Blog Post

AEIdeas

In my most recent Wall Street Journal column, I write about how Prime Minister Narendra Modi, elected in 2014 in part to revive India’s economy, has come under attack from within his own Bharatiya Janata Party. In a nutshell, his critics charge Modi — or his handpicked finance minister, Arun Jaitley — with tanking Asia’s third largest economy instead of fixing it.

Some of this recent criticism is over the top. While India’s growth may have slowed, the economy is certainly not in a tailspin. (The International Monetary Fund expects growth to recover next year.) Nonetheless, the ongoing debate about the economy points to a larger development. Over the past three-and-a-half years, the BJP, once India’s natural party of business, has morphed into its party of bureaucracy.

Read the column: Modinomics is in trouble

The Modi government has granted often-rapacious tax officials harsh powers of search and seizure with little oversight. Policy decisions show scant regard for the BJP’s traditional base of small traders and shopkeepers. A new goods and services tax, advertised as “good and simple,” came larded with migraine-inducing complexities that only an Indian bureaucrat could love.

The prime minister’s day-to-day reliance on officials — rather than on outside technocrats or career politicians — is so great that even a recent expansion of his council of ministers included the induction of four former bureaucrats.

It wasn’t meant to turn out this way. Traditionally the BJP, as well its predecessor the Bharatiya Jana Sangh, drew much of its support from trading and merchant castes. In small-town north India, where the BJP often played second fiddle to the left-of-center Congress Party, the local shopkeeper often doubled up as party representative. He shared not only the BJP’s dream of Hindu revival, but also its instinctive mistrust of the heavy-handed socialist state constructed by Congress.

During its first term in office (1998-2004), the BJP simplified taxation and rolled back the state’s role in the economy by pioneering India’s first privatizations of state-owned companies. According to an apocryphal story, Finance Minister Jaswant Singh had a tax form simplified by asking a top bureaucrat to fill it out for him.

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Modi was expected to deepen this business-friendly approach. He had campaigned as a pro-business reformer who would bring jobs and development to the country. His catch phrases included “minimum government, maximum governance.” In Gujarat, which Modi ruled for nearly 13 years before becoming prime minister, Modinomics was built on a reputation for rolling out the red carpet for business.

Modi has done a fine job of attracting foreign investment to India, in part by strongly signaling that the country is open for business. He has also promised to make it easier to do business in India. The trouble, as businessmen complain privately, is his chosen instrument: the very bureaucrats who made India a byword for red tape in the first place.

On taxation, the Modi government has not rolled back but doubled down on its predecessor’s worst instincts. Both the prime minister and the finance minister speak increasingly about formalizing the economy and increasing the tax base. On the ground, this means imposing both complexity and corruption on millions of struggling small businesses.

For now, it’s hard to say what, if any, political impact unleashing a tsunami of tax notices on businesses and force-fitting the world’s most complex goods and services tax (GST) on a largely informal economy will have. Traders and merchants have protested in several cities. The government has been forced to reduce tax rates on some items, and to simplify filing requirements for small business. If things go well, the protests signal only teething troubles rather than deeper problems with the design and implementation of GST.

But while the political fallout of Modi’s over-reliance on bureaucrats remains uncertain, there’s no question that his business-friendly image has lost its sheen. The BJP, long India’s party of business, has morphed into its party of bureaucracy.