Modi’s new swadeshi deal

Prime Minister Narendra Modi has the uncanny knack of turning adversity into opportunity. When he began his address to the nation on May 12, his fifth since he imposed an unprecedented nationwide lockdown, most expected him to dwell on how his government was handling the COVID-19 pandemic and on plans for an exit strategy. After all, the number of coronavirus cases since the country went into lockdown on March 25 had risen from 564 to 70,756, and over 2,293 Indians had died of the disease. The lockdown had already been extended twice and will complete 55 days on May 17 when the third phase ends. Yet, half the country’s 733 districts remain in the red and orange zones where most of the restrictions on movement will continue into Lockdown 4.0. With these districts accounting for as much as half of India’s GDP, the prospects for economic revival look bleak. More ominously, there are no signs of the infection curve flattening to indicate that the virus has been effectively contained.

Rather than highlight these concerns as expected, the prime minister instead chose the occasion to present a soaring vision of India’s ability to emerge as a strong, self-reliant nation that will also be a world leader. To quell the rising sense of disbelief his words may have provoked, he talked money, announcing a financial stimulus package of Rs 20 lakh crore, equivalent to 10 per cent of the GDP, to revive India’s Covid-stricken economy. This is almost double the amount most experts had been demanding at the beginning of the lockdown. Terming the package Atmanirbhar Bharat Abhiyan (Self-reliant India campaign), Modi also promised to undertake “quantum” reforms for the economy. “Our responsibility to make the 21st century the century of India will be fulfilled by the pledge of a self-reliant India. This will be a new vow for every Indian,” he declared.

Inevitably, the Opposition ripped into Modi’s speech. Congress leader Jairam Ramesh tweeted, “The prime minister did what comes to him best, Maximum Packaging, Minimum Meaning. It was a case of classic NAMO: No Action Messaging Only.”

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THE BIG PICTURE: Prime Minister Narendra Modi during his May 12 televised address to the nation.

However, that the prime minister meant business was evident from the very next day as his finance minister, Nirmala Sitharaman, began daily announcements of financial packages and reforms. By May 15, she had listed packages for urban migrants and farmers and sectors such as Micro Small and Medium Enterprises (MSMEs), real estate and power. More is expected for the education, coal mining and manufacturing sectors in the coming days. While many in the MSME sector were unhappy that they did not receive any direct financial support, other experts criticised the government’s stimulus packages for relying more on easing of credit facilities and moratoriums on loans rather than infusing hard cash benefits directly to the needy as many advanced countries had done (see accompanying reports).

Yet despite the complaints, the prime minister’s address sent out three major signals on how he plans to conduct the twin battles of containing the coronavirus and reviving the flailing Indian economy in the months ahead. On the health front, he indicated that India would have to learn to live with COVID-19 and that it was imperative to resume economic activity. As he put it: “Ladenge bhi aur badhenge bhi (We will fight, and we will grow).” When it came to relief, he made it evident that there would be no free lunches for anyone except the truly needy and the government would instead fund measures that would encourage sustainable growth. Most importantly, by enunciating the goal of self-reliance, the prime minister signalled a fundamental resetting of his government’s economic vision to meet the challenges posed by a Covid-stricken world where no one knows how long the pandemic will last and when life will return to normal.

Self-reliance is a vision that has always been in consonance with the Bharatiya Janata Party’s ideological moorings. Its parent body, the Rashtriya Swayamsevak Sangh (RSS), has long proclaimed the need for a ‘Swadeshi’ or home-grown model of economic development as a project close to its heart. However, lest the slogan be construed as signalling an insular turn, Sitharaman was quick to clarify that Mission Swadeshi was not about turning away from the world. “When the prime minister said self-reliant India,” she said, “he did not want to make India an isolationist country. The intention is to take local brands and make them global. To have the capability to build enterprises that will help the world.” Indeed, some observers saw the swadeshi tag as a cover to pre-empt resistance from Sangh Parivar organisations over some of the bold reforms he proposed to unveil.

Meanwhile, given the distinctly Nehruvian ring to both self-reliance and swadeshi, many industrialists fear a Great Leap Backward. As Ramesh Vaswani, an industrial consultant, said, “It symbolised a system of manufacturing that followed outdated and antiquated practices, governed by the heavy hand of bureaucracy. Self-reliance and the protectionist policies of the past saw industries turn inefficient both in terms of production and costs, making consumers suffer. It would be a non-starter if this government goes back to that.” Piyush Goyal, the Union minister of commerce and railways, however, dismissed all fears of the government turning protectionist. Speaking at a university event soon after, he clarified, “Self-reliance is about working and engaging with the world from a position of strength. It’s about your own self-confidence, that you are not dependent or overly-dependent on the rest of the world. It’s about the confidence of the nation that you can produce quality products in a cost-effective manner, that you can compete with anybody in the world even with the disadvantages we face.”

The Sangh Parivar affiliates india today spoke to were vehement that they were not going down the path Nehru and Indira Gandhi followed. Ashwani Mahajan, convenor, Swadeshi Jagran Manch (SJM), which wields considerable influence in government policy-making, said, “The RSS had consistently opposed the Congress dependence on the public sector in the initial 40 years after Independence and was even against bank nationalisation. The fact is, after its model failed, the Congress did not fall back on domestic private entrepreneurship to deliver but preferred foreign ones without trusting our own people to do so. The prime minister’s self-reliance campaign puts the trust back in the people of India, that’s the difference.” Mahajan is, in many ways, echoing the philosophy propounded by the SJM’s founder, the late Dattopant Thengadi. In his book, The Third Way, Thengadi wrote, ‘Swadeshi is the outward practical manifestation of patriotism. Patriotism is not considered isolationism nor are patriots against internationalism. Their pleas for national self-reliance are not incompatible with internationalism provided the latter is on equal footing with due regard to the national respect of every country.’

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According to S. Gurumurthy, editor of Thuglak and a key Sangh ideologue, the swadeshi model of development holds that “there has to be a cultural underpinning to economic development unlike the western model that insists on one size fits all”. So, why did Modi require a pandemic to launch the swadeshi model and not do so in his first term itself? Gurumurthy suggests two reasons. Globalisation, he says, works only if there is mutual trust between nations, but has been in retreat in the past decade or so because the distrust between nations, particularly after the 2008 economic meltdown, made it unsustainable. Donald Trump’s victory, he believes, was an outcome of the diminishing trust in globalisation to deliver and the growing consensus that patriotism and nationalism were better answers to economic development. The pandemic only sharpened that distrust, with every country waging its own battle to stem its spread. The other reason Gurumurthy advances is: “When the prime minister began his first term, he hadn’t attained the kind of stature he now has on the global stage: a confident, mature world leader backed by the importance of India’s economic growth.”

Those who work closely with Modi say nothing he says or does is casual or impulsive, there is much deliberation and consideration behind his every move. The process of formulating both a relief and reform package, India today learns, had been in the works for weeks even as the pandemic raged on. To his credit, Modi had sensed that coronavirus would emerge as a threat in January itself, soon after the World Health Organization had first notified the virus outbreak on January 5. When he first mentioned the virus at a cabinet meeting, Nitin Gadkari, his colleague, recalls that most of them didn’t take the threat too seriously but weeks later would acknowledge to Modi that he was spot on.

As early as January 25, Modi got his principal secretary, Dr P.K. Mishra, to convene an inter-ministerial meeting of officials from the external affairs, home, health and civil aviation ministries to assess the threat of coronavirus and take precautions. It helped that Mishra, a Gujarat-cadre officer, came with vast experience in handling disasters and calamities. Modi had entrusted him with ensuring that Kutch was rebuilt after the devastating earthquake of 2001. Mishra also helped formulate the National Disaster Management Act in 2005 when he was in the Union government. And it is learnt that he advised Modi to use the act to declare a national lockdown rather than the outdated Epidemic Diseases Act, 1897.

Modi’s decision to impose a peremptory lockdown on March 24, giving the public a mere four-hour notice, came after his top health advisors said that there were signs that the disease was about to reach the community transmission stage. Given India’s poor healthcare infrastructure, this was a national tragedy waiting to happen if the prime minister did not act with urgency. Once the lockdown was in place, Modi got down to striking a fine balance between lives and livelihood. He got Sitharaman to announce a slew of relief measures for the poor and farmers soon after. The Reserve Bank of India (RBI) also stepped in to bail out business by easing the terms of credit and flushing the system with liquidity. The lockdown, however, had one serious repercussion. Not only did the blocking of interstate movement of essential services lead to widespread disruption, urban areas began seeing an exodus of migrants that tore the nation’s heart. Mishra discussed the issue with Modi, and he cleared the formation of 11 empowered groups of secretaries and experts to execute a medical emergency plan apart from ensuring free movement of vital goods and delivery of relief measures. It worked.

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PANDEMIC PAINS: PM Narendra Modi, with his cabinet members, discusses the COVID-19 situation with chief ministers, via video link

As for the logjammed economy, the prime minister and his cabinet colleagues began widespread consultation on how to kickstart economic activity. Modi believed that a financial stimulus package apart, the government should use the opportunity to introduce major reforms. As Mishra said, “The basic distinction the prime minister wanted to make, as compared to other countries, was that we should go beyond relief and firefighting measures. That, with globalisation in retreat and rising protectionism, India should work towards bringing about major reform where we reduce our dependence on other nations and at the same time occupy space that may open up internationally for exports.”

The finance ministry was asked to prepare a package of relief and reforms in mid-April, but the PM wanted more wide-ranging changes. The PMO then convened over half a dozen meetings with secretaries of key sectoral ministries to hammer out major reforms that could be executed. These ministries had earlier been in touch with stakeholders to gather their viewpoint. Industries secretary Guruprasad Mohapatra says there was frenetic activity behind the scenes to focus on around a dozen key sectors rather than “trying to be a leader of everything”. There was also a major exercise to map states according to their competitive advantage in sectors to aid the investment decisions of businesses. The effort, Mohapatra says, was to ensure that “all states compete with each other and some emerge as champions in particular sectors”.

Individual ministries were told to firm up their plans in key sectors and present them to the government. The pharmaceutical sector in India, for instance, is highly dependent on China, Europe and the US for what are known as Active Pharmaceutical Ingredients (API), the raw material used in manufacturing drugs. Seventy per cent of API imports come from China alone, at a cost of $2.5 billion. For the past year, the Centre has been working with states like Himachal Pradesh, Assam, Telangana and Andhra Pradesh to set up API industrial parks so that India can become self-sufficient. These will now get an additional push under Modi’s self-reliance mission.

Yet, pushing through reform in India, as even Modi has realised, is an uphill task. In his first term, while reforms such as a unified goods and services tax and a banking code were implemented, other initiatives, like the Make in India scheme, failed to make even a dent. Though he has yet to fully unveil the contours of his Atmanirbhar Bharat Abhiyan, Modi in his May 12 speech outlined that it would rest on five pillars, undertaking quantum reforms for economic growth, world-class infrastructure, leveraging India’s demographic advantage, harnessing cutting edge technology and generating demand. He also talked of focusing on the four Ls of production, Land, Labour, Liquidity and Laws.

Each of these involves a series of obstacles and tough decision-making. With land being a state subject, Modi faced stiff resistance from states when he tried to enforce a land acquisition act in his first term, forcing him to shelve the plan. His focus since has shifted to having model land leasing laws and for states to develop land parks to attract industry. With regard to labour, his government has already moved a legislation reducing the 44 labour laws to a set of four codes. While the one on the Wages Bill has been passed, the other three, on Occupational Safety, Industrial Relations and Social Security, are pending with the standing committee of the Lok Sabha. Several opposition parties are objecting to its clauses and with the BJP still not in a majority in the Rajya Sabha, it will have to persuade some other parties to endorse the government’s stand. Meanwhile, three BJP-ruled states, Gujarat, Uttar Pradesh and Madhya Pradesh, were nudged by the Centre into announcing major labour reforms to prepare the ground for its passage in Parliament. On liquidity, the government and the RBI have worked in tandem to infuse an excess amount of funds at cheaper interest rates. Although with industry on its knees and bankers still cautious about lending money, production will have to restart for the move to have any effect.

The key to ensuring the success of the self-reliance campaign, however, remains the country’s ability to ramp up production capabilities to meet the huge domestic demand for goods and services. With India’s per capita income still at a low base of $2,000, compared to China $10,000, there is plenty of scope for improvement. Gross capital formation in the country as part of GDP is now around 30 per cent. If the country has to raise it to 32 per cent to boost production capabilities, it needs close to $900 billion in investment. With current foreign direct investment being only around $60 billion annually, the bulk of the investment will have to come from domestic investors. That requires a dramatic improvement in the investment climate. Amitabh Kant, the CEO of NITI Aayog, believes that the time is ripe for reforms across the board to attract industry. As he points out, “Electricity rates are higher than those of other countries; we charge highly for land, manufacturing is taxed heavily compared to other countries, apart from stifling labour laws. All these need reform.”

Telecom is a good example of how the Modi government introduced a slew of policy incentives in 2014 to invite leading manufacturers to set up base in India and sell products both domestically and as exports. That saw a dramatic turnaround of fortunes, with over 260 companies setting up shop. Handset production grew from 58 million in volume and Rs 18,900 crore in value in 2014 to 290 million in volume and Rs 1.7 lakh crore in value in 2018. Exports of mobile phones touched Rs 11,200 crore in 2018. Determined that India should be a world leader in this sector, Modi has set a target of touching Rs 14 lakh crore by 2025 through a system of incentives for manufacturers. The government now cites the development of this sector as proof that the self-reliance policy is not inconsistent with the plan to become the supply chain of the world in particular sectors. Pankaj Mohindroo, chairman, Indian Cellular and Electronics Association, cautions that India should be balanced about its self-reliance policy because, as he says, “For us to grow, domestic demand is just not enough. Indian manufacturers will have to seek global pastures to sell their products and that would mean a give-and-take policy to be part of the global value chain.”

If India has to woo foreign companies who want to reduce their dependence on China, it will have to ramp up its infrastructure, lower costs and improve the ease of doing business while ensuring continuity in policy to win the confidence of global investors. In Budget 2020, Sitharaman said that the government was willing to spend Rs 20 lakh crore annually for the next five years to ramp up infrastructure. These projects now need to be taken up post haste to boost employment and give a positive demand push to the economy.

However, to bring about reform across the nation will be difficult in the short run. Commerce secretary Anup Wadhawan talks of “building pockets of excellence where you mimic the best environment in the world so that the investor cannot distinguish whether he or she is in a developed country or a developing one”. This entails creating platforms with state-of-the art infrastructure and logistics either close to a port or a major railway junction. Instead of the old Special Economic Zones (SEZs) that failed to take off for various reasons, what can be built are competitive economic zones that permit manufacturers to export their products, amortise the benefits they are availing from the zone and allow them to sell to domestic consumers as well. And rather than the government setting up such zones, they can be given out to private concessionaires to develop and maintain as is being done for airports across the country.

Experts say there are three factors that will determine whether the government can make a success of its self-reliance campaign. The first is short term, ensuring that the fiscal stimulus lifts industry out of its current morass, spending more if necessary. It is, however, a Catch-22 situation, with diminished revenue collections squeezing financial room even further. While there has been a sensible and clever balancing of government funds to be disbursed as part of the fiscal stimulus, the government will have to breach its fiscal deficit target to meet the crisis. Secondly, the government will have to desist from micromanaging economic growth and allow markets and investors to make their own choices instead, while keeping the heavy hand of bureaucracy out of the way. Finally, our success will depend on how well India is able to contain the spread of the pandemic in the coming months by keeping it at manageable levels. Another major lockdown would undo the best-laid plans of any government in the world.

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About the author: Sohom Das
Founder of Tuccho.
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