. Those who haven’t experienced the realities of India prior to the mid-Nineties can scarcely believe the gloominess created by the feeling of stagnation and zero hope. The only relief was the fantasy world of a film industry that provided the voyeuristic delights of romance, tourism and adventure. The socialism India experienced scarred the mind of a country as crippling taxation (which, in some cases, touched 98 per cent) and shortages—imagine travelling abroad with just the permissible eight dollars in your pocket—created a culture centred on shortcuts and plain deceit. 

In an ideal world, the process of deregulation that began in the Budget of 1991 should have happened much earlier. By 1980, it was clear to Indira Gandhi that the state was severely overstretched and becoming dysfunctional. It was also evident that the wave of nationalisations and controls over organised manufacturing industry was costing India dearly. Alas, the Congress believed that the poetry of deprivation was a vote-winning formula that Indira Gandhi had turned into a fine art. There could be the occasional deviations—usually favours doled out to notables that enjoyed a special relationship with either the first family or the political Establishment. However, the idea of a rule-based regime where discretionary powers were kept to a bare minimum never struck a responsive chord with a dynastic Establishment that believed it was there to rule India permanently. 

Rajiv Gandhi saw himself as a modernist and was slightly impatient with the political culture of his mother—just as Indira Gandhi felt hamstrung by the Syndicate. Yet, neither Rajiv nor his group of English-speaking inheritors were inclined to deviate from the socialist paternalism of the past. For Rajiv, technology was just an instrument of guided efficiency. 

The extent to which this socialist culture and the glorification of both poverty and austerity—one of the less attractive facets of Mahatma Gandhi’s worldview—became part of the Great Indian consensus, infecting all parties. Apart from the Swatantra Party that combined its distaste for the pro-Soviet foreign policy tilt of the Nehru-Gandhi family with a partiality for liberal, pro-market economics, all the other parties were committed to variants of state controls. 

The Jana Sangh and, subsequently, the Bharatiya Janata Party was no exception. Although its social base was, in the early days, made up disproportionately of traders and small businessmen who wanted relief from high taxes and the Inspector Raj, its defining identity was provided by its distinctive views of nationhood. The BJP, which injected Gandhian socialism as a core belief in its founding document in 1980, had grave doubts over putting any great emphasis on economic policy. ‘Neither Left nor Right, but nation’ has been the slightly ambiguous but preferred mantra of the saffron parivar for long. 

This ambiguity, however, has underemphasised a few features of the BJP’s economic thinking. First, stemming from the distaste of its social bases for high taxes and state intrusiveness, the BJP has consistently favoured deregulation. It is worth remembering that there was an informal understanding between Prime Minister Rao and the BJP leadership over ensuring a smooth passage for the 1991 Budget. Had the BJP teamed up with the Left and its fellow travellers to try and turn the clock back, the liberalisation process would have ended up as the proverbial turning point when history refused to turn. Indeed, the most significant opposition to the 1991 Budget came from the so-called Bombay Club—a clutch of industrialists fearful of competition—and Left intellectuals. Nikhil Chakravartty, a widely-read columnist enjoying a very special relationship with the erstwhile Soviet Union, even described Manmohan Singh as a Quisling—after the Norwegian politician who collaborated with the Nazis—for his repudiation of India’s socialist high church. 

Secondly, there was (and probably is) a large chunk of the BJP that wanted the deregulatory process limited to Indian capital. Murli Manohar Joshi’s famous distinction between computer chips and potato chips, personified the BJP’s partiality for swadeshi entrepreneurs against videshi capital. In the mid-1990’s the BJP mounted an against India’s membership of the World Trade Organisation that would make international trade less subject to the vicissitudes of national politics; and even as late as 2011-12, it stubbornly opposed the opening-up of the retail sector to the Wallmarts and Ikeas. 

At the same time, it is important to recognise that the BJP’s opposition to globalisation has undergone a significant dilution. After the 1998 nuclear tests in Pokhran and the imposition of sanctions by the Bill Clinton Administration, the Atal Behari Vajpayee decided to turn crisis into opportunity by opening the doors wide open to both Foreign Direct Investment and Foreign Institutional Investment. Under the first NDA Government of Vajpayee, a large number of holy cows were put out to pasture. These included the unhindered entry of foreign capital in the entertainment media and a more qualified entry in news media. Under the Modi government, the defence sector—one of the holiest of the holy cows—has been opened for 49 per cent foreign investment. Foreign capital has secured a backdoor entry in the retailing of agricultural produce and, in time, we may witness the opening up of legal services and higher education to overseas participation. In a footnote of this year’s Budget, automatic residence rights have been granted to foreign (non-OCI) passport holders with significant investments in India. 

In the past 25 years, India has inched forward in the direction of both internal liberalisation and globalisation. Yet, it is worth noting that the breakthroughs have resulted, not from a sense of political necessity, but as a grudging response to crises. The process began in 1991 following a severe balance of payments crisis and the mortgage of a part of India’s gold reserves; and the second wave, during the Vajpayee years, was a considered attempt to negate the damaging effects of the post-Pokhran sanctions. India has lowered its protectionist impulses whenever the gun has been pointed at its head. 

In the past 20 months, the Modi Government has taken the process many more steps further. Part of the reform initiatives that involve improving the ease of doing business in India has been the result of the Prime Minister’s own experiences in Gujarat and the overall revulsion against the earlier government’s ‘tax terrorism.’ However, there is another dimension that has remained understated. 

Within a few months in power, the Modi government came to the conclusion that its faith in the ability of Indian industry to revive the investment cycle had been based on over-optimism. Its stringent measures against the reckless cronyism of the UPA, not least of which was the pressure on banks to target defaulters and lower the quantum of non-performing assets, had offended a big chunk of Indian corporates seeking special favours. Rather than succumb to these pressures and expose itself to charges of cronyism, the government chose to look outwards for foreign investors. An aggressive overseas outreach programme aimed at improving India’s global image, a Make in India programme that offered the bait of a vast domestic market in India and a relatively stable fiscal regime are facets of a determination to not be cowed down by sullen domestic fat cats. 

The NDA government’s reform initiatives predated the crash in commodity prices, the economic turbulence in China and the slowdown in the Arab world. But the unintended consequence is that India’s economy now appears more stable, more enduring and more wholesome—despite some outstanding muddles in tax administration—than what many other emerging markets can offer. After his first two Budgets, Jaitley was widely berated by the commentariat for being too conservative and needless incremental. In hindsight, he appears to have been proved more correct than his critics. His non-ideological approach has prevailed. 

One of the lessons that the Modi Government has learnt is to avoid selling the virtues of a deregulated market economy too much. ‘Rolling back the frontiers of the state’ was Thatcher’s mantra against the post-War consensus in Britain. The BJP has cut down the state’s involvement in economic management but it has desisted from flaunting it as an achievement. Instead, it has retained the flexibility to fall back on state intervention when the situation warranted. In fact, its intervention to uprade India’s creaking infrastructure and improve the quality of its welfare schemes has been based enlightened Keynesianism. In the Budgets of both 2015 and 2016, Jaitley has spoken of the need to construct a modern welfare state—not an approach usually associated with the Right wing in Europe and North America. 

There is an obvious message that politicians have grasped better than better than the ideologues who supported Modi in the belief that he is another Thatcher and Lee Kwan Yew put together. In India, as the EPF controversy demonstrates, the faith in the state over an uncertain market is widespread. The assertion that the state should occupy the ‘commanding heights’ of the economy was based on dogma and, quite predictably, landed India in an almighty mess. Likewise, a purely market-centric position, apart from putting decision-making in a straitjacket, suffers from an absence of popular legitimacy. Indians want a state, but a state as a protector and watchdog. The debates of the next 25 years will probably be centred on the necessary balance between an enlightened state and a less skewed market that offers opportunities for a fiercely aspirational Young India. 

OPEN magazine, March 4, 2016