R jagannathan FP 12 Feb 14
If the next election is going to be decided on the basis of what’s happening in the economy – and right now, the economy is heading for the reefs – then the most important question to ask is: who will be the economic doctors called in to assist after May? Who will have a decisive influence on economic policy in the next administration?
The next government is likely to be one of these three: a BJP-led coalition government headed by Narendra Modi (most probable, based on current opinion polls), a Third Front backed by the Congress (next possibility), and UPA-3 (least likely).
There is no need to discuss the latter two in terms of economic policy since we know what UPA-3 will be about (it will be like UPA-1), and we can never know what a Third Front really is till it comes to be. The only possibility worth speculating on is Modinomics – and who will influence it.
The key people who are already said to be providing some level of policy inputs to BJP politicians are Arvind Panagariya of Columbia University, Rajiv Kumar of the Centre for Policy Research, Surjit Bhalla of Oxus Investments, Ramgopal Agarwala of Research and Information System for Developing Countries (RIS). Bibek Debroy is another economist being mentioned as a possible influencer, but this is largely based on the book he wrote on the Gujarat model. But three members from the BJP are said to have been in touch with Debroy on economy ideas for Modinomics.
Modi’s initial vision statement, made at the party’s last national executive meeting on 19 January, has been skimpy on detail and focused on the big picture. The big picture on Modinomics is that his government will be less enthusiastic about doles, and more interested in growth and investment. Though he did talk about offering reliefs in income-tax to the middle class, jobs to at least one member in each family, some kind of universal healthcare, and price stabilisation sops to farmers, these promises are vague enough to mean nothing and everything. Chances are the costs of these promises can be kept pretty low.
The big ideas that are right up Modi’s street, and hence more likely to be implemented if he comes to power, relate to reviving investment in manufacturing, infrastructure, and urban areas. While his talk of creating 100 new cities and bullet trains to all major metros needs to be discounted – they could happen, but will take at least a decade to materialise – the point is clear: his administration will be about reviving investment to revive growth.
If the themesong of the UPA government has been to redistribute taxpayer revenues in favour of the poor and the alleged poor, the motto of a Modi government will be to drive investment into factories and urban agglomerations through public-private partnerships and business-friendly policies. His stint in Gujarat provides us ample reason to believe this is the way he will go.
So who will be his key advisors?
On the international plane, Professors Jagdish Bhagwati, a free trade champion, and Arvind Panagariya, of Columbia University have been early champions of Modi’s Gujarat model of development. They could play a big advisory role in any new Modi government. The Economic Times today in fact says that Panagariya is being drafted to help out with the party’s economic manifesto.
Bibek Debroy, another free-market economist who has written a book on the Gujarat economy, may also be involved in some aspects of policy under a new government. Surjit Bhalla, Chairman of Oxus Investments, has been busy rubbishing the UPA’s economics and also the Aam Aadmi Party’s rise, and he too could be someone Modi’s ministers will listen to. Bhalla has made a presentation to Murli Manohar Joshi, chief of the BJP manifesto committee, but declined to share details. It is not clear how Bhalla’s free-market economics will be digested together with Joshi’s Swadeshi instincts – but his ideas are there for use.
According to sources contacted by Firstbiz, Bhalla’s presentation to Joshi touched on the issue of inflation, low growth, the negative fallout of excessive welfare policies, employment, procurement prices, rupee, etc. He apparently gave his usual right-wing, free market point of view on all these issues. Joshi is said to have listened carefully, demurring only on issues relating to flexible labour laws.
Modinomics will have a broad and sweeping impact on several sectors for the simple reason that it focuses on revving up the growth engines by boosting investment. Reuters
A third economist who could also have an impact on BJP economic policy is Rajiv Kumar, a former Ficci chief and currently working with the Centre for Policy Research, who also played a key role in the 1991 reforms. Kumar is said to have made a presentation to Nitin Gadkari, who is in charge of the party’s economic agenda. Together with Ramgopal Agarwala of Research and Information System for Developing Countries (RIS), Kumar’s ideas may feed into the BJP’s 2050 vision document. This document is expected to be a coherent right-of-centre vision intended to facilitate rapid, but sustainable and inclusive, growth.
The vision document will probably say that India should strive to be the largest economy by 2050 – and has the potential to do so. Kumar’s inputs apparently focussed on giving primacy to growth, employment and skill development. Also health and housing. Urbanisation (smart cities and smart suburbs of existing cities) formed a key part of the thinking. Another piece of advice was to concentrate on enterprise, especially the small and medium sector, as an engine of growth – which means ending the licence raj altogether.
Piyush Goyal, the articulate national treasurer of the BJP and a key stakeholder in the party’s economic policy evolution, is expected to have a ministerial role in a Modi administration. Among old-timers, one cannot rule out the return of Arun Shourie, Telecom Minister under Atal Behari Vajpayee, to the cabinet or in some critical think-tank role. Shourie, who has resurfaced recently in the public domain, has been talking positively about Modi and thus could be a key person to watch after May. His views are also largely free market liberalism. Under Vajpayee he became the only Indian minister to actually privatise any public sector enterprise ever.
Assuming all this comes to be, and all the people who now support Modinomics come to play a part in the next administration either directly or by providing intellectual inputs, who will benefit from it all? Which sectors, which businesses?
Modi’s known interest in technology (IT and telecom) means that he will do nothing to harm these golden geese. But the sectors that will benefit most from his basic growth orientation are manufacturing and infrastructure.
Gujarat is a major player in textiles, and so one can be sure this industry will take off vertically – especially since India plays host to the entire value chain from cotton to yarn to cloth to garments. India’s textiles industry is on the cusp of major glory – and a Modi rise could just trigger this off. Gujarat is also India’s largest oil refining state, and a positive shift towards oil price deregulation – the single biggest cause of UPA’s fiscal deficits - will benefit the public sector and private sector oil sector everywhere.
Infrastructure has been virtually a no-show under UPA-2, and this sector could be the single largest beneficiary from Modi’s expected stimulus for infrastructure and urban growth. It is worth recalling that infrastructure investment took off after Vajpayee kicked off his golden quadrilateral road-building programme. It has helped revive growth and jobs – though the big benefits came later under UPA, when the global economic boom sent growth rates to 9 percent or more.
An infrastructure boom will impact not only the construction, real estate and infrastructure companies, but also cement and steel. And when there is a prospect of these sectors reviving, the banking sector will be the biggest gainer. A key reason why the Sensex is still dilly-dallying around the 21,000-plus mark (as of late January, when this was written) is because the banking sector has loads of bad loans – most of it from these sectors. A infra boom will impact banking stocks as it will make many bad loans less bad or even good. If banking revives, the markets will be over the moon. Banking stocks are really a play on the economy.
It is thus a safe bet that companies in these sectors will be the first to experience a tailwind if the new government is headed by Modi – or even the BJP.
Modinomics will have a broad and sweeping impact on several sectors for the simple reason that it focuses on revving up the growth engines by boosting investment. If the Congress-led UPA revved up the consumption economy (that is, the demand side of the economy) by emphasising doles and subsidies, the Modi economy will pep up the supply side by oiling the rusty investment engine.
This shift in emphasis is critical for an economic revival, and this is why Modinomics – regardless of whether you like the BJP or not – might work better than Sonianomics at this stage.
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