What should Narendra Modi do now and why?

The government has, even if it has not articulated it well, identified the right buttons that need to be pushed—
either by design or by accident. More is needed

Livemint, V. Anantha Nageswaran, March 14, 2017

Politics always trumps economics. The election results announced on 11 March drowned out the preliminary
macro-economic assessment of the demonetisation/note-ban/currency swap exercise carried out since 8
November 2016 that the Reserve Bank of India (RBI) had released on 10 March. It reminded us that India’s
economic growth had begun to fade even before 8 November happened. That was a good reminder for the
government.

Late Monday night, a friend wrote that the time was now ripe for the next new big idea. I am not so sure. Frankly,
this government has, even if it has not articulated it well, identified the right buttons that need to be pushed—
either by design or by accident. The list below consists of good “plumbing” goals. More is needed. That is what
Gulzar Natarajan and I wrote in our joint work, Can India grow?

• Macro-economic stability at the cost of economic growth.

• Swachh Bharat.

• Sanitation—women and girl children access to toilets.

• 24x7 electricity

• Women’s living conditions—LPG connections

• Railways—an important touch point in millions of lives every day—make it work better for them.

• Goods and services tax—a legacy project no doubt. but it hopes to make scale a reality in India by eventually
creating a single market. Can the Indian private sector really create scale? That is a big question.

• Removing obsolete laws from statutes.

• Federalism—right now, it has been mostly fiscal devolution to the next level. Local governments? But, fiscal
devolution to states is a reality.

• Make in India—it is impossible to create jobs for millions without manufacturing share of gross domestic
product (GDP) at least being 20%—light manufacturing is necessary.

• MUDRA Bank—90% of enterprises are self-employed single-person enterprises in the country. If their
employment and productivity double from the abysmally low levels, it will make a huge difference—no matter if
they still remain tiny but a little less tiny than before.

• Start-up India—Rafael La Porta and Andrei Shleifer suggest that educated entrepreneurs are the answer to
reducing pervasive informality and the associated inefficiency.

• Urbanisation—smart cities project.

• Foreign policy—changing the image that the world had of the Prime Minister and getting foreign direct
investment growing.
In many of these things, Prime Minister Narendra Modi has attempted to force the pace of change by going for a
discontinuous jump. Bullet train is a technological leap in railways. Smart cities is a leap in urbanisation.

These “trophy” or “iconic” projects are a bit like creating islands of excellence—export-processing zone or special
economic zone or IITs (Indian Institutes of Technology) and IIMs (Indian Institutes of Management)—and hoping
that they diffuse.

Of course, it is a tactic that has been tried before but the diffusion exactly did not happen. So, why should it be
different now? That is where we identify the failings of this government.

If “plumbing” is the vision, the prime minister should coin a catchy slogan, talk about it, harp on it, obsess about
it, measure it and hold himself and his government accountable to it. For example, the prime minister should end
every speech with a message about Swachh Bharat. That has not happened.

The second failing is that, if plumbing is the vision, one needs a government machinery that works. Of course, it
is a land mine. If one could withdraw 86% (by value) of the currency notes in circulation in one stroke, one can
surely do governance reforms. But, one could have at least set a far better example than he did, with just two
“Super Ministries”. A much more corporate-style accountability at the cabinet level might have percolated down
at least to some civil servants, some ministries, some departments and some states. That has not happened. Some
cosmetic changes have happened (punctuality, cleanliness in government offices in Delhi) but not substantive
enough to make a difference yet, to outcomes.

The third failing is in the vast under-appreciation of the mess that the United Progressive Alliance (UPA)
government had left behind, including in banks. Back in January 2002, in a speech, Dr Y.V. Reddy had pointed
out the special risks in lending to infrastructure projects and to manufacturing sectors that face international
competition. Evidently, public sector banks (PSBs) did not listen. Their huge non-performing assets have
paralysed them and their borrowers too.

Even in the note-ban or note-swap exercise, PSBs might have played a role in partially defeating the government’s
goals. The RBI report mentioned earlier notes that Pradhan Mantri Jan Dhan Yojana (PMJDY) deposits jumped
inordinately excessively after 8 November. They were Rs456 billion as of 9 November. They went up to as high
as Rs746 billion as of 7 December. They had moderated to Rs643 billion as of 1 March.

But PSBs had shown the highest aggregate growth in PMJDY deposit amounts. Regional rural banks (RRB) too
had high growth in PMJDY deposits. To an extent, they are both part of the “extended government joint family”.
Their PMJDY deposits had grown from Rs440 billion to Rs620 billion—a little over 40%. So, if PMJDY deposits
were used for laundering money, it appears that PSBs have a bigger blame to bear than others.

That the government had not used the NPA (non-performing asset) crisis to commence restructuring of Indian
banking—a socialist relic of the Congress—at least partially is a disappointment.

The fourth failing is that, lately and increasingly, the government has resorted to exclusivist ideology and slogans.
It is certainly not wrong to be pro-poor, pro-Dalit and pro-backward but it is wrong to let them degenerate into
anti-others. Addressing India’s problems requires class-less inclusive pragmatism.

The fifth and final failing is the perpetuation of personality cult that dilutes the message of systemic change and
weakens the system’s capability to make decisions.

V. Anantha Nageswaran is the co-author of Economics of Derivatives and Can India Grow?