Modi doing well with one arm tied

I wrote this for the East Asia Forum a couple of months ago but ultimately withdrew it because I felt like a was responding to nothing. I couldn't quite get a handle on what the Indians were thinking viz. reforms and didn't want to put my foot it in. I've decided to post it here mostly just so the work doesn't go to waste and because I dump everything I write here. 

A recent flurry of commentary assesses whether the Modi government is pursuing long-term structural adjustment without paying adequate attention to short-term pain. A strong focus in this discussion is on demonetisation and the new GST. These reforms have admittedly been underwhelming, with the GST so emasculated by political horse-trading as to be barely more efficient than the taxes it replaced, and demonetisation seemingly kneecapping GDP growth.

But the debate has also at times been guilty of using these two items to suggest that Modi’s overall reform scorecard is poor, and that reform in general should be shelved. These are both dangerous notions. Modi’s government has done remarkably well given it faces uncooperative states and upper house politicians, and his reform agenda is something India desperately needs. 

The most important structural reforms for India are in the areas of land and labour. The current regulatory environment across these domains keeps the economy locked up. Labour regulations make hiring risky through strong controls on retrenchment, limiting industrialisation and job creation. And complex land laws make it hard to purchase room for upscaling and impede the emergence of industrial parks, which would provide agglomeration benefits.

The end result is an excessive allocation of labour to subsistence agricuture and capital to services like IT. These allocations do not reflect India’s immediate comparative advantage as an upper low-income country, which is in manufacturing.

There is little progress on these and other longstanding issues at present, and so some claim that the government is not actually reformist. Manmohan Singh recently described Modi as all talk and no action, for instance.

But the slow pace is not for lack of trying. One of the very first reforms attempted by the Modi government was to land laws. The blunt style of the reform backfired. Every opposition party and even some of the BJP’s allies found it more politically profitable to spread simplistic, populist messages than to work toward a fairer and more sophisticated version of what was an otherwise necessary reform.

With the Rajya Sabha outside of BJP control, the reform failed. And as the political calculus has not changed since, Modi has not attempted to push much else through the upper house.

But where the government does not require upper house ascent, Modi is active. The most obvious example is his energetic foreign policy. Modi has personally speerheaded the revitalisation of Indian diplomacy. The Make in India campaign in particular has yielded substantial economic benefits despite being little more than a marketing campaign.

Infrastructure is another area where the government has a relatively free hand, and progress is solid. Year on year growth in infrastructure activities was strong from 2016–2017, and India jumped 19 places in the World Bank’s Logistics Performance Index in 2016 to rank 35 out of 190 countries.

Demonetisation too is an example of reform enacted in part because it was possible to prosecute without parliamentary or state involvement, being largely the purview of the RBI. Many commentators have questioned the government’s prioritisation of this reform over more pressing concerns, but they perhaps overlook that there is little else the government can actually do.

Modi has also attempted administrative reform and to improve government processes. Arguably, progress here is also slow. While India climbed 12 places in the World Bank’s ease of doing business rankings after Modi’s first year in office, it only managed a single place higher after his second and is badly placed overall at 130 out of 160 countries. 

Yet it is the state governments who are dragging their feet here. The federal government provided guidelines to states for nationwide procedural reforms back in 2015, such as moving all paperwork to electronic single clearance windows, as well as incentives and technical support for states to enact these changes. India’s constitution gives the federal government power to do little more than that to bring about change at the state level. Yet more than half the states have implemented less than 10 per cent of the proposed reforms.  

Suman Bery recently noted that an important change wrought by the Modi administration is cultural: the government has brought jobs and growth to the centre of the political discourse, which was previously dominated by social justice. The message is slowly getting through that populist social justice policies are actually anti-poor, and that structural reform is more important now than redistribution. The danger is that the government is tying it’s own noose. It has created demand for reforms without the power to prosecute them.

A successful campaign of deep reforms will require an amenable Rajya Sabha. The prospects for this are not bright. State legislatures elect members to the upper house, and the BJP recently won several major state elections handsomely. But as Arun Swamy notes, even in the best case scenario, the BJP will always need to recruit many unaligned parties and buy-off internal dissent in order to pass big-ticket legislation, and this will inevitably give rise to populist posturing and destructive horse trading.

In the meantime, opposition parties are trying to wedge the government. They are limiting its ability to prosecute good reforms while claiming that it is not moving fast enough, and they criticise the reforms it can and does get done for being of low priority. Observers frustrated by the slow-pace of structural reform need to see through this ruse.

EDIT: India shot up more than 30 places in the ease of doing business rankings this year to be within the top 100 (and among the top 10 reformers). However, some have suggested this is the result of measurement error as the data were only collected in a few cities, notably Mumbai, the business capital.