When Harry met Modi

In a Forbes magazine article that caused a happy stir in right-wing social media, Harry G. Broadman argued that Prime Minister Narendra Modi’s “governing prowess” had “boosted India’s GDP growth” and “produced sizeable increases of inflows of foreign direct investment (FDI)”. He stated that the reforms implemented by Modi in his first three years were “sizeable, though not huge”, but still impressive in the context of a “messy” system of democracy, and “against the backdrop of decades of reform inertia and inaction by successive governments in Delhi”. Furthermore, Modi’s reforms “are destined to make lasting, rather than transitory, changes in the structure of the Indian economy”.

It sounded a lot like the claims that pro-Modi commentators used to make until demonetisation and farm loan waivers broke their spirit. Take a dash of genuine policy accomplishments, toss in some tweaked (or, worse, simply renamed) pre-Modi initiatives that have carried on, add some hyperbole, underplay the blunders and voila! you have a Strong Reformist Government.

But don’t take my word for it, let’s evaluate the list of claims presented to prove that a “cunning and effective” Modi is transforming India in an unprecedented way.

Broadman starts with FDI, arguing that Modi has contributed not only to a big jump in FDI flows to India (which is plausible) but that India under Modi has equalled China, the great economic story of our time. That’s because India’s FDI in 2015 (as a share of GDP) rose to 2.1%, approaching China’s 2.3%. Furthermore, “between 2005 and 2015 (obviously a period that in part predates Modi)”, he writes, India’s FDI (as a share of GDP) doubled, while China’s halved.

It’s unclear why India deserves the credit for a slowing of FDI flows to China, and the World Bank chart (below) is self-explanatory. FDI to India has picked up, but is still in line with the historical trend. But don’t let that stop anyone overselling this accomplishment.

Screen Shot 2017-07-03 at 11.29.59 PM.png

Broadman then goes on to list eight “notable” reforms, which we analyse below, starting with those that are, in fact, correct:

A revised law on bankruptcy, which will generate freer flows of capital and the flexibility for them to be invested in their highest value in use, thus promoting a more robust, competitive Indian market both for new business start-ups as well as for forcing stale companies who cannot make ‘a go of it’ to close shop and sell their assets.

Few people realise that India’s investment rate is currently at a 14-year low, and a major reason is the inability of some of India’s biggest companies to pay off their debts, which has hurt banks’ ability to lend. The 2016 Insolvency and Bankruptcy Code is aimed at reversing this by speeding up the resolution of bad loans. This will be a complex and drawn-out process, but putting this law in place was necessary, and counts as a win for the Modi government.

The introduction of a nationwide sales tax, which will integrate an otherwise excessively complicated disparate system of different state and federal taxes, a reform that will not only increase tax collections but also help reduce interstate barriers to trade and distortions arising from gaming where within the country purchases should be consummated.

There’s a heated debate underway over how much India’s complex Goods and Services Tax (GST) will benefit the economy, and many will recall that Prime Minister Modi was instrumental in blocking the United Progressive Alliance (UPA)’s original GST proposal as Gujarat chief minister. But hypocrisy aside, the Modi government has shepherded the GST into existence, helping transform India into something close to a single market, and gets the credit for this major tax reform.

Elimination of subsidies for diesel fuel, which will help plug a fiscal hole in government revenues, and even more important create disincentives for using an energy source that adds to, rather than diminishes, pollution and greenhouse gases.

It is true that the Modi government formally decontrolled diesel prices on 18 Oct 2014. But all the heavy lifting had been done by the UPA, which on 17 Jan 2013 permitted retailers to increase the price of diesel by 50 paise/month.  As a result, the gap between the actual cost of supplying diesel and its subsidised retail price dropped from ₹9.21/litre to ₹2.80/litre between Jan 2013 and May 2014 (according to Ministry of Petroleum data). It continued under the Modi government until a collapse in global oil prices starting Aug 2014 eliminated the price gap entirely. By the time the Modi government decontrolled diesel prices, oil prices had crashed to the point that decontrol produced a diesel price cut (rather than a hike) of ₹3.37/litre, a freebie no politician could refuse.

If anyone deserves credit here, it is Manmohan Singh.

Removing regulations that forced companies to repetitively renew their business licenses at an artificially high frequency simply to generate revenues to be collected by local bureaucrats.

This one is mystifying. India abolished licensing for most industries on 26 Jul 1991, and the list of industries that require a licence has declined to four: aerospace & defence, industrial explosives, hazardous chemicals and tobacco products. The process of renewing licenses for this handful of industries has indeed been simplified — most notably in defence, where the duration of a licence has extended from three to 15 years, but this hardly qualifies as major reform.

Relaxing rules that reserved specific sectors to be the province of only small and medium sized enterprises even if large firms could produce the goods or deliver the services at lower cost and create economies of scale.

This one is just wrong. The number of items reserved for small-scale enterprises fell from 836 in 1995 to 20 in 2015 under successive governments, and the Modi government’s sole contribution here was to de-reserve the last 20 items. The perils of Googling your way to economic analysis?

Using transparent and competitive auctions for allocating access to the telecom spectrum.

There’s no doubt that the Modi government held telecom spectrum auctions in Mar 2015 and Oct 2016, and is planning one more in 2017. But there’s nothing new here. Even the UPA conducted a “transparent and competitive” auction of 3G and 4G spectrum in May-Jun 2010, before its reputation had been tarnished by what the Supreme Court termed an “arbitrary” and “capricious” 2G spectrum allocation in 2008. Following the Supreme Court’s cancellation of that allocation, the UPA held 2G auctions in Nov 2012, Mar 2013 and Feb 2014. Essentially, the Supreme Court has ensured that no government can allocate resources without holding an auction, and Modi’s being PM is frankly incidental here.

Opening investment in the railway network to majority foreign ownership, thus allowing India to tap into new sources of capital to build out its infrastructure and help the country integrate into a unified economic space to create economies of scale in both manufacturing and agriculture and thus enhance its international competitiveness.

Sounds promising, one problem: foreign investors are still substantially barred from “investment in the railway network”, which remains the preserve of Indian Railways. Where they are permitted is in railway infrastructure, specifically suburban corridors under public-private partnership (PPP), high speed rail, freight corridors, railway electrification, signalling, freight and passenger terminals, rail projects in industrial parks and mass rapid transport systems. This is a solid set of investment avenues, although there was already foreign participation in mass rapid transport and freight corridors before Modi took office. More importantly, any investment in railways depends crucially on the decisions made by a cautious railways bureaucracy. Raising FDI limits may be helpful, but they were never the main barrier to private participation in India’s rail story.

This could count some day as a win for the Modi government, but it’s still very much a work-in-progress.

Permitting foreign investors to participate in construction projects that otherwise were reserved for only domestic service providers, thus generating opportunities for joint ventures and other businesses to incorporate world-class construction techniques and materials.

Another misfire, it would seem. FDI has been freely allowed in construction for more than a decade, and accounted for 7% of total FDI flows between Apr 2000 and Mar 2017. However, stagnation in the sector has slowed FDI flows in recent years, and the Modi government has eased minimum area restrictions, investment lock-in periods and the like (here and here), winning approval from the real estate industry. But the reforms haven’t yet worked: FDI flows to the sector in the last two years were US$218 million, one-twelfth (I kid you not) of the US$2.6 billion that came in during the UPA’s final two years. These reforms may be desirable, but they are far from transformational.

It turns out that only two of the eight reforms proposed as evidence of Modi’s reformist chops add up; five are simply wrong, and one seems too minor to count. To top it all, Broadman concludes with a familiar defence of demonetisation, repeating the widely-known benefits of going cashless without any real examination of the heavy costs of demonetisation, something even Modi supporters now acknowledge (here and, ahem, here).

To sum up, I’ll have what he’s having. 

13 thoughts on “When Harry met Modi

  1. Sachin

    Slowing down of FDI in China as a percent of GDP and comparing it with India’s rate completely ignores the size of the GDP on which this percentage is calculated. Factoring that in might give a slightly different picture. Again the longer term over which China has been attracting FDI might perhaps mean that the low and medium hanging fruit in terms of projects etc. might already have been plucked?

    1. Actually comparing India and China on the basis of GDP share does control for the size of GDP, which was Broadman’s point. China’s plateauing could help India if new manufacturing capacity were to shift here (think Foxconn factories), but much of the incremental flow to India appears to come from the services sector — exceptions being autos and electronics intended mostly for the domestic market.

  2. Kunal

    Never ever show data that can be used to turn the tables. Look into your graph once again, after 2008 you pretty much killed our economy and then we had things going for us again in 2012 onwards, when it was pretty much a foregone conclusion that you guys aren’t coming back into power.

    Now please check the slope of the line moving after 2014, y=mx + c anyone? Hope you can appreciate the sharp rise in FDIs. I would really like to see what’s the number reported for India in 2016. And BTW you should also check out the same graph for 90’s to 2000, wonder what happened in 2000 that we started gaining momentum. In the similar vain I would laud you for the gains that you were able to showcase in 2005-2010, but guys yourself not just killed, but ate the golden egg laying goose. You should have sustained, built and transformed our nation into what we deserved, but you guys were too busy leeching, sucking and raping our economy and people for your individual gains.

    Stop crying over GST and demonetization, you filthy louts, you have no shame, no empathy, no sympathy for us, all you have is a regret that you are not able to loot and plunder as much as much. I don’t know we always cry that Gauri invaded is 17 times, you sucked the blood out of us for 70 years.

  3. Jon

    It feels like author is one of those lutyens band of journalists (let’s for the sake of arguement use the word journalist otherwise whatever this is or whatever we see today in media is far from journalism) milking and sucking in every drop of grass thrown at their direction by previous UPA regime. So when several economists (both domestic and international) and many noted personalities like Apple CEO or Bill Gates or even folks at IMF are downright stupid and blinded by Modi Bhakti (as you like to call it) but you Mr. Amitabh you are a real gem and because you say it was a blunder, it was a blunder. (now before you start throwing names like Amartya Sen.. please save yourself, I have read his views as well). I wonder if you were so brilliant at economics, what are you doing writing this blog? You should be out there working with World bank, IMF or even making policies at Finance ministry which is being run by clowns. Just the fact that you are where you are and they are the ones making policy should enlighten you about their qualification a little. And I did not mean to make a personal attack, I apologize for my last line but this blind hatred for Modi or anything he does, has started getting me. And before you label me Bhakt, let me tell you I am not. I believe even BJP has many corrupt people and clowns making stupid statement in public should be thrown in jail. But when the credit is due you gotta hand it. If you think, demonetization has broke the spirit of aam admi, ask us. We are aam janata. We were standing in line for hours during those days. Whenever such decision is made, it hits us the hardest not media people or people like you who sits in AC rooms and write pages about hardship of common man. Despite all the pain, I (and 99% people who I have interacted with me) feel demonetization was necessary and going cash less would certainly help plug the holes and reduce the benami transactions (a point you missed about going cashless is crores were saved as subsidy is nowadays directly deposited to bank accounts opened under PMJDY).
    But then why would you care about all this? If you want to go back to previous sloppy, most corrupt and “chalta-hai” and “sabka sath-sabka fayda” type government, I won’t blame you. Most media people would like so.

    1. Let me get this right, you think I need to be an IMF or World Bank economist before I am qualified to critique government policy, but winning an Economics Nobel Prize isn’t enough for Amartya Sen to be taken seriously.

      I suggest you spend less time worrying about who is making the argument and more on whether it is correct or wrong.

      1. Jon

        Just as I said, if Amartya sen expressed one side views, many names including ones I mentioned expressed exactly opposing views. Who is right? Facts and data can always be tweaked an presented on a way as to favor one’s argument.

      2. That’s a bit nihilistic. Debates help resolve contending interpretations of fact, but we won’t get very far if we spend most of our energies instead casting aspersions on people.

  4. vishnu prasad

    Amitabh Dubey,
    With all due respect – this way nothing is done by Modi or MMS because since 1950’s everything incl our constitution was already laid by someone or the other. Even a precursor to MMS was Rajiv Gandhi and even before that Mr.TT Krishnamachari who laid foundations for all economic institutions in our country.

    Few things which may sound indifferent but i believe are big deals:
    1. Repealing over 1000s of clauses and irrelevant laws.
    2. General governance reform where administration is accountable over things which they had to do.
    3. cleaning up system of the basic issues be it macro or micro level – Demonetization, Deregulation of oil, Ujwala scheme, JAM strategy
    4. Making MNREGA accountable in building assets with ROA
    5. GST – irrespective of what ppl say, driving this to reality in 3 yrs by compromise and having some form to get in right direction. Mr PC had opportunity to do this and because of his arrogance with state FM he couldnt move.
    6. Opening up FDI in areas of defence, rail and many areas.
    7. Pushing real growth through focus on housing sector which is key for any growth.
    8. Getting many billions of investment in Coal sector & related energy sector by cleaning up Coal india and many other navaratnas…though the after effects of the policy from MMS like NPA’s still persist while govt is doing this.

    There is many more….you need to be pragmatic & realist when you challenge. I feel the above is a too biased opinion.

  5. swamy

    Look, Mr Amitabh Dubey,

    First there was a churn, and the world was created.

    Then ramayana happened. Went quiet for some time.

    Then Mahabharata happened. Went quiet for some time.

    Then Modiji came, lifted Gujarat off the seacoast. Usko Sudhaara.

    Then he lifted rest of the land mass you call India, and usko sudhaara.

    Bas, rest is history. No amount of data is valid or required.

    If you think Congress did something, then we believe that whatever came before them did that. Although we believe that there is nothing called congress.

    When Modiji thinks that accepting Nobel will lend prestige to that puny award, he will accept it.

    Sab Modiji ki kripa hai, and teri data ki aisi ki thaisi.

  6. swamy

    oh, and we ran out of burnol in the first two years. now on offer, neosporin.

    the number of critics has gone up in year three, and some of the bhakts are trying to make more than one word arguments. I guess their IT cell is taking shape, but there’s still hordes of people who will tweet on command. for example, take the issue of linking aadhar card with voter id. currently the twitter universe is filled with hordes of robots tweeting in favour of link.

    I hope some day, they will grow brains, and understand the law, and other finer things. But i have been disappointed before, and see no reason to have any hope…except for some sort of mass extinction event. Now, if they are the cause of it, that would be something.

    Even someone a little aware of the world around them like Subramaniam Swamy, is a personal disapointment, because of his actions or compulsions.

    That man is currently rooting all out to send out indian army urgently to be involved in some fight somewhere. I hope he’s made commander and sent to the front as well. Along with the hordes that watch and cheer for the ‘republic’.


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