Most liberals think that the Modi government has fundamentally challenged the secular fabric of India. I disagree. Prime Minister Narendra Modi needs to be appreciated for consistently espousing messages of unity and tolerance in the face of the constant stream of bigoted statements from his party colleagues in the Lok Sabha. His critics need to realise that he has little control over the fringe elements of the Sangh Parivar.

I also don’t find problematic the government’s extreme emphasis on growth, urbanisation and industrialisation. There really isn’t any chance of sustained prosperity without industrialisation and the Big Machine. Modi isn’t the first prime minister to clearly pursue such objectives with a passionate zeal. Jawaharlal Nehru made modernisation the bedrock of his vision for an India with a “scientific temper”.

The diagnosis

What I have a problem with is the ideological framework through which the government and its advisors pursue economic policy-making. The current government’s economic narrative runs something like this:

The United Progressive Alliance, because of Sonia Gandhi’s leftist leaning, spent too much, and because of Manmohan Singh’s powerlessness caused too much of policy paralysis and corruption. The first caused inflation and debt, which spooked investors and rating agencies, and the second led to a drop in investment because the “ease of doing” business was not good enough and projects got stuck in bureaucratic logjam. Moreover, the UPA government failed to take advantage of a new mandate in 2009 to pursue the much-needed liberalising reforms, namely labour and capital account deregulation. This, goes the narrative, has prevented the emergence of India as the next manufacturing giant of the world after China.

The treatment

To rectify this, the Modi government has committed itself to removing policy paralysis, pursuing infrastructural investment, deregulating factor markets and easing regulatory burdens. This has meant clearing most infrastructure projects through the environment ministry – a decision we may eventually come to regret in a generation because of its environmental impact. It has also meant continued emphasis in opening India to further international capital flows by opening insurance, and railways among other sectors for foreign investment. Meanwhile, the government is geared towards introducing reforms by changing land and labour markets.

The result

Growth may or may not have picked up, depending on how one understands the juggling of statistics over the past six months. But what is clear is that there has not been a manufacturing turnaround of the kind wanted by the Modi government.

The rosy picture of an annual manufacturing growth of 7% created by the new-series data released by the Ministry of Statistics doesn’t match the story being told by other crucial indicators. Exports have actually declined over the past year, and the Industrial Index of Production for manufacturing in March 2015 was only 2.3% more than March 2014. Moreover, an analysis by the Indian Express of 286 manufacturing companies of the BSE-500 index list shows “net sales to have registered a 2.3 per cent decline in 2014-15 over the preceding fiscal”.

Unlearnt lessons

Why is this so? The Modi government has failed to realise that without some activist trade and industrial policies, industrialisation in general and manufacturing in particular rarely, if ever, take off. This is perhaps most evident through the developmental history of the United States, China, South Korea, Japan and practically any major country that has managed to become rich over the past century.

The United States, for instance, had the highest tariffs of any major economy till the First World War. There is a general consensus among economic historians that severe protection (from British and German competition) played a role in making the US a giant in capital goods industries – particularly steel and automobiles. Similarly, the Chinese have thoroughly subsidised steel and solar energy sectors through state-regulated finance (most of the banking in China is state-owned). The result is that the Chinese make more steel than the rest of the world combined and are now emerging as the clear world leader in the field of solar panels.

Such policies are not anti-market. Instead, they advocate a collusion of state and market capabilities. The state, through quality bureaucratic analysis, manipulates and helps the private sectors reach competitiveness. These measures may include conditional subsidies, facilitation of cheap technology transfer, forcing small firms to merge to reach economies of scale, and temporary trade protection.

The TINA narrative

Instead of taking this approach, the Modi government has bought into the famous There Is No Alternative argument. TINA argument rests on a few axioms. Private sector – both domestic and foreign – is the only sector that could ensure profitable and hence “rational” investments. This means that capital mobility – both national and international – has to be deregulated. Once the deregulation is achieved, the government must engage in a race for thorough simplification of regulations and factor markets – the “ease of doing business” – to attract this investment. In the case of the Modi government, you may also add marketing tricks like Make in India. In other words, there is no alternative to deregulation, privatisation and trade liberalisation.

Factors like technology, economic structure and market demand and sizing barely make into such analysis.

The problem is that once this is implemented, there is virtually no end to this “race to the bottom”. As a poor Third World country, India shall never have the quality infrastructure, institutions or laws that are so common in upper-middle income and rich countries. Such quality public goods are largely the result of development rather than the cause of it. For instance, a country cannot eradicate petty corruption till it becomes reasonably high-income.

No matter how much deregulation, disinvestment or trade liberalisation a government pursues, every time there is that inevitable capital exodus or collapse in investment, pundits will still blame the government for not pursuing “structural reforms” rigorously enough. One such exodus has already begun with the withdrawal of foreign institutional investors from domestic equity markets over the past three months. For most pundits, the culprit was again the unwillingness of the government to pursue tough “reforms”.

No doubt some “reforms”, like easing of labour laws and Goods and Services Tax Bill, are really needed. But as long as the government thinks that deregulation, general infrastructure investment and “ease of doing business index” is the end of the story as far as raising investment (and hence growth) is concerned, it shall face stringent disappointment.