A right turn

In a classroom at Columbia University’s School of International and Public Affairs in 2012, Arvind Panagariya squarely blamed the UPA government’s National Advisory Council (NAC) for ruining the Indian economy. In the US, the India story had turned sour after the heady days of 2006-07: policy paralysis had replaced high growth rate as India’s claim to fame.

Prime Minister Manmohan Singh is pushing for more market-friendly reforms to fix the economy, Panagariya told his class of international graduate students. But the Sonia Gandhi–led crew of socialists in the NAC is holding Singh back, he asserted. What’s worse, they are imposing populist welfare schemes on the Prime Minister, from the food security bill to MNREGA, which the government could not afford. According to Panagariya, the NAC’s flawed policies cost us a decade in the race for economic parity with China.

Now as vice-chairman of NITI Aayog (National Institution for Transforming India) and one of Prime Minister Modi’s top economic counsels, Panagariya will finally have a chance to shape more market-friendly policies for India. Amartya Sen’s protégé Jean Dréze was the leading light of the NAC’s welfare policies; Jagdish Bhagwati’s protégé Panagariya will be hoping to overturn the legacy of their (sometimes bitter) ideological rivals.

In his classroom, Panagariya made a simple and visually compelling case for further liberalising the Indian economy. In a series of graphs he had mapped the key economic and social indicators in India since independence. In all the graphs, four decades of sloth since independence was dramatically disrupted by the 1991 neoliberal reforms: productivity and consumption took a leap, growth rates and capital markets took off, the balance of payment crisis was averted and foreign currency reserves soared, millions were pulled out of poverty.

Panagariya argued that India’s land, labour and capital markets urgently needed a “second generation of reforms” to return to eight-plus per cent GDP growth and to wipe out absolute poverty in 15 years. What struck me as a student then was his confidence that India’s chaotic, socialist-by-default democracy will elect a free market reformer. He believed that India’s electorate had changed fundamentally and that pro-growth economics was now good politics.

His confidence was backed by some fascinating data from state elections. In May 2012, Panagariya co-wrote (with ICRIER’s Poonam Saxena) a chapter titled ‘Economic Reforms and Election Outcomes,’ in India’s Reforms: How They Produced Inclusive Growth, which showed a strong correlation between state growth rates and the ability of incumbent state governments to return to power.

It was surprising because conventional wisdom had it that populist welfare schemes, not growth rates, decided elections. Even his own partymen often attributed Manmohan Singh’s 2009 re-election to MNREGA and farmer loan waivers, much more than the outstanding growth rates under UPA-1. The defeats of Chandra Babu Naidu in 2004 in Andhra Pradesh and Buddhadeb Bhattacharya in 2011, in West Bengal, further reinforced the myth that reformers don’t win elections. It had become a cliché that good economics was not good politics in India.

But Panagariya’s data analysis showed that in reformist high-growth states, 85 per cent of the ruling party candidates won their seats in recent elections, compared to only 52 per cent and 40 per cent in medium- and low-growth states respectively. This correlation was a new phenomenon: only in the last decade some states witnessed growth rates of over eight per cent, enabling the three categories.

This correlation had the potential to disrupt India’s traditional caste- and sops-based election strategies. Good economics was now good politics and there was healthy competition among states to grow faster. As it turned out, Modi became a face of this disruption, coming to national power showcasing his high-growth Gujarat model. Panagariya can claim with some justification that his thesis in ‘Economic Reforms and Election Outcomes’ was validated by Modi’s victory. But Panagariya knows that nudging India towards the free market still requires ample persuasion. Hence he rejects the common comparison of Modi’s government to those of Ronald Reagan and Margaret Thatcher, leading free-market reformers in their respective countries.

“Policies of Reagan and Thatcher sought to shrink the role of the State and expand that of the market in what were already market economies,” he told Reuters last year. “Here, in India, we are trying to give back markets the space that belonged to them in the first place and was usurped by overactive regulations. In effect, we are trying to move from far left of the centre towards the centre.”

While Panagariya may dismiss the comparisons, this undoubtedly is the most right-wing government in India’s history. Free-market proponents like him, marginalised for decades in our policymaking, finally have an opportunity to create legacies as the thinkers and policy wonks who decisively moved India away from its default socialism.

Modi now has a troika of elite Indian-American economists at the top levels of policymaking in Panagariya, Raghuram Rajan and Arvind Subramanian. There is also Bhagwati, who does not have an official post but has the Prime Minister’s ear. For those who hail Modi as India’s Reagan, this team will have to match up to some absolute legends, the architects of Reaganomics: Milton Friedman, Friedrich Hayek, Paul Volcker and Arthur Laffer.

( Sambuddha Mitra Mustafiis the founder of The Political Indian )

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