As much as the Modi government talks about minimum government and maximum governance, there’s no denying that the government is now trying to do it all—reminiscent of the overbearing approach taken in the pre-liberalisation era. In the government’s mind, it can do anything.
Private sector not manufacturing? Government will fix it. Indians spending too much abroad? Government will fix it. Consumers not spending enough? Government will fix it. Food is becoming too expensive? Government will fix it. Imports are too high? Government will fix it.
The thing is, many of these are not for the government to spend lots of money ‘fixing’, and many of these attempts will end either in failure or have unintended consequences.
Also read: Why your iPhone 15 cost you way more than it would have in US, despite ‘made in India’ factor
Return of socialism in Indian economy
The 1950s in India was the period when the socialist mindset really began to take hold in the country’s policymaking—the government would drive growth, investment, culture, everything. The private sector would be a willing ally. Sounds familiar? It should. This is as accurate a depiction of the last 10 years as it is of the 1950s and early ‘60s.
Finance Minister Nirmala Sitharaman increased the capital expenditure budget for 2023-24 by a huge 33 per cent to Rs 10 lakh crore, or 3.3 per cent of GDP. It’s not anybody’s argument that the government should not invest in capital creation, but it needs to introspect about why it needs to to such an extent.
On the one hand, as the government argues, it needs to pick up the slack left by sluggish private investments. On the other hand is the possibility that the government is crowding out the private sector. It’s a tough line to walk for the government—if it pulls back on the throttle, the economy could slow even further, but if it continues investing at this aggressive pace, the private sector might not find the room it needs to grow in. But there’s no indication that the government is thinking about this. Perhaps they are, but keeping all discussions secret also runs the risk of being viewed as inactive.
Also read: Indians spending beyond their means. Don’t just fix it with freebies, bring policy changes
The subsidy cycle not going far
Then there is the government’s overwhelming belief that it can transform India into some sort of manufacturing hub for the world. What’s actually happening is that Make in India is making things more expensive for Indians. The reason China has become a manufacturing behemoth is because it does it far cheaper than the rest of the world. This is largely because of the way the Chinese government subsidises its industry and some part is to do with the economies of scale that those vast factories make possible.
Can India subsidise its industry to the same level as China? No. We just don’t have the resources. Rather, our resources are better spent on other things such as improving healthcare and education.
So, we are in a situation where the Indian government is subsidising industries that manufacture here, but the subsidy isn’t enough to make Indian manufacturing actually competitive. So companies are coming here and manufacturing inefficiently to make items more expensive than they could have had they been made elsewhere.
Take the example of the iPhone. The latest iPhone models—the ones assembled here—cost anywhere between 20-63 per cent more in India than they do abroad.
Some of this is because of Apple’s pricing policy, and some has to do with the exchange rate, but a large part is because the phones are assembled here and not actually manufactured. About 90 per cent of the parts still come from abroad, and so they attract import duties.
Make in India is not really reducing India’s import dependence. It’s barely better to import inputs and assemble the finished products here than to import the entire product itself. The government’s ‘we can do anything’ attitude is only making all of these products more expensive for Indians.
This ‘maximum government’ attitude is also clear in the way the Modi government wants to track how Indians are spending abroad. The 20 per cent Tax Collected at Source on foreign spending is reminiscent of the pre-liberalisation days when the government used to impose limits on the foreign exchange you could take abroad, and the days when you had to take permission to take it out of the country in the first place.
Another way the government is possibly biting off more than it can chew is in single-handedly trying to eliminate the economic distress of the bottom half of the economy, laudable as the attempt is. Economic data is pointing towards an inequitable recovery from the pandemic, where the relatively well to do are doing better than before, and the relatively worse off are even worse off. Rather than encouraging and facilitating increased employment—and no, the few factories foreign companies are setting up are not nearly enough—the government is instead trying to help those at the bottom by increasing subsidies on food and fuel.
How many more people can and should be subsidised and for how much longer are again questions that need to be discussed.
The government’s intrusions extend to a jerky, unpredictable trade policy that not only hurts trade partners but also our own farmers. When food prices were shooting up, the government chose to ban or restrict the export of wheat, some kinds of rice, and onions. Our trade partners have asked India some very basic questions at the WTO, such as why we did it, why we haven’t yet formally informed the WTO, how long these restrictions will last, etc.
In addition, the export ban punishes farmers for something not in their control. Why is it that companies making electronics are being given incentives to manufacture here—even though they make costlier products—while farmers are the ones that take a hit when the price of their produce rises?
Yet another way the government is seeking to exert control is by banning the import of laptops and other electronics unless the companies doing the importing have the right licence. There’s word in the government that the deadline for this will be pushed back further than it already has, but that relaxation is because the industry is pushing back hard, not because the government sees anything problematic with the idea.
A lot of what India has gained over the last 30 years was because the government opened the country and economy up to the world in the 1990s, allowed a relatively free flow of imports and exports, and then because it took a step back and allowed the private sector to drive growth in the 2000s. Openness in attitude and policy helped India.
In its drive to constantly display strength, the Modi government is now exposing India to the weaknesses of the past.
Views are personal.
(Edited by Anurag Chaubey)