Many attribute Narendra Modi’s three successive electoral victories in Gujarat to the success of his economic growth model. What are its key features? How suitable is it for a backward State such as Bihar? What explains India Inc’s overenthusiasm to the idea of Modi heading the next government?
With Modi to be a major factor (besides Rahul Gandhi and Arvind Kejriwal) in the 2014 general elections, it would be interesting to analyse the efficacy and suitability of his growth model.
Not much information is available in the economic literature. However, one can construct a rough sketch from the limited information available in the public domain. The following can be termed as the key features of the Modi model that worked in Gujarat and, many believe, can work in other parts of the country.
A key feature has been focus on development of basic infrastructure in the State, such as power, ports and road networks. As a result, Gujarat boasts uninterrupted availability of 24x7 power even in its villages. This has helped all sectors of the state economy, more so the power-intensive manufacturing.
Gujarat is an apt example of manufacturing-led growth, with its share in the state’s GDP (34 per cent) being more than double the all India average (16 per cent).
Artful balancing Gujarat exemplifies how growth of all the three sectors of the state economy contributes to its overall development. Faster growth of agriculture positively affects the overall economic performance of a region by its direct and indirect impact on the other sectors e.g. manufacturing and services.
On the other hand, slower growth of agriculture (food production in particular), leads to food inflation and subsequent hikes in industrial wages. This adversely affects the cost-competitiveness of the manufacturing sector. Slower growth of agriculture and manufacturing ultimately pulls down the services sector even though services do not depend as much as agriculture and manufacturing on infrastructural facilities, or the nature of the regulatory regime.
When it comes to the composition of the GDP, primary sector accounts for 20.9 per cent, secondary 35.9 per cent and tertiary 43.2 per cent of the state GDP compared with 13.7 per cent, 26.7 per cent and 59.6 per cent, respectively, of India’s GDP.
In addition, all the three sectors of the economy have been growing in tandem at 9-10 per cent rates in Gujarat. This has helped the State to maintain its growth trajectory when India’s overall growth has declined to 5 per cent or below.
Of late, India is increasingly being criticised for its lethargic bureaucracy that does not move and in the process, hampers investment. Red tape has kept the potential growth rate of India at lower levels.
However, in Gujarat, Modi has empowered the state bureaucracy to take decisions and expedite project clearance. This has kept the rate of investment high in the State quite in contrast with many other parts of India that are stuck in bureaucratic indecision.
A pro-business regulatory regime is a necessary but not sufficient condition for growth; a culture of hard work and entrepreneurship is equally important, if not more. Gujarat is historically blessed with these attributes that could work in its favour. Modi had no role to play in this.
Modi deserves credit for providing an enabling environment in the form of quality infrastructure, a working bureaucracy and a relatively corruption-free business environment that could let local enterprise flourish. Labour does not work in a vacuum, quality infrastructure and uninterrupted power has helped keep total factor productivity high in the State and ensured sustained growth.
Geographical advantage No government can change its geography. Gujarat possesses a strategic location on the west coast with several advantages, including good connectivity with major trading hubs such as the UAE and Singapore. Its long coastline (more than 1,600 km) and availability of ports have been one big advantage. No wonder, Gujarat ports account for roughly 25 per cent of India’s exports.
The State’s proximity to ports makes it possible to import locally unavailable inputs at competitive costs and support the growth of industries that possess considerable backward and forward linkages such as petroleum and petrochemicals, power generation, pharmaceuticals and copper smelters.
While many Indian States are not able to solve land-related issues, the Modi government has been able to provide not only land for industries but also keep land prices in check. This has ensured faster growth of manufacturing, which requires huge tracts of land, especially for industrial clusters and SEZs.
As a result, Gujarat now accounts for roughly 17 per cent of India’s total industrial output, 62 per cent of India’s petrochemical output, 51 per cent of chemical output and 35 per cent of pharmaceutical output. Despite the traditional advantages the State possesses, this is no mean achievement.
Suitability of Modi’s model Can Modi’s model be replicated in a State such as Bihar with completely different economic fundamentals such as a land-locked geography, low per capita income, higher incidence of poverty and no industrial base post the State’s bifurcation? Given the inherent peculiarities of a particular State, straitjacketing won’t work. The trick is to devise policies to tap the local situation and resources — which the Modi government has successfully done in Gujarat.
Good governance is necessary but it can take one only so far. Bihar is witnessing impressive growth in construction, telecom and other services, but not manufacturing because of power shortage.
The share of manufacturing in Bihar’s GDP remains below 5 per cent. Only 16.4 per cent of its households has electricity connection. That primarily explains the State’s backwardness.
Can Modi’s model work for the country as a whole? Not really, but infrastructural development and empowering bureaucracy are pertinent lessons that one can replicate at an all-India level. However, restoring the country’s potential growth rate to 7-8 per cent will need much more -- in particular, the cooperation of States in GST implementation and ensuring seamless movement of merchandise across the country.
More than two-fifths of India’s population lives below the poverty line. This ratio is higher for States such as Bihar, Orissa and West Bengal. Modi’s model does not throw much light on how to address the question of distributive justice, a key public policy goal in poorer States. There could be other growth-enhancing options, e.g. potential benefits of trade with neighbouring countries. That would require inclusive politics and an accommodative foreign policy.
(The author is Group Economist of a corporate house. Views are personal.)