India is violating the taboo of privatization

Necessity led Mr. Modi to engage in this ambitious reorganization of the economy. In his first term, he focused less on economic reform and more on expansive welfare schemes – including bank accounts for the poor, subsidized cooking gas and government-funded construction of toilets. But in the face of collapsed growth and growing skepticism about India’s trajectory, the government has pivoted on the most explicit pro-business agenda since at least the early 2000s and probably since 1947 independence.

Here are the elements of Modinomics 2.0: The Prime Minister is increasingly using his massive megaphone to praise private businessmen as creators of wealth who deserve the nation’s respect. The government has budgeted about two trillion rupees ($ 27.50 billion) over the next five years to boost production, providing “production-related incentives” for domestic and foreign companies in 13 sectors, including those that produce mobile phones, pharmaceuticals. , automobiles and car components and solar batteries. In recent years, Apple,

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

The government has also pledged to privatize a number of state-owned companies, including Air India and two unnamed public sector banks. At the end of last month, addressing the bureaucrats in charge of administering the privatization, Mr. Modi removed one of his old slogans: “The government has no business.” In Parliament, he ridiculed the idea of ​​bureaucrats running everything from fertilizer factories to airlines.

In his speech on the budget last month, Finance Minister Nirmala Sitharaman pledged to reduce the public sector to a “minimum level” in four “strategic sectors”. He also broke a taboo by repeatedly using the word privatization. Indian politicians have long preferred the euphemism “disinvestment”. Although modest in scope, the proposed bank privatizations directly reject one of India’s most damaging legacies – the 1969 nationalization of Indira Gandhi’s bank.

At the same time, the Modi government decided to allow the private sector to play a greater role in agriculture by competing with state-controlled marketing yards, began easing the laws of onerous labor, raised the limits of foreign investment in insurance, and talked about establishing a so-called bad bank to deal with non-performing assets and streamline notorious land dispute resolution mechanisms.

All this is taking place against the background of four years of sustained tariff increases that have partially reversed three decades of trade liberalization. In 2019, India exited negotiations to join the Comprehensive Regional Economic Partnership, an Asia-Pacific free trade group. It has also scrapped or renegotiated several bilateral investment treaties concluded in the last quarter of a century.

How do you add all this? Optimists believe Mr Modi is ready to deliver the long-sought industrialization of India. In an opinion, Bangalore businessman and commentator Manish Sabharwal summed up the government’s ambition as “increasing the productivity of India’s regions, firms and individuals, making them more formalized, urbanized, industrialized, financialized and more skilled.”

Logically, firms looking to diversify supply chains outside of China will choose India for its large domestic market and deep skilled labor fund. The tariff stick and the carrot of production-related incentives will stimulate this change. Mr Modi’s popularity gives him political capital to make radical changes that other politicians would not dare to consider. Recent agricultural reforms are an example.

These arguments cannot be rejected. However, a doll of skepticism is justified – completely absent among Modi stimulators.

For starters, promising reforms do not mean the same thing as their delivery. Protests by farmers in Punjab and Haryana have already called into question agricultural reforms. The government has tried to land Air India since 2017 without success. Quixotic courts in India – often ruled by economically illiterate judges with radical powers – add another wrinkle to the process. As with any government bid to choose winners and losers, there is always the danger of benefiting from well-connected friends rather than competitive export champions and betting on the wrong industries.

Nor is it clear that the international environment is welcoming. In a telephone interview, Vivek Dehejia, a commercial economist at Carleton University in Ottawa, points out that India could not reach trade agreements with the US and the European Union even before trade becomes an explosive domestic problem in the West. Weak relations with China and India’s rejection of RCEP also affect India’s access to Asia’s largest markets. In many cases, India’s domestic market is too small to count. It needs to create a more stable regulatory environment, put an end to “fiscal terrorism” by officials and modernize the infrastructure to become competitive as an export hub.

“You can try to compete as an ambassador car on a Formula 1 track,” says Mr Dehejia. “But you’ll have to be incredibly lucky to make it work.”