Modiji, change the mood

People are blaming the Modi government for the state of the economy. That’s fair enough. It’s been in charge, after all, for six years. 

But we must also remember that the Indian economy stumbles in style. It’s a short step for it to go from hero to zero. 

This has happened once before in the 1960s when the Indian economy went into a decade-long coma. Just as it has now. 

Thus, in November 1962, India was defeated by the PLA in a short war in the Himalayas. Then, October 1963, Prime Minister Jawaharlal Nehru suffered a stroke and in May 1964, he died. So till 1969, the Congress and the country were run by a small group of regional bosses. 

To succeed Nehru, they first appointed Lal Bahadur Shastri as prime minister. But he too died very suddenly in January 1966. Then they appointed Indira Gandhi and lived to rue the day. 

Earlier, in June 1965, Pakistan — stupid as ever — had attacked India. It attacked once again in September. It lost both times. But these two wars cost India a lot of money. 
 

As if this was not bad enough, in both 1965 and 1966, the monsoons failed and food ran short. India became a basket case, depending on the United States of America for food, which made us literally beg for it. That’s where anti-Americanism began. 

By the end of the summer of 1966, the treasury was also almost empty. To add salt to these wounds, the World Bank forced India to devalue the rupee by a whopping 36.5 per cent. 

Naturally, investment came to a virtual halt for the next five years. It was called “Plan Holiday”, a lost decade, gone with the wind. Poof!

Growth, which was at a reasonably robust 5.5 per cent in 1960-61, slowed drastically in the subsequent years. The economy contracted 3 per cent in 1965-66 and saw 0 per cent growth the next year. Till 1970 it stayed below 2 per cent. 

But Indira Gandhi was a fighter. She went for broke with two parallel and simultaneous solutions in July 1969, demonstrating extraordinary courage. Oklahoma or bust. 

One was political, to wrest control of the Congress party, which she actually split. The other was economic, to wrest control of the banks, 14 of which she nationalised. 

Modi’s options 

Unlike Mrs Gandhi, Mr Modi doesn’t have to worry about his party, not yet. But he does have to worry a little bit about a war with China. 

And he has to worry a lot about the economy. It will determine his political future. 

To revive growth in the 1970s, Indira Gandhi had nationalised everything in sight — even for three months, the grain trade in 1973. And she turned India into a near autarky. 

The theory was that since we have no dollars, we won’t have imports. The thought that we could export to earn dollars occurred only to Jagdish Bhagwati and T N Srinivasan, two distinguished economists. 

Now Mr Modi must do the exact opposite of what Mrs Gandhi did: he must denationalise whatever is left to be denationalised. And he must explain to the country that “atmanirbhar” doesn’t mean autarky because, thanks to the Congress policies since 1992, we have enough dollars now.  

Indeed, he has already announced a beginning to this denationalisation programme. It must be hugely accelerated, to what amounts to a garage sale — buy one, get two free. And he must announce a steep increase in import tariffs on things that don’t immediately need much capital to be produced locally. 

Denationalisation will have no great meaning for industry because in manufacturing, the public sector has virtually ceased to exist anyway. However, it will have a huge impact on banks and the financial sector. It seems a bank privatisation programme is currently being finalised. 

The underlying principle is easy to enunciate: governments should only monopolise the supply of money, not the demand for it. 

Equally, or even more importantly, this reversal of the Indira Gandhi formula will change the mood in the country just as its adoption did in 1969. It will also finally lay to rest the ghost of vacuous socialism that’s been haunting India since 1991. 

Mr Modi thus has a huge opportunity before him. Whether he grabs it the way Mrs Gandhi did in 1969 or squanders it as he did in 2014 will determine his economic legacy. 

But unlike other Indian prime ministers, he has been given a second chance. It’s up to him now. As they say, fortune favours the brave.