If exit polls are to be believed, Prime Minister Narendra Modi is in for a third consecutive term. (Photo: REUTERS)
The world’s largest election has concluded. If exit polls are to be believed, Prime Minister Narendra Modi is in for a third consecutive term, with a larger mandate. A feat rare in the world and Indian democratic history. This mandate comes against the backdrop of near universal provision of basic necessities like housing, sanitation, water, clean household fuel etc. Infrastructure has been a mega success story and expansion of higher education is on track. This is why the election mandate appears to be large and confirmatory of approval — and with an express demand for continuation and more.
Three key demands would be on the uniform civil code, delimitation and farm laws — each has been long overdue. Over the next few days, weeks, and months we will all rightly debate the meaning and implications of this event. A critical part of the discussion should be the identification of what needs to be done, as well as when, how, and why.
“We The People” of India recognise the need for change. Over the years, we have recognised that there is a place for things that do not change with time – a museum. And politicians who do not recognise the need for change have been shown the door. But how do we communicate that despite the series of hits, there have been important misses in policy? How do we communicate that the goals set for Viksit Bharat are inconsistent with the mind-set of some administrators? How do we communicate that the present system may not be, or is not, agile enough to administer the world’s third largest economy? The system needs to change, adapt and reform. We must think globally and act locally. If the two contradict each other, Modi must opt for the former.
As economists, we are concerned more about economic policy that is compatible with the collective aspirations of society. We will highlight our concerns with regard to statistics, and deregulation, and the need for economic freedom to be at the centre stage of policy making.
India needs to be modern and global on information and statistics. India was once a pioneer in collection of data and had state of the art statistical systems. These systems were useful as important and critical instruments for policy making. Why the past tense? Because the old systems were good for the pre-internet era, perhaps even till the late 1990s. Today, most economies of India’s size have an independent statistical authority – many with legislative backing and more importantly with well published and advertised statistical calendars. One visit to the website of a statistical agency should inform people of the existing important indicators, existing field surveys and the statistical calendar for the coming year. Each statistical product such as the NSS surveys should be in these calendars – and all data must be released as per the calendar. Violation or delays in reporting of these important data should be prohibitively costly. And we have an institution that adheres to these modern standards of “data justice” — the RBI; so there is no justification for other important institutions to be any different.
Example: India’s monetary policy framework has a twin objective of stable economic growth and moderate inflation. Delaying the release of Periodic Labour Force Surveys has implications for monetary policy. There are of course other issues with the way MOSPI collects information, its reluctance to do an income distribution survey – or even initiate some important longitudinal surveys. India’s administrative statistics are comparable to the best in the world due to rapid digitisation, but dashboards are not sufficient to understand hits and misses of development programmes — and MOSPI has not kept pace with the statistical innovation achieved by many of its counterparts.
Data and policy on foreign investment is another area that needs rethink. A very important determinant of growth is investments, and the government has correctly chosen to do the heavy lifting (infrastructure) for most of the last decade. But we should take note of the decline in FDI investments in India. Some have argued that high interest rates in the US have resulted in lower levels of foreign investment. Not true — high interest rates affect the size of the flow of FDI to different countries, not their share in any country. What is worrisome is that India’s share in overall FDI has been declining for some time.
Let us juxtapose the two facts — fastest growing economy and declining FDI. What caused this strange outcome? Was there any policy intervention over the last year which led to this contradiction? There was: The scrapping of India’s Bilateral Investment Treaties (BITs). Why? No answer. BITs provided a level playing field to foreign firms. With a single stroke of the dreaded regulatory pen, foreign companies no longer have protection from judicial proceedings in India. Given the highly unpredictable nature of India’s judiciary, high pendency of cases, and inordinate delays in action, FDI investors have decided to vote with their feet by exiting India and going elsewhere.
This is not surprising given that Indian judges cancelled coal allocations due to corrupt allocations but acquitted the person responsible for making those allocations. Investors do not appreciate such inconsistencies and would naturally prefer arbitration outside of a relatively unpredictable judicial system. Some form of protection from arbitrary changes in rules and retrospective judgments will send encouraging signals to both foreign and domestic investors. As we have just successfully conducted the largest electoral exercise, is this not a perfect time to reflect, review, and choose to bat global?
This brings us to the third and possibly the most important, and most difficult, of reforms — justice or judicial reforms. Think 1991 regarding economic reforms. An honest attempt was made with the judicial appointments bill; a renewed mandate would provide the promise of yet another attempt to build a truly modern judicial system that is speedy, agile and protects individual rights in the world’s largest democracy.
India’s strength lies in the fact that most of its entrepreneurial success has occurred in areas that were ignored by the government, such as in services or high-skilled manufacturing. This is not a coincidence as too much intervention can often distort incentive structures and lead to perverse outcomes.
It is therefore desired that the government work towards building a truly modern regulatory framework, one with a strong system of checks and an institutional structure that incentivises diversity of opinion. Doing so will create more capacity within the Indian state and allow it to focus on key public goods such as healthcare and education — and to do so in a more proactive and meaningful manner.
India is on course, at least in ambition, to be a developed county by 2047. Realising this political and economic dream means important changes in regulation — restriction of arbitrary powers of regulators, the need to remove regulatory ambiguity and the need to bring in a culture of willful restraint by the state and judiciary. If achieved, no protection from Indian regulators or institutions would be sought by investors — foreign or domestic. The achievements of the last decade were critical for making realistic a dream thought impossible a few years ago. As discussed, there is a lot of unfinished business left. A renewed mandate is perhaps the best opportunity to start finishing them!
Bhalla is former Executive Director at IMF and Bhasin is a New York-based economist. Views are personal
