<b>Mihir S Sharma:</b> Mr Modi brings back the state

The PM's speech shows he hasn't learnt from the statist error that was demonetisation

The strangest part of Prime Minister Narendra Modi’s speech on New Year’s Eve came about half-way in, when he piously invoked the name of certain past leaders he said would approve of his chosen policy path. The names he picked were of Jayaprakash Narayan, Ram Manohar Lohia, and K Kamaraj (and Lal Bahadur Shastri). About the only thing common to the first three men together was opposition to Indira Gandhi. So why was this strange? Because, above all, the leader who Mr Modi appears to be emulating is, of course, Indira Gandhi. And not the chastened post-1980 Indira Gandhi, either. 

The PM’s speech on December 31 was as close to an invocation to old-style statism and class war as we have heard from a PM in this country since Mrs Gandhi’s first tenure. As many have pointed out, widespread support for demonetisation springs largely from the belief that, for once, rich Indians are suffering as much as the poor. Mr Modi, ever the canny politician — like Mrs Gandhi — has chosen to highlight and feed that sentiment. 

The PM is certainly right on the fundamentals: Too few people pay income taxes; and too much of our economy is structured to incentivise dishonesty. But these have been problems for decades; in 1974, Mrs Gandhi made an appeal in Parliament to “ostracise” the dishonest, especially tax evaders and hoarders. In July 1974, The New York Times reported that the Indian government had begun a “vigorous drive” against tax evaders and hoarders. 

Of course, there’s one big change since then: Mr Modi did not speak out (this time, at least) against “hoarders”. In the 1974 raids, stocks of “steel, paper, kerosene, soap, and cigarettes” were also the targets. Now, let’s ask ourselves: Why is it that Mr Modi does not have to worry about hoarded soap? Could it be because Mrs Gandhi’s appeals to be more honest, appeals which Mr Modi repeated just now, had worked? That is unlikely. Could it be because of the efficiency of the state’s inspectors and the accuracy of its raids, the same instrument that Mr Modi intends to rely on now? That is equally unlikely. Could it be, just perhaps, because we no longer have the kind of economy where people need to hold on to stocks of goods – because fundamental, market-driven reform has changed people’s behaviour? Well, yes, of course. 

But this fundamental insight has escaped a government and a prime minister that is intent on repeating mistakes even Mrs Gandhi seemed to eventually learn from. If there is one lesson from demonetisation that the PM should have taken to heart, it is surely this: You can rely on Indians, whether ordinary people or officials, to subvert instructions, however well-meaning. Of course money was laundered. Of course most of the withdrawn cash will come back to the Reserve Bank of India instead of being burned at a great bonfire in Chandni Chowk, adding to Delhi’s pollution. Of course bank managers collaborated with tax evaders. And what is the PM’s reaction to that? To give more power to the official, in expectation that they will be able to root out wrongdoing. Forget about 40 years ago, hasn’t the PM noticed that statism hasn’t worked even in the past 50 days?

I would have thought that, given the economic history of the past decades, this hardly needs saying, but apparently it does: Statist repression does not turn citizens into better people. It teaches them to manage the state. What does help societies and economies work better is inducing better behaviour through well-designed and properly-functioning institutions. For example, if in India direct taxes are to be genuinely reformed, the first step is to remove exemptions and concessions. There are entire reports full of the reforms that need to be carried out to tax administration if over 1.3 per cent of Indians are to be brought into the direct tax net. But, instead, we are apparently going to return to the 1970s. 

Don’t worry, however, the government tells us. There’s a big difference — today we have tech! We will be able to act on data. Sure we will. In fact, there’s so much data out there with the government now, so much of it inconclusive, that income-tax officers will have the equivalent of completely arbitrary power. If you want to remember how raid raj works, do look up the section of the Shah Commission Report that deals with the activity of the finance ministry under the Emergency. If the pattern is repeated, those who have angered the government will find themselves examined by the taxman, while those who support it will not be. And why would the pattern not be repeated? Is that not exactly how the government has behaved when it comes to the Foreign Contribution Regulation Act (FCRA) and NGOs? Those who have angered the highest in the land are investigated and their FCRA clearance revoked; the various dubious organisations associated with the ruling dispensation can continue to be funded out of Elizabeth, New Jersey, no questions asked. 

And finally, the last component of the class war that Mrs Gandhi — sorry, Mr Modi declared was, of course, Garibi Hatao. Like many a prime minister before him, he exactly followed the Indira template — praise the people and then announce a long series of sops that nobody fully understands. The PM’s list of giveaways was broadly a restatement or expansion of long-standing schemes, which renders impossible any attempt to effectively distinguish it from previous governments’ efforts and give it a less statist sheen. Interest subvention for small-ticket housing loans, for example, was central to previous such efforts, so it can’t exactly be touted as a brilliant new innovation by a progressive, market-friendly government. Low-income housing under such schemes was never “handed out”; the beneficiaries had to build it, and borrow the money at a differential rate of interest. The PM raised the eligible loan size and lowered the interest (though it’s uncertain whether the interest rate differential changes that much.That’s not exactly a new direction. 

Nobody can now claim that Mr Modi intends to take this country forward towards a less regulated, more dynamic, less statist economy. The RSS’ Rakesh Sinha said on TV after the speech that “the state is back”. He is right. And I’m sure, if we all do exactly the right thing, the effort will work, too, as it could have in the 1970s. Perhaps Mr Modi will succeed where Mrs Gandhi failed, and make Indians into better people. But I don’t think anyone should bet on it. 

m.s.sharma@gmail.com

Twitter: @mihirssharma