India breaks the taboo of privatization

The need led Modi to embark on this ambitious reorganization of the economy. In his first term, he focused less on economic reform and more on welfare schemes – including bank accounts for the poor, subsidized kitchen gas and the construction of government-funded toilets. But in the face of the collapse of growth and growing skepticism about India’s trajectory, the government has turned to the more explicitly pro-business agenda since at least the early 2000s and possibly since independence in 1947.

Here are the elements of Modinomics 2.0: The prime minister is increasingly using his huge megaphone to praise private entrepreneurs as wealth creators who deserve the nation’s respect. The government has budgeted about two trillion rupees ($ 27.50 billion) over the next five years to boost manufacturing, providing “production-related incentives” to domestic and foreign companies in 13 sectors, including those that produce cell phones, pharmaceuticals , automobiles and automotive components, and solar batteries. In recent years, Apple,

Samsung and Foxconn have established factories in India. The government expects Cisco and Tesla, among others, to follow.

The government has also pledged to privatize several state-owned companies, including Air India and two unidentified public banks. At the end of last month, speaking to the bureaucrats charged with managing privatization, Modi dusted off one of his old slogans: “The government has no business to be in the market.” In Parliament, he ridiculed the idea of ​​bureaucrats running everything from fertilizer factories to airlines.

In her budget speech last month, Finance Minister Nirmala Sitharaman promised to reduce the public sector to the “minimum” in four “strategic sectors”. It also broke a taboo by repeatedly using the word privatization. Indian politicians have long preferred the euphemism “divestment”. Although modest in scope, the proposed bank privatizations directly repudiate one of socialist India’s most damaging legacies – the nationalization of Indira Gandhi’s banks in 1969.

At the same time, the Modi government acted to allow the private sector to play a greater role in agriculture, competing with state-controlled marketing yards, began to relax burdensome labor laws, increased limits on foreign investment in insurance and spoke of establishing create a so-called bad bank to deal with defaulting assets and optimize notoriously slow land dispute resolution mechanisms.

All of this occurs in a scenario of four years of sustained tariff increases that partially reversed three decades of trade liberalization. In 2019, India pulled out of negotiations to join the Comprehensive Regional Economic Partnership, a free trade grouping of Asia-Pacific economies. It has also ruled out or renegotiated several bilateral investment treaties signed in the last quarter of a century.

How does it all add up? Optimists believe that Modi is about to deliver the industrialization that India has long sought. In an opinion article, businessman and commentator Manish Sabharwal, from Bangalore, summed up the government’s ambition as “increasing the productivity of India’s regions, companies and individuals, making them more formalized, urbanized, industrialized, financialized and qualified”.

According to logic, companies seeking to diversify supply chains outside China will choose India for its large domestic market and large quantity of skilled labor. The tariff stick and the carrot of incentives linked to production will stimulate this change. Modi’s popularity gives him political capital to make radical changes that other politicians would not dare to contemplate. Recent agricultural reforms are an example of this.

These arguments cannot be dismissed immediately. However, a lot of skepticism – totally absent among modi-boosters – is guaranteed.

To begin with, promising reforms is not the same as carrying them out. Protests by farmers in Punjab and Haryana have already questioned agricultural reforms. The government has tried to unload Air India since 2017, without success. India’s quixotic courts – often administered by economically illiterate judges with broad powers – add another wrinkle to the process. As with any government offer to choose winners and losers, there is always a danger of benefiting close friends rather than competitive export champions, and betting on the wrong industries.

Nor is it clear that the international environment is welcoming. In a telephone interview, Vivek Dehejia, a commercial economist at Ottawa’s Carleton University, points out that India has failed to reach trade agreements with the U.S. and the European Union even before trade has become an explosive domestic issue in the West. Complicated relations with China and India’s rejection of RCEP affect India’s access to Asia’s largest markets as well. In many cases, India’s domestic market is too small to count. It needs to create a more stable regulatory environment, put an end to “fiscal terrorism” on the part of employees and update the infrastructure to become competitive as an export hub.

“You can try to compete with an Ambassador car on a Formula 1 track,” says Dehejia. “But you’re going to have to be incredibly lucky to make this work.”