India: The Current Policy Environment

The Wall Street Journal | Page A017 Friday, 5 March 2021

Nearly seven years after he was first elected, India’s Prime Minister Narendra Modi finally appears
ready to place the private sector at the heart of his development model. This belated embrace of
business is welcome. But the path Mr. Modi has chosen—state-guided capitalism of the East Asian
variety—is strewn with pitfalls.
If it works, the proposed mix of tariffs, production-related incentives and deregulation will make
India a manufacturing hub bursting with new factories supplying global markets. But the country
may instead end up as an isolated backwater where well-connected firms shielded from
competition enjoy de facto monopolies, while consumers and small businesses pay more for
shoddy goods.
Necessity has driven Mr. Modi to embark upon this ambitious reordering of the economy. In his
first term, he focused less on economic reform and more on expansive welfare schemes—including
bank accounts for the poor, subsidized cooking gas, and government-funded toilet construction.
But faced with collapsing growth and increasing skepticism about India’s trajectory, the
government has pivoted toward the most explicitly pro-business agenda since at least the early
2000s, and possibly since independence in 1947.
Here are the elements of Modinomics 2.0: The prime minister is increasingly using his massive
megaphone to praise private businessmen as wealth creators who deserve the nation’s respect. The
government has budgeted roughly two trillion rupees ($27.50 billion) over the next five years to
boost manufacturing by providing “production-linked incentives” for domestic and foreign firms
in 13 sectors, including those producing cellphones, pharmaceuticals, automobiles and auto
components, and solar batteries. In recent years, Apple, Samsung and Foxconn have set
up manufacturing facilities in India. The government hopes that Cisco and Tesla, among others,
will follow.
The government has also pledged to privatize a raft of state-owned firms, including Air India and
two unnamed public-sector banks. Late last month, addressing bureaucrats charged with
administering the privatization, Mr. Modi dusted off one of his old slogans: “The government has
no business to be in business.” In Parliament, he ridiculed the idea of bureaucrats running
everything from fertilizer plants to airlines. In her budget speech last month, Finance Minister
Nirmala Sitharaman pledged to pare the public sector to a “bare minimum” in four “strategic
sectors.” She also broke a taboo by repeatedly using the word privatization. Indian politicians have
long preferred the euphemism “disinvestment.” Although modest in scope, the proposed bank
privatizations directly repudiate one of socialist India’s most damaging legacies—Indira Gandhi’s
1969 bank nationalization.
At the same time, the Modi government has moved to allow the private sector to play a larger role
in agriculture by competing with state-controlled marketing yards, begun to ease onerous labor
laws, raised foreign-investment limits in insurance, and spoken of setting up a so-called bad bank
to tackle nonperforming assets and of streamlining notoriously slow land-dispute settlement
mechanisms.
All this takes place against the backdrop of four years of sustained tariff increases that have partly
reversed three decades of trade liberalization. In 2019 India walked out of negotiations to join the
Regional Comprehensive Economic Partnership, a free-trade grouping of Asia-Pacific economies.
It has also scrapped or renegotiated several bilateral investment treaties entered into over the past
quarter century.
How does all this add up? Optimists believe Mr. Modi is poised to deliver the industrialization
India has long sought. In an op-ed, the Bangalore- based businessman and commentator Manish
Sabharwal summed up the government’s ambition as “raising the productivity of India’s regions,
firms and individuals by making them more formalised, urbanised, industrialised, financialised,
and skilled.”
As the logic goes, firms seeking to diversify supply chains away from China will choose India for
its large domestic market and deep pool of skilled manpower. The stick of tariffs and the carrot of
production-linked incentives will spur this shift. Mr. Modi’s popularity gives him the political
capital to make sweeping changes that other politicians wouldn’t dare contemplate. Recent
agriculture reforms are a case in point.
These arguments can’t be dismissed out of hand. Yet a dollop of skepticism—entirely absent
among Modi-boosters—is warranted.
For starters, promising reforms isn’t the same as delivering them. Protests by farmers from Punjab
and Haryana have already thrown agriculture reforms into question. The government has tried to
offload Air India since 2017 without success. India’s quixotic courts—often manned by
economically illiterate judges with sweeping powers—add another wrinkle to the process. As with
any government bid to pick winners and losers, there’s always the danger of benefiting well-
connected cronies rather than competitive export champions, and of betting on the wrong
industries.
Nor is it clear that the international environment is welcoming. In a phone interview, Vivek
Dehejia, a trade economist at Ottawa’s Carleton University, points out that India couldn’t reach
trade agreements with the U.S. and the European Union even before trade became an explosive
domestic issue in the West. Fraught relations with China and India’s rejection of RCEP affect
India’s access to Asia’s largest markets as well. In many cases, India’s domestic market is too
small to count. It needs to create a more stable regulatory environment, end “tax terrorism” by
officials, and upgrade infrastructure to become competitive as an export hub.
“You can try and race an Ambassador car on a Formula One racetrack,” Mr. Dehejia says. “But
you’re going to have to get incredibly lucky to make it work.”
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