Capitalism with Modi characteristics

The current model may bear similarity to the East Asian one, but it is in fact a new variant - capitalism with Modi characteristics

Those who argue that the economic policies of Prime Minister Narendra Modi are socialist either do not know what socialism is or do not understand what the policies of Modi are. Government spending on schemes to enhance inclusion, and in social sectors like education and health, is very much a part of many successful capitalist economies (think Scandinavia) just as the presence of state-owned companies is not a guarantor of failure in other capitalist economies (think Singapore and China). Capitalism has several variants that have been successful — Anglo-American, North European, East Asian. Unfortunately, several pundits consider only the Anglo-American model as the poster child of capitalism’s success. Modi’s model is not Thatcherite or Reaganesque. While it may bear similarity to the East Asian model, it is in fact a new variant — capitalism with Modi characteristics.

The three most famous characteristics of the Anglo-American model are large-scale privatisation, light-touch regulation, and a minimal social safety net. The absence of these in the Modi model confuses some free marketers. The East Asian model put growth first with the state focusing on infrastructure (both physical and social). Redistribution came later. The North European model managed to combine growth and equity but with unique social contracts in relatively homogenous societies. For too long, India tried to emulate the Soviet Union (which was also the pre-1978 Chinese model). And when it liberalised after 1991, it did so by stealth, without any explicit political conviction or strategic long-term path. 

Narendra Modi’s ‘minimum government, maximum governance’ pledge (widely misunderstood as the Anglo-American model) has a clarity of vision and purpose. Actually, it may have helped if it had been framed as ‘maximum governance, minimum government’. It is different from the other variants of capitalism because it puts equity upfront, both in political rhetoric and in administrative action. At India’s level of per-capita income (around $2,000 only), it would be politically impossible to eschew inclusion as an explicit plank of government policy. Where the Modi model differs from socialism is that he has injected efficiency into the pursuit of equity. He has used the market principles of competition, technological innovation and accountability to deliver, in a targeted manner, public goods and services to the hitherto excluded without leakages and corruption (the most prominent side effects of a statist system). 

The Modi model also has a definitive view of enterprise and its connect with the government. As far as government-owned enterprises are concerned, those which are profitable are not likely to be privatised as long as they are able to compete. However, on loss-making and struggling public sector units a hard budget constraint will be imposed, leading to closure or privatisation. Defining the government’s relationship with private enterprise is more complex. Rampant crony capitalism in the decade before Modi first took office threatened the legitimacy of the whole post-1991 order. And yet, without private enterprise, there is no possibility of high growth and job creation. The Modi model is different from, say China’s, because it is explicitly differentiating between crony capitalists and honest capitalists. There is a distinction between who prospers on inherited wealth and networks of privilege, and those who rise on merit alone. For the latter, a concerted effort is being made to ease the environment of doing business. In a political economy that is still ‘profit shy’, Modi has fashioned the new capitalists as job creators rather than wealth creators. Of course, while the new generation rises, the crony capitalist order needs to be reined in. It is a tough balancing act to replace the old order with a new one without causing disruption to the economy. 

The intellectual discourse on whether India’s economic policies are capitalist or socialist has unsurprisingly put in front the age-old battle between state and markets. The spectrum from capitalism to communism is defined by the relative dominance of markets and the state. The Modi model has an explicit third dimension, possibly the first dimension in his worldview — citizens. In this model, the focus of economic policy is on bringing about a real change in the ‘ease of living’ of the average citizen rather than a conventional focus on the creation of wealth or GDP or size of industry. The state and market must play their respective roles and constantly deliver quality goods and services (public and private) at competitive prices to the citizens of India. On their part, citizens must perform their duties even as they claim their rights. There are no free lunches except for the minority that faces extreme deprivation.

The broad contours of Modi-style capitalism have been drawn out. These will be refined in the next five years. If the market principles of efficiency, competition and merit continue to guide public policy, India may finally have its own model of successful capitalism.
 

The author is chief economist, Vedanta