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The political economy of Narendra Modi’s victory

LiveMint logoLiveMint 22-05-2014 Manas Chakravarty

The triumph of the Bharatiya Janata Party’s (BJP’s) Narendra Modi in the general election and the scale of his victory mark a decisive shift in power to the political right. For the first time, the right-wing has the power to push its policies through. For the first time, the Indian people have voted unabashedly for capitalism.

Of course, the United Progressive Alliance (UPA) government could hardly be described as socialist. But the debacle of the BJP-led National Democratic Alliance’s (NDA’s) “India Shining” campaign in 2004 had led to the belief that the only way to stay in power was to ensure a steady stream of sops for the masses. Economic development in any country is far from being a smooth process. Peasants have to be converted into workers, a surplus has to be generated, capital has to be accumulated. A new economy has to be built on the ruins of the old. The destruction may be labelled “creative” à la Schumpeter, but it is nevertheless destruction. It is no wonder then that such a transformation in developing countries has usually occurred under authoritarian regimes or under conditions where democracy was severely limited and the scope of protest curtailed. Under democracy, the masses are unlikely to be content with trickle-down. That is why the UPA government went in for subsidies and entitlements. The system worked very well during the boom years but as soon as growth slowed after the financial crisis, the contradiction between the accumulation necessary for development and social welfare came out in the open. The resulting high inflation on the one hand and the lack of jobs for the huge numbers of young workers joining the workforce on the other made for an explosive situation waiting to be exploited. It left the door open for a charismatic leader like Modi to mobilize the masses on the plank of development.

One of the reasons he has been able to do so is because the old rural society is dying a slow and painful death. Sons no longer want to work on their ever-diminishing fragments of family land. Education, improved communications, migration, higher purchasing power have all led to increased dissatisfaction and a desire for a better, preferably urban, life. The peasantry in India is being converted, not into a proletariat, but into unskilled or low-skilled labour eking out an existence in the slums. They form the seedy underbelly of Indian capitalism, but it is, nonetheless, capitalism, with all the changes in attitudes that it entails.

Now that the elections are behind us, two questions raise themselves. One is the short-term one of how to get the cyclical recovery going. The other and much more interesting one is whether Modi will usher in the structural reforms that will transform India into a modern capitalist nation.

The first one is relatively easy. Much of the Indian private sector, especially in the infrastructure segment, is neck-deep in debt and has no appetite for investment. The public-private partnership model lies in tatters. The way out of the mess is twofold: one is of course to get the stalled projects off the ground by coordinating with the states; the second is for the government to invest in infrastructure. It can find the resources to do so either by freezing or curtailing the welfare schemes or by disinvesting its stake in the public sector. Increasing tax rebates for housing could help boost construction. At the same time, it would be necessary to keep the fiscal consolidation going, if interest rates are to be reduced. Again, disinvestment is the obvious way out, particularly as the stock markets are likely to be supportive of the new government. Tackling the inspector raj, removing red tape and quick clearances are other obvious areas in which the new government can work speedily. The cyclical bounce need not raise inflation, simply because there is much spare capacity in industry.

Long-run structural change, however, will be far more difficult. BJP-ruled states such as Chhattisgarh have been firm believers in subsidies and sops. An increase in administered prices for cooking gas and electricity, for example, is not going to be popular although it is essential. Major tweaking will have to be done if the land acquisition policy is not to be a fetter on capital accumulation. Far more important, though, is the wholesale transformation that will have to be made in manufacturing. If young people joining the workforce are to find productive jobs, we will need a big expansion of the manufacturing sector. So far, people leaving the farms find work in the low-productivity construction sector, or in low-productivity jobs in the unorganized sector. For productivity to rise, they will have to be absorbed into manufacturing. There are numerous studies that have been done on the ways to effect this structural transformation. The problem is to implement them.

The issue is primarily political, because the Indian manufacturing sector is a hotchpotch of measures designed to protect petty producers as well as labour. Modi will need to hack through this thicket of regulations if he is to build a modern manufacturing sector and the process is likely to be hugely disruptive.

It is here that the election results present a great opportunity. Modi is known to be a decisive leader and his critics have called him authoritarian. From the point of view of ensuring rapid economic growth, that may not be a bad thing, as East Asian examples show. His massive victory puts him in a position to impose his will not only on his opponents, but on recalcitrant elements within his party. He has the full backing of the corporate sector and of international capital. And there are five full years left before the next election—in at least three of them he can go ahead with reforms without being unduly perturbed about its short-term effects.

Many commentators have compared Modi to Margaret Thatcher. Recall that Thatcher not only took on the labour unions but also the establishment in her own party. Also, her bold reforms had an adverse impact on the British economy initially, but paved the way for long-term growth. As for the markets, during Thatcher’s three consecutive terms in office, between 1979 and 1990, the FTSE All Share index went up by a cumulative 263%.

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