Situating Modinomics

What is Modinomics? Classical, neo-classical, monetarist, supply sider, demand sider, Austrian? An analysis based on different economic theories.

The 2014 verdict was understandably an endorsement of both the Hindu political right and the economic right as much as rejection of rampant crony socialism under the UPA. Expectedly, there was anticipation that Prime Minister Modi would summarily put in place the reform measures to stimulate the mired economic growth. Barring perhaps P.V. Narasimha Rao (circumstance-motivated) and A.B. Vajpayee (in part ideologically driven), no other Indian Prime Minister has been identified with the economic right as much as Modi.

Intriguingly, the bequest of past governments is defined by the scale of State involvement in the economy rather than the measure of State withdrawal. Implied in the verdict of 2014 was an increasing space for supply siders in the policy machinery. However, economic gestures originating from the government in the last 12 months perplex and mystify both friends and critics alike. Incontestably, the direction of reforms is unambiguous, yet the relatively leisurely tempo seems annoying. What is unanswered is this question: Can “Modinomics” be slotted in any particular economic school of thought?

The Various Economic Schools Of Thought

Both Classicalists and Marxists were fixated with production. The essential divergence was the role and ownership of capital, which Marxians prophesied would swing decisively towards the proletariat. Moreover, Marxian philosophy underscored Luddite thinking of technological threats to the status quo. Neo-classicalists underlined human behaviour, stressing on utility and profit maximization, the key assumption being “rational agent”, later challenged by behaviouralists.

The inability of classical models to explain the Great Depression resulted in the rise of Keynesian models, thus macroeconomics. Keynesians, though favouring both monetary and fiscal interventions to increase aggregate demand, over time became recognized as fiscal interventionists. The monetarists of the Chicago school opposed government and central bank intervention in the economy, but favoured the latter undertaking inflation targeting. Reaganomics stressed supply side approaches underlining increases in aggregate supply through easing regulatory procedures, besides resorting to marginal tax cuts. Margaret Thatcher was Hayekian, declaring his works to be the guiding belief of her economics.

In brief, Keynesians, demand siders, Marxians and their variants offer preferentiality to bigger State involvement, more government and centralized economic decision making; while classicalists, neo-classicalists, monetarists, Austrians and supply siders support less and less government, though disagree on the extent of scrutiny.

Policy preferences manifest either in the form of expression of intent (stated preference) and corresponding actions (revealed preference). The gap between the two points out inconsistencies, and can help us in positioning Modinomics.

Modi’s Policies

Modi’s campaign mantra of “Minimum Government, Maximum Governance” cheers up the Austrians, classicalists, neo-classicalists, monetarists and supply siders. Ease of business through regulatory changes is a pillar of supply side economics. But, unequivocal direction not-withstanding, they are unlikely to be content with perceptible sluggishness in execution.

Abolition of wealth tax, cutbacks in corporate tax rate over a five-year period (tempting autonomous investment in the interim), possibility of lower personal taxes, introduction of a single Goods and Service Tax (GST) substituting superfluity of central, state and local taxes acknowledge the ensconcing of supply side economics in the policy apparatus.

Modinomics however is not doctrinaire. Recognizing clearly that private investment has a lag, both the General Budget and the Railway Budget make an allowance for enhancing public investment on infrastructure. In the Budget debate in Parliament, Finance Minister Arun Jaitley indicated public investment to be a precursor to a growing role for public-private partnership in revitalizing the investment cycle. Ironically, this demonstrates an affirmation of the Keynesian treatment to revive economic growth at least in the short run. Nehruvian India too depended on public investment to build industries, albeit in a very different state of affairs. Though it may be a passing phase, this demonstrates the Modi government’s readiness to intervene in the economy.

Make in India attempts to increase aggregate supply. Rather than increase government expenditure to raise aggregate demand, it endeavours to draw in private investment to produce consumption goods either subsumed by amplifying domestic demand or overseas demand through increasing exports. This emulates the Chinese plan from the 1980s onwards, though on the whole, Chinese domestic demand was incidental to the process.

Clamour for rate cuts to augment availability for credit both for investment and consumption echo demand side economics.

In contrast, formalizing the role of the RBI in inflation targeting is a monetarist remedy. In absence of increasing aggregate supply, however, inflation targeting might counteract possible economic growth.

Swachch Bharat, a measure for preventive healthcare, reveals a spotlight on the supply side. Ending the monopoly of Employee State Insurance (ESI) and Employee Provident Fund (EPF) and the introduction of a surfeit of social security schemes from Jan Dhan Yojana to insurance schemes, apart from creation of MUDRA Bank for small and medium enterprises, all point to a slow but steady replacement of the socialistic economic system with market models. Direct Benefit Transfers also reinforce the market course of the economic policies.

Yet, somewhere, there is a growing perception of a disinclination to cede space to the private domain in quite a few social sectors. Post colonialism, the newly liberated predominantly agrarian or primary sector-driven countries looked towards brisk industrialization to ascend the tree of affluence. More than a few developmental economists made a career out of advising how substantial public investment in heavy industries, accompanied by availability of surplus agrarian labour, achieves these objectives.

The source of inspiration was the Soviet Union where prima facie, mass industrialization occurred with “successful employment” of “surplus” agrarian labour.

In all fairness, they did not have the benefit of hindsight. Replication of Soviet models in varying degrees thus became the norm. MNREGA, supposedly helping surplus agrarian labour find work in the lean season, and the current Finance Minister underscoring the role of private sector expansion to absorb this surplus workforce, draw attention to the failure of these policies. While investment in physical capital to absorb agrarian labour originates in the developmental school, Skill India, aiming to bridge the talent and skill gap which needs to be overcome to make a successful transition, is rooted in the Chicago school, and the Beckerian models in particular.

The Land Bill too finds validation in developmental schools, contrary to the perception of it being entrenched in market economics. While definitely an improvement over the UPA version, it is a far cry from even remotely attempting to decontrol land markets. Neither do we see any signs of restoration of the Right to Property as a fundamental right. The Mines Bill and the coal auctions, backed by strong legislation, trace their roots to Coasean economics.

The abolition of the Planning Commission and replacing it with the NITI Aayog, establishes the explicit shift from centralized socialist economics to decentralized free market economics. However, the issue of withdrawal of government from public sector enterprises has left much to be desired. The articulated aim to revive rather than privatize or shut down indicate that the government is in no hurry to exit business space. Further, the progress on the ground has been slow despite ambitious targets on paper. The seriousness of intent will be demonstrated as the fiscal year progresses and will test the political nature of the reform bargain. Subsidies barring petroleum too remain impervious to reforms.

Shades Of Grey

Any attempt to situate Modinomics reveals it to be in differing shades of grey. To paraphrase the late Singapore supremo Lee Kuan Yew, economic policies cannot be a prisoner to theory. Pragmatism aligns economic policy to favourable political outcomes. Past experiences do not assure electorally favourable outcomes in many instances, be it 1996 or 2004. It would therefore be pointless in trying to pigeonhole Modinomics into a single stream of economic thought.

Our table is an attempt to locate the economic policy measures under different ideological schools.

This article is part of our special series on Modi government’s first anniversary in power.

Narendra Modi has started a process of shifting Indian political economic thought towards the right. Nonetheless, there may not be a Thatcher’s Hayek moment in the House of Commons or Nehruvian declaration on socialism in the Avadi session of the Congress in 1955. In a long arduous journey, it would be unfair to expect early outcomes. What is likely, however, is that the journey might culminate perhaps at a near-distant horizon, and an Indian Prime Minister might generate sufficient political consensus to remove “socialist” from the preamble of Indian constitution. That moment would finally disenthrall India from the Nehru-Gandhi brand of crony socialism.

The author teaches economics at a leading business school. His area of interest lies in dissecting resource contestations and human behaviour at the intersections of digitization, urbanization and globalization.