Terms of Trade | Neoliberalism, with Indian jugaad
To think that India has found a balance between reforms and welfare is simplistic. Indian innovations in political economy are being driven as much by needs of domestic capital
If the standard (economic) Left critique is to be believed, India’s economic policy turned “neoliberal” ever since Manmohan Singh presented his first Budget in 1991.
The word “neoliberal” is generally used to describe the pro-market and anti-State conservative turn in economic policies which started with the Reagan-Thatcher era in the 1970s and 1980s in the West. This was a rupture from the Keynesian demand management phase which began after the second world war, an era which is often termed as the golden age of capitalism.
If one goes by what the self-proclaimed “neoliberals” say, India’s economic policy is best described as neoliberalism in progress with intermittent roadblocks. Many others believe that the current regime in India has evolved an unusual but effective mix of pushing reforms and welfare at the same time and the debate over neoliberalism or lack of it in Indian economic policy is not even relevant anymore. The truth, as is often the case, might be slightly more complicated.
Four pillars of Indian neoliberalism..
Most people agree that the four most important milestones on India’s road to neoliberalism are, in chronological order, the announcement of new industrial policy in 1991, India joining the World Trade organisation (WTO) in 1995, enactment of Fiscal Responsibility and Budgetary Management (FRBM) Act in 2003 and the adoption of inflation targeting framework as the anchor of monetary policy in 2016. Each of these policy decisions serves a specific purpose.
The first laid the ground for free enterprise and dismantled the licence-quota raj in the economy. The second ensured the integration of Indian economy into the global trade system. The third made counter-cyclical Keynesian demand management via the government spending route illegal. And the fourth offers a promise that any spike in inflation even without Keynesian demand management will be nipped in the bud via demand deflation through high interest rates.
...And how they are subverted
The question to ask, however, is the following. Is India as neoliberal in de facto terms, as may appear in de jure terms? Let us look at some recent statements and facts.
On July 7, the food secretary of the government of India said that the government had directed edible oil producers to reduce their prices by up to R10 per litre within a week. The government intervening in the demand-supply mechanism of the free market to influence prices is the original sin, as far as free-marketers go.
India’s record of placing arbitrary trade restrictions, especially on food items, is perhaps the most dubious in the world and a mockery of any commitment to free trade. That the government announced a wheat import ban almost immediately after everybody, including the Prime Minister, was talking about Indian exports feeding the world, is just another example of this policy inconsistency.
The FRBM Act, at least at the level of the Centre, has ceased to matter for all practical purposes for a long time. Most independent economists had started publishing two estimates, on-budget and off-budget, of the fiscal deficit in the pre-pandemic period. While most of the off-budget items have been dispensed with after the pandemic, nobody is even talking about a tentative timeline of the fiscal deficit reaching 3% levels, as is enshrined in the FRBM Act.
Everybody, including the Reserve Bank of India (RBI), agrees that it did not act as per its inflation targeting mandate when inflation started surging after the pandemic. Rather than file a report to the government, which is what the mandate asks of the RBI in case it misses its inflation target, the RBI governor proclaimed that the central bank was not “hostage to any rule book”, in a way justifying the central’s bank’s decision to violate what is now its constitutional mandate.
Each of these examples, strikes at the core of the four important milestones on India’s road to neoliberalism. To be sure, these events must be seen as an exception rather than the rule. In each of these fields, the government and the RBI still proclaim a deep commitment to the ideas of neoliberalism, even if it is couched as a commitment to reforms.
Explaining the inconsistency
So, what is one to make of this contradiction in economic policy making in India? Is India neoliberal or is it not neoliberal?
The best answer to this question can be given by invoking a Hindi word, which has actually made its way to the Oxford English Dictionary. What Indian economic policy is practising is neoliberalism with jugaad, i.e. a workaround around the puritan neoliberal policy framework where the State does not intervene in markets and containing inflation and fiscal deficits is the be all and end all of macroeconomic policy.
As is always the case with jugaad, there is a reason why economic policy in India has deployed these workarounds.
Understanding this requires a slight detour into the basic macroeconomic conceptualisation of the Indian economy and the way forward.
If one were to cut through the clutter of all political economy jargon, there are three main objectives which economic policy tries to pursue in any modern economy — achieve reasonable growth, protect macroeconomic stability and maintain democratic acceptability of the political regime while pursuing the first two goals.
Economists believe that it is impossible to pursue these three goals at the same time.
One of the best articulations of this argument has come from Harvard economist Dani Rodrik who has argued that a country cannot pursue national sovereignty, democracy and hyper globalisation at the same, time and one of these must be sacrificed in order to pursue the other two goals. India’s intermittent deviations from the established principles of neoliberal or laissez faire capitalism are best understood in this framework.
Even when fiscal deficit and inflation levels are not at levels where they would pose a tangible threat to macroeconomic stability – even economists and commentators close to the policymaking establishment have repeatedly questioned whether the 3% fiscal deficit and 4% inflation target should be treated as sacrosanct – a breach of these levels upsets global finance capital because excess inflation can derail calculations of return on financial assets. The global obsession with long term sovereign bond yields is the biggest reflection of this fact.
While it is important to recognise these concerns in the policy framework, the political arm of the government is often more pragmatic in balancing these commitments with economic objectives which matter for a large number of voters.
Various examples can be given where realpolitik considerations trigger a departure from commitment to values of hyper globalisation. Intermittent export bans, especially on food items, which violate our commitment to free trade, are meant to prevent domestic anger over inflation. Doubling down on counter-cyclical measures, notwithstanding an ideological aversion to them, and increased spending on the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), to prevent large scale destitution, is another such example.
To be sure, there is more than adequate evidence to argue that the global (neoliberal) consensus around hyper globalisation is not something cast in stone. Aggressive fiscal stimuluses deployed by advanced countries after the pandemic is evidence of this.
Where domestic capital complicates the story
The deviations from neoliberalism are primarily on account of political economy considerations relating to mass of voters. But it would be naïve to believe that concerns of the poor majority are the only factor to reckon with in a democracy such as India.
While India can take reasonable pride in the fact that it has maintained a democratic system, barring the brief interruption of the Emergency, it is also a fact that there is a complicated link between sources of political funding and support for some of the most successful political parties in India and policies.
The bulk of political funding is sourced from big business in the country. To be sure, India can also take remarkable pride in the fact that foreign players, neither political nor financial, still have very little influence in Indian polity. As is the case everywhere, the asymmetry in political finance and support for ruling parties brings its own destabilising forces to India’s political economy paradigm.
It is here that India’s tryst with neoliberalism in the last three decades has brought the biggest change. While the typical quid pro quo between politics and big business was what can be loosely described as corruption (tax evasion and circumventing the restrictions under the license-quota raj) in the pre-reform period, it has shifted to facilitation of formalisation of the economy in the current phase, where big business expects the political regime to open up hitherto unavailable markets for it via two routes. These include making the informal sector unviable (so that the formal sector can replace it) and plugging large-scale infrastructure gaps in the economy through direct or indirect capital spending.
It is hardly surprising that the current government, which is led by a party which enjoys unprecedented political funding from big business in India, as reflected in data from electoral bonds, is pursuing both these objectives with a lot of vigour.
To be sure, formalisation of the economy in itself is a sound objective — but the manner in which it is done and the transitional steps towards it leaves behind losers and winners. Pursuing such a strategy, thus, complicates the political balancing act because it also puts a squeeze on mass incomes, as we have seen in the aftermath of policies such as demonetisation and Goods and Services Tax.
The departure from UPA’s political economy
In hindsight, one of the biggest political economy failures of the United Progressive Alliance (UPA) government was to not see the eruption of formal versus informal sector binary in politics. In believing that the fruits of growth will continue to pay for an ever expanding umbrella of welfare endowments, the UPA assumed that the growth boom will last forever. Having led the poor on the garden path of welfare spending, the UPA found it difficult to roll back the fiscal stimulus after the 2008 crisis and ended up creating a partial wage-price spiral which was a major trigger for macroeconomic instability. Not only did it spook global financial capital, it also made the domestic capitalist class very anxious.
To be sure, factors other than welfare spending such as the land acquisition act, which made it significantly difficult to take up large scale projects, also played a role in the alienation of big capital from the Congress.
The Bharatiya Janata Party (BJP) under the leadership of Narendra Modi has been aware of this contradiction from day one and taken a twin approach to handle this challenge.
The fist is a qualitative change in the nature of welfare provisioning where it is focused more on asset enhancement – it ranges from houses to toilets to now tap water – rather than income enhancement. Through this approach, the BJP hopes to inculcate political loyalty via improving living standards without disturbing labour-capital balance where the former gains in bargaining power when the State provides assured employment or regular income support.
The second has been advocating legislation which pushes the envelope of policy reforms for big business as much as possible. In many such attempts, the regime is pragmatic enough to backtrack when it fears a political backlash. The ordinance to dilute the land acquisition act, three farm laws are some examples. On many other fronts, such as reduction in corporation tax rates, divestment of LIC and the proposed privatisation of public sector banks, the policy paradigm has moved significantly in favour of the private sector.
Will such a strategy work?
This strategy seems to be working, at the moment, not so much because of its inherent virtues but due to the failure of the political opposition which either sees the neoliberal turn in India’s economic policy as a linear path from 1991 onwards or is unable to create a proactive movement demanding relief from the economic headwinds of forced formalisation policy direction.
If things do not change, the opposition will have to continue to take satisfaction in intermittent reactive victories against certain government policies, which would generate enthusiasm in civil society circles but do little to change the realpolitik trajectory in India.
Every Friday, HT’s data and political economy editor, Roshan Kishore, combines his commitment to data and passion for qualitative analysis in a column for HT Premium, Terms of Trade. With a focus on one big number and one big issue, he will go behind the headlines to ask a question and address political economy issues and social puzzles facing contemporary India.
The views expressed are personal