In Narendra Modi, Panagariya – and the vast army of editorial and op-ed writers influenced by him – has finally found a prime minister who unabashedly believes in free market as opposed to state control, free trade instead of protectionism, and boosting the entrepreneurial drive as opposed to clocking the ego of the bureaucrat.
Panagariya began to extol the virtues of the “Gujarat Model” long before Modi became the Bharatiya Janata Party’s prime ministerial candidate. He has defended Gujarat’s poor human development record by noting the drastic improvement of human indices under Modi and by casting doubts over the usage of international malnutrition parameters for Indian population (which presumably is genetically shorter and thinner than other ethnic groups). Such defence has entailed very public battles with the likes of Amartya Sen and Jean Dreze.
Once the general election approached in 2014, media stories about Panagariya advising the BJP government-in-waiting began to surface. Panagariya and Modi’s mutual reverence has finally culminated in Panagariya spearheading the revamped Planning Commission.
Yet another think-tank?
The NITI Aayog has its good and the bad sides. The good perhaps being the conscious effort to take into account the role of states in making of the national economic strategy. The bad reflected in the wholesale dispensing of the five-year economic strategy-making framework (China still publishes five-year “guidelines”) and the mechanism of sectoral planning.
Still, its modus operandi remains unclear. Will it have powers that are binding? Or would it just be a think-tank – taking part in the market of ideas with a host of other think-tanks, intellectuals and media outlets?
Nevertheless, the appointment of Arvind Panagariya and his traditional camaraderie with the centre-right crowd of the BJP tells us much about what economic strategy the NDA government is likely to pursue.
Welfare in kind
From the numerous op-ed pieces and books Panagariya has authored, his understanding of the current state of the economy appears three-fold. One, that large fiscal and current account deficit resemble poor macroeconomic management of the economy. Excessive spending has pushed prices up and dampened the credibility of the central government. For Panagariya, a fiscal deficit crossing perhaps the 4.5% mark may invite virulent reaction from Credit Rating agencies – leading to spike in interest rates, and making India an unfavourable investment location.
Two, that weakening investment (and its productivity) is the key culprit behind weak growth and employment. Weakening investment, for Panagariya, is due to the government’s inability in pursuing supply-side reforms – such as labour deregulation and tax regime stabilisation – that boost private sector confidence, and also due to the general policy paralysis at the Centre, especially the obstinacy of the Environment Ministry in holding up big projects.
And lastly, that current welfare projects – such as Food Security and National Rural Employment Guarantee Act – have largely been channelled through broken institutions such the Public Distribution Scheme and local bureaucracies. Panagariya, thus, calls for cash transfers (as opposed to transfer in kind) for renewed efficiency in promoting social justice. Welfare in cash than in kind shall reduce the profound leakages in the system and rekindle local markets, or so the logic goes.
If the above captures the illness with the economy, what then is the doctor’s prescription? Panagariya’s Track 1 reforms – as he refers to them in his book Tryst with Destiny – “aimed at accelerating and sustaining growth” are a mix of deregulation and vigorous investment in general infrastructure.
The central rationale behind this is that deregulation shall allow for better business sentiment and thus more private investment from both foreign and domestic capital. Whereas infrastructural improvements would generally cut costs and improve productivity.
The deregulation drive is centred on two areas of policy – labour and land law. The labour laws – which Panagariya single-handedly blames for weak manufacturing in India – are infamously cumbersome. There is the Trade Unions Act of 1927, which allows the formation of unions for seven or more workers, thus denying small businesses “labour-market flexibility”. And the much derided Industrial Disputes Act of 1947, which forbids entrepreneurs the power to fire if they employ more than 100 workers.
As a critic of the Preferential Trade Agreements and a consistent believer in the power of the market to guarantee efficiency, Panagariya is committed to liberalised capital and goods movements across the globe. This suggests that he is largely in agreement with aggressive slashing of foreign investment hurdles initiated by the Modi government. Moreover, at a time of a severely uncompetitive manufacturing base, Panagariya has supported calls to even further decrease the current tariff thresholds.
For Panagariya, the ability of an entrepreneur to hire and fire and not get entangled in legal problems, along with a stable tax, infrastructural and regulatory environment, should be enough to kick-start a spurt of medium-sized firms in labour-intensive sectors like textiles.
The Modi government – with its repeated emphasis on “improving the environment for business”, pushing India up the “Ease of Doing Business index”, and advertising blitz to invite foreign and domestic capital – seems to have wholeheartedly subscribed to the economic framework of Panagariya and his ilk.
In other words, getting Panagariya to head the most cerebral body in the Central government means that India should get ready for a cocktail of aggressive liberalisation of trade and capital, and deregulation of all factor markets (land and labour) in the hope of inviting capital to “Make in India”.
Whether this strategy shall make India “the next China” – as is the stated objective of this government – is something I shall discuss in my next piece.
This is the first in a two-part series on economist Arvind Panagariya.
Akshat Khandelwal's Twitter handle is @akshat_khan. He can be contacted at email@example.com.