Much has already been said about the first Independence Day speech delivered by Narendra Modi as Prime Minister — the extempore oratory, the emphasis on sanitation and on women’s issues, and so on. The closing down of the Planning Commission has been both welcomed and decried. However, what was less commented upon is the fact that that the speech was not a series of unconnected statements but the articulation of an explicit vision for India, including an internally consistent economic model that is a clean break from India’s past. Interestingly, the emerging model looks increasingly like an adaptation of the strategy used by East Asia to rapidly modernise — less Reagan and Thatcher, more Lee Kuan Yew.
Since 1991, India’s economic framework has slowly shifted away from the socialist vision of Jawarharlal Nehru but, till now, politicians seemed almost apologetic about making the changes. In fact, many of the institutions of the Nehruvian era had continued to thrive. Perhaps the most important of these was the Planning Commission that had continued to churn out Soviet-style “Five-Year Plans” and remained at the heart of a centralised resource allocation process. In his speech, Mr Modi abolished the institution in one sweep. It will now be replaced with a National Development and Reform Commission that will probably function more as a think-tank.
So, does the abolition of the Planning Commission mean that Mr Modi is India’s Thatcher? His speech argued for a model based on export-oriented manufacturing. This includes encouraging domestic manufacturers to export as well as inviting the world’s top companies to relocate production to India. As he put it “Come, make in India”. Notice that this approach is not about agnostic free-markets, but more akin to the East Asian mercantilist strategy of creating competitiveness by investing in industry clusters.
This emphasis on manufacturing is significant because India’s economy and its exports are dominated by the services sector. The tertiary sector has steadily increased its share of the economy and now accounts for around 60 per cent of the GDP. The industrial sector, in contrast, has seen its share remain unchanged at around 26 per cent of the Indian economy for the last three decades and the manufacturing sub-sector is less than 15 per cent of GDP. Compare this with China where manufacturing generates 34 per cent of GDP.
Mr Modi’s emphasis on export-led manufacturing should be seen, moreover, in the wider context of his government’s focus on heavy infrastructure ranging from power generation to railways. His government also seems to be expending energy on reforming labour laws, an area previous governments has not dared to touch. All of this is necessary for East Asian growth model based on the mass deployment of labour and capital in industry. Notice that it is also consistent with Mr Modi’s frequent references to the need to build/expand cities; urbanisation and industrialisation being two sides of the same coin. Contrast this with the traditional idea that urbanisation was a problem to be discouraged.
The preference for an “East Asian” growth model makes sense given India’s demographic pipeline. India needs to create jobs for 10 million new entrants to its working age population every year. It also needs to accommodate the millions who wish to shift away from agriculture which still employs half of the workforce but generates only 13 per cent of the GDP. Although the services sector was able to generate growth in the past, it has proved to be a poor job creator and only employs 27 per cent of workers, far lower than its share of the economy. In contrast, construction and manufacturing have done much better at creating jobs for semi-skilled workers. Given Mr Modi’s record as an administrator, he will probably succeed in reducing bureaucratic hurdles to industrialisation. His greater challenge will be the financing of his growth model. The East Asian model is hinged on a sharp increase in the country’s investment rate. The high growth phase in Japan and the East Asian tigers was accompanied by an investment boom.
India’s fixed investment rate has declined in recent years to around 30 per cent of the GDP whereas the East Asian model would require a rate closer to 40 per cent. Foreign capital can play a supporting role, but ultimately it will boil down to expanding the domestic financial system by an order of magnitude without risking a future crisis.
Another major problem will be the migration of tens of millions of people who will be sucked into the expanding industrial economy. India does not have China’s socio-political controls to manage such a large-scale movement of people. Therefore, it will have to be handled in a totally different way. Mr Modi is hoping to pre-empt the problem through his project of creating a hundred “smart cities” but we do not yet know exactly how the programme will be implemented.
Whether or not one thinks it will succeed, it is fair to say that Mr Modi has articulated a coherent vision for India for the first time since Nehru. It also appears that Mr Modi will be less of a free-market champion like Thatcher and more of a “moderniser” like Lee Kuan Yew or Deng Xiaoping who viewed markets as a tool rather than as an end. Indeed, like these East Asian leaders, Mr Modi seems to view economic growth as part of a broader modernisation effort. It is no coincidence, therefore, that he speaks of toilets and sanitation just like Lee Kuan Yew once imposed severe fines for littering and spitting in Singapore. The city-state used to be lampooned for its cleanliness campaigns but for Lee Kuan Yew it was part of his overall modernisation mission. It appears that Narendra Modi views his mission in the same way.
The writer is global strategist, Deutsche Bank
