India breaks privatization taboos

The necessity has Mr. Modi driven to tackle this ambitious reorganization of the economy. In his first term, he focused less on economic reform and more on extensive welfare schemes – including bank accounts for the poor, subsidized cooking gas and government-funded toilet buildings. But faced with the collapsing growth and growing skepticism about India’s trajectory, the government has turned to the most explicit pro-business agenda since at least the early 2000s, and possibly since independence in 1947.

Here are the elements of Modinomics 2.0: the prime minister is increasingly using his massive megaphone to praise private businessmen as wealth creators who deserve the country’s respect. Over the next five years, the government budgeted about two trillion rupees ($ 27.50 billion) to promote manufacturing by providing ‘production-linked incentives’ for domestic and foreign businesses in 13 sectors, including those selling mobile phones, pharmaceuticals , manufactures cars and car components, and solar batteries. In recent years, Apple has,

Samsung and Foxconn have set up manufacturing facilities in India. The government hopes that Cisco and Tesla, among others, will follow.

The government has also undertaken to privatize a number of state-owned enterprises, including Air India and two unnamed public sector banks. Late last month, Mr. Modi addressed one of his old slogans about bureaucrats charged with administering privatization: “The government has no business doing business.” In parliament, he mocked the idea that bureaucrats run everything from fertilizer plants to airlines.

In her budget speech last month, Finance Minister Nirmala Sitharaman undertook to keep the public sector to a minimum in four “strategic sectors”. She also broke a taboo by using the word privatization repeatedly. Indian politicians prefer the euphemism ‘disinvestment’. Although the proposed banking privatization is modest, it may refuse one of the most damaging legacies of socialist India – Indira Gandhi’s 1969 banking nationalization.

At the same time, the Modi government enabled the private sector to play a greater role in agriculture by competing with state-owned marketing sites, began to ease the heavy labor laws, increased the foreign investment limits in insurance and spoke of the institution a so-called set up bad bank to tackle underperforming assets and to streamline infamous slow-moving land dispute resolution mechanisms.

All of this is taking place against the backdrop of four years of sustained tariff increases that have partially reversed three decades of trade liberalization. In 2019, India stepped out of the negotiations to join the Regional Comprehensive Economic Partnership, a free trade group of Asia-Pacific economies. It also scrapped or renegotiated several bilateral investment agreements concluded over the past quarter century.

How does it all come together? Optimists believe that Mr. Modi is ready to deliver the industrialization that India has long sought. In an opinion, Bangalore-based businessman and commentator Manish Sabharwal summed up the government’s ambition as’ increasing the productivity of India’s regions, businesses and individuals by making them more formalized, urbanized, industrialized, financed and skilled. ‘

As the logic goes, companies that want to diversify supply chains outside China will choose India for its large domestic market and a large amount of skilled manpower. The stick of tariffs and the root of production-linked incentives will spur this move. Mr. Modi’s popularity gives him the political capital to make comprehensive changes that other politicians would not dare. Recent agricultural reforms are an example of this.

These arguments cannot be rejected directly. Still, a dollop of skepticism – which is completely absent among Modi boosters – is justified.

To begin with, promising reforms are not the same as carrying them out. Protests by farmers of Punjab and Haryana have already called into question agricultural reforms. The government has been trying to download Air India since 2017 without success. Indian quixotic courts – often manned by economically illiterate judges with extensive powers – add another ripple to the process. As with any government trying to pick winners and losers, there is always the danger of favoring well-connected buddies rather than competitive export champions, and of betting on the wrong trades.

It is also not clear that the international environment is welcoming. In a telephone interview, Vivek Dehejia, a trade economist at Carleton University in Ottawa, pointed out that India could not reach trade agreements with the US and the European Union even before trade became an explosive domestic affair in the West. Fraudulent relations with China and India’s rejection of RCEP also affect India’s access to the largest markets in Asia. In many cases, the domestic market in India is too small to count. It should create a more stable regulatory environment, end ‘tax terrorism’ by officials and upgrade infrastructure to become competitive as an export hub.

“You can try to race an Ambassador car on a Formula One racetrack,” he said. Dehejia. “But you’ll have to be incredibly happy to make it work.”