Developmental Authoritarian

Taking cue from Atal Bihari Vajpayee government befell; PM Narendra Modi is taking steps like demonetization that speaks louder about reforms rather deadly spiral of silence

By DANFES

Despite the political chatter, media natter and well-versed economic debate on demonetization, one crucial question remains unanswered since 8 November.

The question is simple. What prompted Narendra Modi to usher in such a drastic change at a great risk to his career? Political leaders are codified genetically to be risk averse, even more so when it involves antagonizing their core support base. So to rephrase the question, why did Modi take such an insane risk?

If one discounts the larger conspiracy theory that this is all part of some elaborate scam — a theory that fails the first test of plausibility because scams are ploys that hoodwink the system to ensure maximum benefit at minimum risk — focusing on this key question may help decode the motive behind demonetisation that has confounded even the best of the economists.

A look at Modi’s trajectory of reform initiatives since he assumed the Prime Minister’s office reveals one clear pattern. Modi wants to initiate economic transformation of India through a top-down reformative approach. He is even willing, as a host of schemes and administrative steps would testify, to bulldoze his way to change which is always risky in such a large, culturally and economically diverse country such as ours.

He has so far found it hard to breeze through these systemic changes but that is more due to the rambunctious nature of our democracy and the structural challenges built within. The clear picture that emerges, however, that he is a man in a hurry. Modi is obsessed with the passion to trigger a positive change. He dreams of leaving an indelible mark in history. He is highly motivated to usher in sweeping, transformative adjustments and he wants to do it very, very quickly.

Social theorist and political psychologist Ashish Nandy, in an interview to The Wire, cites “developmental authoritarianism” to describe Modi’s move. Nandy says the PM believes in the Singapore model and is following the path of “every South East Asian leader who has tried to quicken development”.

While Nandy’s point is well taken, Modi differs from his South East Asian brethren in one key aspect. Unlike, for instance, Singapore, Indian Parliamentary democracy doesn’t allow Prime Ministers three decades of uninterrupted power. Modi must test his electoral fate at least by 2019 even as his party undergoes mini-referendums almost throughout his five-year tenure.

Therefore, Modi is India’s Lee Kuan Yew on adrenalin.

There’s one more aspect. The Prime Minister is mortally scared of the fate that befell Atal Bihari Vajpayee. Despite authoring deep-rooted, organic reforms and revolutionizing India’s market economy, Vajapyee failed to extend his mandate beyond one term. The root of Modi’s disruptive, almost brutal reformative step also lies in the lesson from Vajpayee’s defeat. It is imperative that we put demonetization in this context, why Vajpayee India’s most underestimated reformer, failed to get reelected and how the government that followed first fed on the low-hanging growth fruit and then ravished the economy through a series of (if well-intentioned) missteps that left a scorched earth by 2014.

There is more than one metric to show that Indian economy really took off during the Vajpayee years as focus was laid on building the infrastructure, disinvestment goals were achieved, telecom revolution brought millions within mobile net and, as BBC apprises, “India became an emerging power in information technology, business processing outsourcing and biotechnology.”

The problem with structural reforms, as columnist Vivek Kaul put it in a 2014 column for Firstpost that it takes a little time for the results to be evident and economy is not a “James Bond movie, where the storyline of one movie has very little connection with the next.” The author points out through a series of facts and figures that “the economic growth during the UPA rule fed on the economic growth during the NDA rule. The UPA has left the economy in shambles, and the government that takes over, will have a tough time turning it around.”

So the first lesson from Vajpayee defeat was, as Modi would have noted, that transformative reforms take more than a little time to deliver results and very often the regime that implements those are not the ones to reap the political benefits.

If ushering in quick changes was Modi’s first challenge, the second, equally difficult one was to reverse the almost negative growth and high inflation of UPA 2 years.

As columnist and author Niranjan Rajadhyaksha, while assessing UPA’s performance, wrote in a Livemint column in 2011, “the ruling alliance has not aggressively pushed economic reforms but seems to have decided to ride the growth wave unleashed by a higher savings rate, demographic power and the benefits of the reforms done by the Narasimha Rao, United Front and Atal Bihari Vajpayee governments since 1991. The inability to reform labor laws and build state capacity has meant that the UPA has taken the convenient way out —promising entitlements that cannot be sustained on our narrow tax base.”

One of the stated goals of demonetization is to widen the narrow tax base by bringing in more of the informal sector into the banking net. In recent past, a lot of focus has been laid on how the Prime Minister has “shifted the narrative for demonetization from black money eradication to cashless economy”. But the point is, one is intrinsically linked to the other. A more digitized economy will make it harder for unmonitored transactions to take place since cash typically leaves no trail. Economists in support of the move have pointed out how the transformative pain will be more than offset by long-term gains arising out of a more compliant and transparent tax base.

But Modi’s problem, as Harvard University professor Kenneth Rogoff points out in Financial Times, “is that there is just too much collateral damage… India did not have nearly sufficient stock of new currency on hand to replace the old, throwing the cash economy into seizure. But he also added that “in an economy profoundly crippled by tax evasion and corruption, India’s radical demonetization may yet have positive long-run effects. In a sense, Modi’s broader goal is to change the mindset of India.”

This, then, is the crux of Modi’s move. He wants to usher in a configurationally change in the Indian economy that depends on a behavioral change. And as if that was in itself not mighty difficult to do, the Prime Minister just made it even more difficult for himself by settling a self-imposed goal that these changes must be initiated quickly enough so that at least some of the fruits are ripe enough to be plucked near the end of his term.

This may explain the insane risk that he has taken through demonetization — a brute force that leaves in its wake huge amounts of collateral damage. And this may also explain the tearing hurry in inflicting a less-cash economy on an unprepared nation.