India breaks the privatization taboo

The necessity has Mr. Modi to embark on this ambitious realignment of the economy. In his first term, he focused less on economic reforms and more on comprehensive social services – including bank accounts for the poor, subsidized cooking gas, and government-funded toilet construction. But faced with collapsing growth and increasing skepticism about India’s trajectory, the government has turned towards the most explicitly pro-business agenda since 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 creators of wealth deserving of the nation’s respect. The government has budgeted roughly two trillion rupees ($ 27.50 billion) over the next five years to boost production by providing “ production-related incentives ” to domestic and foreign companies in 13 industries, including those producing mobile phones, pharmaceuticals, produce automobiles and auto parts, and solar batteries. In recent years, Apple

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

The government has also committed to privatizing a large number of state-owned companies, including Air India and two unnamed public sector banks. At the end of last month, Mr. Modi turned to bureaucrats charged with administering privatization and discarded one of his old slogans: “The government has nothing to do with business.” In Parliament, he ridiculed the idea that bureaucrats control everything from fertilizer plants to airlines.

In her budget speech last month, Finance Minister Nirmala Sitharaman pledged to bring the public sector to an “absolute minimum” in four “strategic sectors”. She also broke a taboo by using the word privatization repeatedly. Indian politicians have long favored the euphemism of “divestment”. Although modest in size, the proposed bank privatizations directly reject one of socialist India’s most damaging legacies: Indira Gandhi’s nationalization of the bank in 1969.

At the same time, Modi’s government has moved to empower the private sector in agriculture by competing with state-controlled marketing yards, began relaxing harsh labor laws, raised limits on foreign investment in insurance, and talked about it. establish a so-called bad bank to tackle underperforming assets and streamline notoriously slow land dispute settlement mechanisms.

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

How does this all add up? Optimists believe that Mr. Modi is ready to realize the industrialization that India has long strived for. In an op-ed, Bangalore-based businessman and commentator Manish Sabharwal summed up the government’s ambition as “increasing the productivity of Indian regions, businesses and individuals by making them more formalized, urbanized, industrialized, financed and skilled.”

As the logic goes, companies looking to diversify their supply chains outside of China will choose India for its large domestic market and deep pool of skilled workforce. Tariff retention and the root of production-related incentives will drive this shift. Mr Modi’s popularity gives him the political capital to make sweeping changes that other politicians would not dare to consider. Recent agricultural reforms are an example of this.

These arguments cannot be dismissed outright. Still, a blob of skepticism – completely absent among Modi boosters – is warranted.

For one thing, promising reforms are not the same as they make. Protests from Punjab and Haryana farmers have already called into question agrarian reforms. The government has been trying unsuccessfully to unload Air India since 2017. India’s quixotic courts – often staffed by economically illiterate judges with great powers – add another wrinkle to the process. As with any government bid to pick winners and losers, there is always the danger of well-connected cronies taking advantage of rival export champions and betting on the wrong industries.

Nor is it clear that the international environment is inviting. In a telephone interview, Vivek Dehejia, a trade economist at Carleton University in Ottawa, points out that India could not negotiate trade deals with the US and the European Union until trade in the West became an explosive domestic issue. Tense relations with China and India’s rejection of RCEP are also affecting India’s access to Asia’s largest markets. In many cases, India’s domestic market is too small to count. It must create a more stable regulatory environment, end “tax terrorism” by officials and improve the infrastructure to become competitive as an export hub.

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