Narendra Modi Is No Populist

An increasingly common line of attack against Indian Prime Minister Narendra Modi is that he has abandoned economic reform to embrace populism. “As he gears up for next year’s general election,” the columnist Sadanand Dhume wrote in a recent op-ed in the Wall Street Journal, “Mr. Modi sounds more like a tub-thumping Latin American populist” than the business-friendly politician he campaigned as. Unquestionably, the Modi government has disappointed on privatizing state-owned enterprises—something it once promised to do—and it has increased tariffs and expanded welfare schemes.

However, it makes little sense to judge Modi on his approach to state-owned businesses and tariffs alone. Not only have reforms in those fields arguably reached a point of diminishing returns, but such an outlook also ignores a wider set of policies that foster a healthy market-oriented economy. In a country that still has vast numbers of poor people, moreover, welfare programs designed to deliver bare essentials while keeping overall government spending and deficits in check can hardly be called populist.

It is true that India’s progress since Modi’s 2014 election hasn’t been particularly rapid, but gradual reforms coupled with welfare protections have delivered economic growth and steady declines in poverty for the last 40 years now. The pace has made both the economy and the polity more resilient, and there is no reason to expect or want something different now.

Take privatization, which first became a talking point in the 1980s. In those days, the new Washington Consensus called for ending state control over business, reducing trade barriers, and promoting fiscal discipline. At that time, India’s public-sector enterprises were huge, accounting for about a third of the country’s nonagricultural GDP. Moreover, trade barriers were extensive, and fiscal profligacy was rampant, with the central government’s fiscal deficit consistently running above 7 percent of GDP in the late 1980s.

Thirty years later, India’s public-sector enterprises are still large, but they have declined in influence, accounting for 14 percent of nonagricultural GDP. There is surely still room for reform, but it is not apparent that focusing a lot political energy on further privatization would be worth the incremental returns. The privatizations of the Boris Yeltsin era in the early 1990s in Russia offer a cautionary tale. They resulted in the cheap sell-off of state assets and the vast enrichment of Russia’s oligarchs. Worse still, in the subsequent backlash, the Russian state has re-established its control over large swathes of industry.

On the trade front, in the last several decades, India has gone from a relatively closed economy to one of the world’s more open ones. India’s trade openness, which is measured by the ratio of exports and imports to GDP, stands at 41 percent. That is higher than the figure for many other major developing economies, including China. In the 1980s, by contrast, India’s total trade as a percentage of GDP was about 15 percent, far lower than today.

The Modi government’s recent decision to raise import tariffs on some goods has been characterized by many, including Arvind Panagariya, a former advisor to the administration, as regressive, but it is worth noting that India runs the third-largest merchandise trade deficit in absolute dollar terms after the United States and the United Kingdom. The recent increase in tariffs is partly a reaction to that widening gap.

Economists would suggest that the right policy is to encourage exports, not to curb imports. However, with growth sluggish around the world, globalization and offshoring having reached a plateau, and trade tensions mounting, it doesn’t seem particularly realistic to expect the government to increase exports quickly. Other than tariffs to discourage imports, the alternative would be to weaken the Indian economy or the rupee significantly to make imports more expensive and exports cheaper. Both these courses are hardly politically palatable, whereas tariffs can be.

And then there is the question of welfare. In a democracy like India’s, where the poor come out to vote in large numbers, no administration can afford to ignore the concerns that fuel populist impulses. In fact, viewing populism as antithetical to reform is a serious error. Reforms can’t be endured if the benefits don’t reach the masses, just as no populist policy can be sustained without economic growth. Since 1981, roughly the start of India’s rise as an economic power, the central government has almost always married the two. In turn, India’s economic boom has gone together with a steady decline in poverty, which, in turn, has legitimized necessary reforms and blunted the threat of revolutionary communist movements.

The Achilles’ heel of any welfare system, especially in developing countries, is inefficiency. The Modi government has tried to address this weakness. With the introduction of new technology—the universal biometric identity card—used in combination with direct transfers to beneficiaries, the government has been able to reduce theft and better target subsidies. Thus, despite an expansion of welfare schemes, New Delhi has managed to keep the costs nearly the same, which has reduced the deficit in each of the past three years. Excluding interest payments on debt, the government now runs a substantial surplus.

Apart from efficient delivery, the government has also taken steps to make sure it has enough money to pay for its welfare programs. India has long dealt with rampant tax evasion and a low tax-to-GDP ratio, but in the past two years, India’s tax base has increased dramatically, by over 50 percent, thanks to two major policy initiatives. In July 2017, the government launched the Goods and Services Tax, unifying a mind-boggling array of state and local indirect taxes. Beyond that, the new tax forced many small businesses that previously dodged taxes to file returns.

The other policy initiative that broadened the tax base was demonetization. On Nov. 8, 2016, the government cancelled 86 percent of currency in circulation overnight in a bid to tackle black money, that is, income illegally obtained or not declared to evade taxes. Regardless of whether demonetization was a sound policy move and whether it succeeded in its original objective, there is growing evidence that it sharply increased tax compliance and tax collections.

These days, more economic activity has been brought into formal channels, which has helped create a track record of documented income. Also helping is the exponential rise in digital transactions—sparked by demonetization and further enabled by the government’s steps to create a unified electronic and mobile payments ecosystem. Together with a universal biometric identity, a documented record of income will allow many more people and small businesses to access credit.

Last but not least, the government’s massive financial inclusion program—through which it provided affordable banking services to the unbanked by opening about 300 million bank accounts—will increase the tax base by bringing more people into the formal economy. Recent research shows that Indians in the program have gradually learned to use banking services and have even reached the same level of usage as households with existing bank accounts.

Modi is no stranger to populist speechmaking. But he recently struck a very different tone in a public event attended by industrialists. In his remarks, he lauded businessmen for their role in nation-building. To be sure, India needs to do much more to make the economy business-friendly, and the government has no business running hotels, airlines, and steel plants—as it does now. Nonetheless, to focus only on the country’s shortcomings would be to miss the important lessons that can be drawn from India’s experience managing democracy and capitalism. To protect free-market capitalism from destructive populism, we need more democracy—and the milder forms of populism that may come with it.