Column: Mapping Modinomics and the new Cabinet

Written by K Vaidya Nathan | Updated: May 28 2014, 10:10am hrs
Macroeconomic thinking has evolved from classical economics to Keynesian to neoclassical synthesis, to post-Keynesian to monetarism, and now the new classical economics and supply-side economics. If we have to place Modinomics in the over-all map of macroeconomic thinking, it would be most similar to the new supply-side economics. This school of macroeconomics argues that economic growth can be most effectively created by lowering barriers for people to supply goods and services as well as by investing capital. According to this strand of literature, economy benefits from a greater supply of goods and services and from investment and expansion of businesses.

One can read the tea leaves of Modis economic thinking from his choice of the Cabinet. As he took oath as Indias 15th Prime Minister, he ushered in significant changes in administration, dismantling existing structures by merging key ministries in an apparent attempt to bring in more synergy in governance and make decision-making quicker and more efficient. For now, he and his council of ministers make for a total strength of 46, compared to the more-than-seventy in the last two UPA regimes. The number may go up slightly as tweaks follow over the next few months, but is likely to remain around fiftya one-third reduction from the previous regime. This idea of minimum government and maximum governance is most consistent with supply-side economics which argues for a leaner government and exploiting synergies among various aspects of governance. Many of the small ministries have been merged to create more synergies. For instance, corporate affairs ministry has been brought under the finance ministry. Similarly, coal and power sectorsinterlinked through fuel supply and generation linkageswill be overseen by a single cabinet minister. The panchayati raj ministry has been merged with the rural development ministry. The planning and statistics ministries, required to work in close coordination with each other, will have one minister.

Modis initiative of coalescing ministries is consistent with the idea of supply-side economics, that progress comes from recombining the manner in which resources are used in many different activities, however small. Developing several growth areas, each contributing a share to overall growth is conducive to broad-based and resilient growth.

This idea of supply-side economics is in contrast to the demand-side emphasis of Keynesian economics. The essence of Keynesian analysis is its conclusion that the level of national income and employment depend on the level of aggregate demand and that easy money and expanded budget deficits, by stimulating demand, can increase output and employment. Although this may have been an appropriate emphasis during the depression years of the 1930s when Keynes developed his theory, in the new millennium it has become increasingly clear it is wrong to focus exclusively on demand and to ignore the factors that increase the potential supply of output, viz., capital accumulation, technical progress, improvements in the quality of the human resources, freedom from regulatory interference, and trade.

As the CM of Gujarat, Modi gained a reputation as a pro-business administrator by speeding government decision-making and removing bureaucratic hurdles that slow development. He, time and again, argued that India needs technology and logistics, supply-chain innovations driven agriculture; which in turn can provide sustained demand for manufacturing sector goods and for services. In his landmark Shri Ram Memorial Oration at SRCC, Delhi, he dropped enough hints of implicitly wearing a supply-sider hat when he introduced the catchphrase P2G2: pro-people good governance. He said that all three major sectors of the economy viz., agriculture, industry and services should be given equal importance for development. This helps in overall development. This nation requires development politics. If we switch to politics of development, we will soon be in a position to bring about lasting change and progress.

Even during his election speeches, he mentioned that he would aim to shrink the top layers of government and expand at the grass-roots level. In his January 19, 2014, address to BJP members, Modi argued that persistently high level of unemployment was not because of inadequate demand but was due to UPA government policies like MNREGA, which effectively reduced the supply of rural labour. He contended that developing brand India requires a combination of talent, tradition, tourism, trade, and technology. This is not only consistent with making India more open to absorbing ideas, skills and technology but also explicitly recognising the role trade and technology can play in Indias development.

In all of these ways, Modi has been implicitly a supply-sider even though he possibly may not have heard of the term supply-side economics. Indeed, much of Modis supply-side economics is a return to basic ideas about creating capacity and removing government impediments to individual initiative that were central in Adam Smiths Wealth of Nations and in the writings of the classical economists of the nineteenth century. The experience of the UPA government policies had temporarily made it easy to forget the importance of the supply factors but now the incumbent government is returning to mainstream economics.

The author, formerly with JPMorganChases Global Capital Markets, is a Finance Faculty in Residence at the University of Connecticut