ModiNomics is an informally coined term describing PM Modi's approach toward Indian economy. In this blog series, I intend to explain how I view Modi's economics as an approach tailored for India and something that seems to be working.
Treatment to any country's economy has to be one that is designed specifically for that country. And Modi seems to be doing just that. Would his approach be right for India? Only time will tell. PM Modi is surely having his share of challenges in elevating Indian economy at a macro-level (and policies like Demonetization, GST have disrupted the status-quo, but disruptions can be progressive too). And Modi will have to take some serious steps to boost the macro economy. But at the micro level, ModiNomics seems to be working and bringing in systemic changes to India's economy and preparing it for an accelerated growth.
To understand how India stands to benefit with ModiNomics, lets see how Indian economy has fared since independence. In this first part of the ModiNomics series, I attempt to summarize its course from 1947 to 1991 (until before P.V. Narshimha Rao took charge).
The Nehruvian economy (1947 - 1966):
After India became independent, PM Nehru had a herculean task of fixing many things, and economy was one of them. Nehru steered an independent India to become a democracy that was socialist in nature and was to have a controlled & planned economy.
Nehru set up a democratic constitution inspired from the US and the UK. The socialism-heavy economic structure was inspired by a mix of moderate socialism in democratic western Europe and severe socialism in the Communist USSR (Nehru thankfully steered clear from communism). In Nehru's thought, socialism had become inseparable from democracy. He wanted to attempt a planned industrialization within a democratic framework. So he borrowed the planned economy aspect from the Soviet Union (planned industrialization, planning commissions, 5-year plans, other administrative structures and high government control), but decided to execute it in a democratic setup.
The private industry had established a formidable independent economic base in 1947 (trade, banking, insurance, mining). Rather than leveraging that to its best, Nehru planned on making Public Sector Units as the key burden-bearers of his planned industrialization (with severe control of the state over their operations). He favored PSUs being in charge for heavy and capital goods industry. He also pushed for nationalization of stable sectors (transfer of ownership from private companies to PSUs) instead of letting private players grow. His restrictive polices (e.g. license-raj) made it difficult for private companies to remain viable. This deprived Indian economy of the crucial contribution the private sector could have made to propel it further.
This setup came to be known as Nehruvian Socialism. It was a structure which India, a nation that was broken, poor, illiterate and had inherited ruined agriculture and industry - could use as a pedestal to kick off its economy. But persisting this structure beyond first decade turned out to be very non-progressive for the nation. In the years to come, the role of the productive, efficient, competitive and progressive private sector was set to diminish and that of the inefficient, low-productivity, public sector was set to grow.
Indira Years (1966 - 1984):
Indira's first term as a PM coincided with the first wave of globalization (late 60's). The western democracies began investing in Asian countries. Those who welcomed foreign investment with open arms flourished. Indira tried her luck too. The US, World Bank and IMF wanted India to liberalize her trade, industrial controls and devalue her currency. Indira accepted these demands as well. But the continued recession, inflation, low exports and a major drought made her abandon this path without waiting for its long term gains to realize. Turned back to "economic nationalism", through the 70's and early 80's she pushed industrialization, but also made policies that obstructed it: protectionism, high duty on imports, control over private sector's produce, monopoly of PSUs, etc. Nationalization (banks, insurance, coal) was encouraged further. Acts like MRTP, FERA made it difficult for large private businesses to operate and put numerous restrictions on foreign countries to invest and operate in India. This prevented economies of scale and technological advances. Moreover stiff labor laws disallowed inefficient, loss-making companies to shut shops.
India remained non-competitive and technologically backward. Internally too, competition was killed, PSUs were let to run more inefficiently and non-productively. The first cautious attempt to reforms was made by Indira only in 1982 ('Operation Forward'). Indira somehow overlooked China's course-correction under Deng Xiaoping's leadership. The coalition with Left parties did push her to give up economic reforms, but the fact remained - India had pursued the wrongly chosen economic path even further.
Post-Indira period of 1984-91:
The Rajiv years (1984-89), saw economy doing marginally better for a brief period but was in trouble for most of the part. Rajiv failed to be the modernizer he wanted to be. The late 80's saw growth in Services, Advertising, FMCG, Stock market. Telecommunications did take off. Rajiv traded cautiously and stayed away from dismantling his mother's weak industrial policies. His piecemeal attempts of reforms (industrial deregulation, exchange rate flexibility, partial lifting of import controls), and lack of reforms of financial and labor markets did not yield results. And he abandoned them shortly after because of an upcoming political crisis.
In the meanwhile the USSR was breaking down as a country and its socialist economic model was failing. India, however failed to pick up the signals and stuck to severe socialism.
The two years that followed Rajiv Gandhi's term (1989-91) were fraught with political turmoil and instability imposing two weak PMs on India - V.P. Singh and Chandrasekhar. Economy and reforms went into a complete slumber.
Overall Journey:
The Nehru & Indira years resulted in curbed economic growth and neglect for reforms. Nationalization, Protectionism, non-conducive environment for large private corporations, license-raj, import-substitution-industrialization (ISI), inflexible labor laws, unionization, strikes, government's control over what to produce & how much to produce & how much to sell for - all this made it challenging for industry and jobs to grow. This further convinced the government to continue being the primary job creator instead of a facilitator. It continued creating fat and financially non-viable administrations, PSUs - creating within them unnecessary levels of decision-making. The country remained poor leaving its citizens at the mercy of subsidies and freebies. Indian economic foundation needed a surgery.
In the 1985-90 period, India did see higher (5.5% GDP) growth. However this growth was misleading and unsustainable as it was a trigger from over-borrowing and over-spending. It eventually led to mounting of debt and a subsequent crash in 1991.
Overall, the pre-1991 journey of economy pushed India deeper into financial debts and international borrowings, and economic reforms took a backseat. India's Forex reserves fell from $5.85 billion in 1980-81 to $4 billion in 1989-90 to less than $1 Billion (just enough to run the country for 3 weeks) in July 1991, when P.V. Narsimha Rao had taken charge. A radical course correction was needed as we entered into the 90's. And the new PM, P.V. Narsimha Rao took this matter very seriously.
I will cover this in my next article. Stay tuned.
Authored by: Mandar Garge (June 22, 2019)
Treatment to any country's economy has to be one that is designed specifically for that country. And Modi seems to be doing just that. Would his approach be right for India? Only time will tell. PM Modi is surely having his share of challenges in elevating Indian economy at a macro-level (and policies like Demonetization, GST have disrupted the status-quo, but disruptions can be progressive too). And Modi will have to take some serious steps to boost the macro economy. But at the micro level, ModiNomics seems to be working and bringing in systemic changes to India's economy and preparing it for an accelerated growth.
To understand how India stands to benefit with ModiNomics, lets see how Indian economy has fared since independence. In this first part of the ModiNomics series, I attempt to summarize its course from 1947 to 1991 (until before P.V. Narshimha Rao took charge).
The Nehruvian economy (1947 - 1966):
After India became independent, PM Nehru had a herculean task of fixing many things, and economy was one of them. Nehru steered an independent India to become a democracy that was socialist in nature and was to have a controlled & planned economy.
Nehru set up a democratic constitution inspired from the US and the UK. The socialism-heavy economic structure was inspired by a mix of moderate socialism in democratic western Europe and severe socialism in the Communist USSR (Nehru thankfully steered clear from communism). In Nehru's thought, socialism had become inseparable from democracy. He wanted to attempt a planned industrialization within a democratic framework. So he borrowed the planned economy aspect from the Soviet Union (planned industrialization, planning commissions, 5-year plans, other administrative structures and high government control), but decided to execute it in a democratic setup.
The private industry had established a formidable independent economic base in 1947 (trade, banking, insurance, mining). Rather than leveraging that to its best, Nehru planned on making Public Sector Units as the key burden-bearers of his planned industrialization (with severe control of the state over their operations). He favored PSUs being in charge for heavy and capital goods industry. He also pushed for nationalization of stable sectors (transfer of ownership from private companies to PSUs) instead of letting private players grow. His restrictive polices (e.g. license-raj) made it difficult for private companies to remain viable. This deprived Indian economy of the crucial contribution the private sector could have made to propel it further.
This setup came to be known as Nehruvian Socialism. It was a structure which India, a nation that was broken, poor, illiterate and had inherited ruined agriculture and industry - could use as a pedestal to kick off its economy. But persisting this structure beyond first decade turned out to be very non-progressive for the nation. In the years to come, the role of the productive, efficient, competitive and progressive private sector was set to diminish and that of the inefficient, low-productivity, public sector was set to grow.
Indira Years (1966 - 1984):
Indira's first term as a PM coincided with the first wave of globalization (late 60's). The western democracies began investing in Asian countries. Those who welcomed foreign investment with open arms flourished. Indira tried her luck too. The US, World Bank and IMF wanted India to liberalize her trade, industrial controls and devalue her currency. Indira accepted these demands as well. But the continued recession, inflation, low exports and a major drought made her abandon this path without waiting for its long term gains to realize. Turned back to "economic nationalism", through the 70's and early 80's she pushed industrialization, but also made policies that obstructed it: protectionism, high duty on imports, control over private sector's produce, monopoly of PSUs, etc. Nationalization (banks, insurance, coal) was encouraged further. Acts like MRTP, FERA made it difficult for large private businesses to operate and put numerous restrictions on foreign countries to invest and operate in India. This prevented economies of scale and technological advances. Moreover stiff labor laws disallowed inefficient, loss-making companies to shut shops.
India remained non-competitive and technologically backward. Internally too, competition was killed, PSUs were let to run more inefficiently and non-productively. The first cautious attempt to reforms was made by Indira only in 1982 ('Operation Forward'). Indira somehow overlooked China's course-correction under Deng Xiaoping's leadership. The coalition with Left parties did push her to give up economic reforms, but the fact remained - India had pursued the wrongly chosen economic path even further.
Post-Indira period of 1984-91:
The Rajiv years (1984-89), saw economy doing marginally better for a brief period but was in trouble for most of the part. Rajiv failed to be the modernizer he wanted to be. The late 80's saw growth in Services, Advertising, FMCG, Stock market. Telecommunications did take off. Rajiv traded cautiously and stayed away from dismantling his mother's weak industrial policies. His piecemeal attempts of reforms (industrial deregulation, exchange rate flexibility, partial lifting of import controls), and lack of reforms of financial and labor markets did not yield results. And he abandoned them shortly after because of an upcoming political crisis.
In the meanwhile the USSR was breaking down as a country and its socialist economic model was failing. India, however failed to pick up the signals and stuck to severe socialism.
The two years that followed Rajiv Gandhi's term (1989-91) were fraught with political turmoil and instability imposing two weak PMs on India - V.P. Singh and Chandrasekhar. Economy and reforms went into a complete slumber.
Overall Journey:
The Nehru & Indira years resulted in curbed economic growth and neglect for reforms. Nationalization, Protectionism, non-conducive environment for large private corporations, license-raj, import-substitution-industrialization (ISI), inflexible labor laws, unionization, strikes, government's control over what to produce & how much to produce & how much to sell for - all this made it challenging for industry and jobs to grow. This further convinced the government to continue being the primary job creator instead of a facilitator. It continued creating fat and financially non-viable administrations, PSUs - creating within them unnecessary levels of decision-making. The country remained poor leaving its citizens at the mercy of subsidies and freebies. Indian economic foundation needed a surgery.
In the 1985-90 period, India did see higher (5.5% GDP) growth. However this growth was misleading and unsustainable as it was a trigger from over-borrowing and over-spending. It eventually led to mounting of debt and a subsequent crash in 1991.
Overall, the pre-1991 journey of economy pushed India deeper into financial debts and international borrowings, and economic reforms took a backseat. India's Forex reserves fell from $5.85 billion in 1980-81 to $4 billion in 1989-90 to less than $1 Billion (just enough to run the country for 3 weeks) in July 1991, when P.V. Narsimha Rao had taken charge. A radical course correction was needed as we entered into the 90's. And the new PM, P.V. Narsimha Rao took this matter very seriously.
I will cover this in my next article. Stay tuned.
Authored by: Mandar Garge (June 22, 2019)