Column: The long and the short

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Published: June 1, 2015 12:20:01 AM

The Modi govt must bring in radical reforms to revive manufacturing and move people away from the farm sector

There is a lot of speculation and judgement being deployed on the first year of the Modi  government. There is no doubt of the facts—inflation lower, GDP growth higher whether you use the old accounting method or the new one. Coal and the spectrum auctions have been exemplary. Budget deficit will be under control this financial year and, no doubt, from now on. A lot of revenue  has been gathered from asset sales, a sum larger than in any year of the earlier NDA government.

Even so, there is a sense of being underwhelmed, of expectations having been raised so high that some disappointment has to be foreseen. Captains of industry are muttering. At the same time, the immediate short-run shock of unseasonal rainfall has led to farmers’ distress and suicides. Many of the infrastructure projects which were stuck during the UPA days have still not been relaunched. Banks’ NPA numbers are a bit better, but not by much. So, how do we evaluate the prospects for the future ?

Several caveats need to be entered at the outset before we can say much. First is that in economics, there is not only ‘no free lunch’ but ‘no fast-food’either. Things take time to improve, especially if the malaise is deep. From that perspective, let us say that the problems confronting this government originate from the last five years, the last twenty five years and the last sixty five years. One could go back farther back but the period since 1947 is long enough to be sufficient.

The last five years of UPA saw low growth and high inflation relative to the normal course over the previous ten years. GDP growth during these years was much lower than before and inflation uncharacteristically high. The inflation was a consequence of a deliberate policy of redistributing resources away from the urban to the rural areas. MSP and MGNREGA were the instruments for raising real wages and the larger farmers’ incomes. The redistribution was sectoral—from urban to rural, but not within the rural or the urban sector. Input subsidies were not touched at all. All the restrictions on food marketing stayed in place. Any hopes that FDI can improve logistics and cut the cost of delivering food stuffs from the farm to the dining table were firmly dashed. Inflation came down once the increase in MSP was kept moderate. With oil-price falling as well, inflation can continue to fall.

The short-run distress of the farmers, due to unseasonal rains, has confused many politicians. The underlying cause is not the acts or omissions of the one-year-old government but the structural  weakness of industrial policy since Independence. Manufacturing growth was concentrated in highly capital intensive industries for much of 1950s and 1960s. Then, industrial growth slowed  down after the oil shock. Even the reforms of 1991 did not improve the situation. The restrictive industrial legislation had destroyed any chance of a growth pattern similar to the other Asian Tigers or China.

Slow growth of manufacturing meant too many people stuck in agriculture. The structural problems of small and scattered holdings, lack of good equipment and complementary inputs such as improved seeds were known at the outset in 1947 but never tackled. This meant that around 85% of the farmers are subsistence-level ones and obtain incomes below the poverty line. It is this large cohort which is susceptible to suicide. The Green Revolution helped the bigger landholders to get more productive. The smaller farmers remained precariously small.

The Modi government needs to tackle this 65-year-old problem within its next four (the remainder of its term at the moment), if not nine, years. This requires labour market reforms that raise the rate and quality of industrial growth. The poorer peasants can then leave the land and secure well-paid manufacturing jobs. The Land Bill is as crucial to this as are labour market reforms. Make-in-India may bring FDI, which can raise the rate of growth of manufacturing. But the land and labour market reforms are preconditions for its success.

The other obstacle is that since 1991, reforms have been undertaken in fitful spasms rather than continually.

Reforms have not been bold since they have had to be consensual. The most remarkable fact about the Rao-Singh reforms of 1991-1996 is that despite much criticism of neoliberal economics, no successor government, including even of the Left parties, has reversed any of the reforms. The corollary however is that no government, including the current one, is willing to face unpopularity in pursuit of radical reform. Reforms are always watered down to satisfy all sides within each ruling

party and across parties, as will no doubt happen with the Land Bill. The Modi government is young with only one year gone and four or nine to come. It has the time to take risks and make deep reforms. The question is: Does it have the stomach for radical reform?

The author is a prominent economist and Labour peer

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