Milan Vaishnav
[dropcap]T[/dropcap]he National Democratic Alliance’s (NDA) general election campaign generated huge expectations of economic renewal, yet the government has talked largely in generalities about economic reform. Indeed, today we know far more about its foreign policy and social aspirations than about its economic policy vision. Prime Minister Narendra Modi has rebutted criticism about the absence of a grand vision, telling a Madison Square Garden audience, “I plan to do big things for small people.” The “Make in India” campaign seems like that grand vision, but at present, it is only slick marketing backed by promises to slash red tape.
To actually encourage firms to “Make in India,” the government will have to enact substantial policy reforms. In pursuing these reforms, the government must decide the yardstick against which it will evaluate economic policy alternatives: is it the net impact on businesses or on consumers? The answer one chooses leads to a series of distinct policies. Pro-business policies imply government intervention to promote firms, while a pro-consumer approach envisages a competitive market with a less intrusive role for government. While the former approach suggests protectionism, restrictions on foreign investment, and special business privileges, the latter approach would instead seek pro-trade policies, better consumer protection, and equal treatment across firms.A pro-business approach favours dominant incumbents over new market entrants, while a pro-consumer approach encourages lowering entry barriers to enable “creative destruction” of inefficient firms. Pro-business policies are often defended in the name of job creation and employment preservation, but what good are jobs unless they add value to consumers? When a government prevents productivity gains to protect a few businesses at the expense of many consumers and producers, it is simply a form of minority appeasement. Such policies impose costs on society, and government lacks the information to make intelligent decisions on the trade-offs involved.
The interests of the “small people” whom the prime minister seeks to help are best served by high competition and precise consumer protection regulations, but these often run against the interests of incumbents. While businesses can be pro-consumer, dominant firms can also use their clout to entrench their positions. Given the influence of some business houses and the relatively new and incomplete nature of Indian liberalization, there is a risk that business lobbying can pressure the government to neutralize competition and harm consumers. What is good for the nation’s biggest business houses is not always good for the country.
The jury is still out on whether India’s growth story has been more pro-business or more pro-consumer, but there is cause for concern. More than 40% of India’s billionaires are from industries heavily dependent on government largesse, and leaders in other sectors, including information technology, regularly lobby for concessions. Moreover, government firm ownership often restricts foreign market access, as industries dominated by public sector companies have been particularly successful in fending off competition. Although the new government seems loathe to present an overall economic vision, the measures it has (and has not) taken send a mixed signal about its approach.
While the proposed reductions in red tape are pro-consumer measures, there are also hints of a pro-business tilt. The government has spoken about reforming the management of public sector enterprises rather than subjecting them to greater market tests, and reports suggest there are proposals to restrict import of non-essential items such as alcohol, sugar, and edible oils. The government has also been non-committal on liberalizing sectors where competition would help consumers but pressure domestic producers, and has only cautiously moved on lifting foreign direct investment (FDI) caps in key sectors like defence. While the government has not reversed its predecessor’s decision on FDI in multi-brand retail, it has criticized it at every turn. It is, therefore, no surprise that foreign retailers have not rushed to set up shop. One reason for this may be Modi’s political background.
While his record as Gujarat’s chief minister is marked by improvements in economic freedom, a prime minister’s role is quite different from that of a chief minister’s. State governments, unlike the central government, do not control sectoral entry/exit rules, most taxes and tariffs, foreign trade or consumer protection regulation. While state governments can take steps to improve the business climate, only the centre can affect overall market structure through pro-consumer policies. For the central government, “promoting business” confuses means with ends. If businesses are meant to serve consumers and the government is supposed to serve all Indians equally, what’s the way forward? For starters, the much-heralded “Make in India” campaign needs to be more than just a “Vibrant India” policy.
If the government focuses on “promoting business”, it might fall into the trap of protectionism, concessions, and diluting consumer protection. The campaign must instead expand economic freedoms and improve ease of doing business, without picking winners, increasing protectionism, or compromising on consumer protection. The Prime Minister has repeatedly stated that government should not be in the business of business, and has taken modest steps to enable a greater role for market forces. But when policy issues demand difficult trade-offs, will the government side with business or consumers? Milan Vaishnav is an associate with the Carnegie Endowment for International Peace in Washington, D.C. Suyash Rai is a senior consultant at the National Institute for Public Finance and Policy in New Delhi.
