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India in Transition

Government Must Exercise Restraint, Hone Focus to Boost Economy

Devesh Kapur
January 6, 2020

When Prime Minster Narendra Modi came back to power, he had many things going for him: a renewed mandate, an absolute majority in parliament, a prostrate opposition, and a level of personal popularity with the electorate that dwarfed any other leader.

But, at the same time, his new government was confronting three major challenges. The first was a tepid economy whose weaknesses were threatening all other goals. The second was a more uncertain international environment, stemming from an unpredictable and polarized United States and a resurgent China.

But it was the third challenge that was perhaps the most difficult and the most insidious — his government’s ability to exercise self-restraint on issues that could threaten its two core goals: A rapidly growing India that could make a legitimate claim on the world stage. As former US President Abraham Lincoln had put it, “Nearly all men can stand adversity, but if you want to test a man’s character, give him power.”

To understand the nature of power, go back to 1972. Indira Gandhi was at the peak of her power after the Bangladesh war. Barely two years later, despite the Pokhran nuclear test, she was facing an unprecedented challenge to her rule in the form of student protests and diminishing legitimacy. What happened in such a short period of time?

First, in the aftermath of the first oil-shock in 1973, the economy went into a tailspin. Second, when that happened, she overestimated her own abilities and underestimated everyone else’s, exemplifying the ease with which one can slide across the fragile line separating confidence from certitude, when lubricated by successive victories.

But perhaps, most importantly, she lost sight of addressing her main challenge — the economy — because the pursuit of other agendas clouded her focus.

There is a story in the Mahabharata when Dronacharya, who was tasked with training the Kaurav and Pandav princes in the art of warfare, holds an archery competition. Dronacharya placed a wooden bird on a branch, and in a test of their archery skills, asked his students to strike the eye of the wooden bird. But before each student shot his arrow, he asked each one of them what they saw. All but one mentioned sundry other objects besides the wooden bird — the tree, its branches, the sky, other birds. Only Arjun said, “I can only see the eye of the bird.” He won the competition because while everyone else’s gaze wandered over multiple objects, only Arjun focused solely on the only goal that mattered — the eye of the bird.

The weakness of the Indian economy has been clear for a while. All other goals of this (or any government) should have been set aside until its health was restored. Unless the economy can grow more rapidly, India’s aspirations will simply be delusions. There are many reasons for the current slowdown, including the toxic lending legacy inherited from the United Progressive Alliance government. But that was known by 2014. Since then, the government indeed did take some decisions from demonetization to Goods and Services Tax, from recapitalizing banks to the Insolvency and Bankruptcy Code and Ujjwal Discom Assurance Yojana (Uday) on the power sector.

In all cases, however, the outcome has been sub-par, the result of ignoring the lesson Dronacharya wanted the princes to learn: unless you have an unwavering focus on the core task at hand through sustained high level political attention and bureaucratic engagement, you will not achieve your goal.

Whatever the merits or demerits of demonetization per se, it imposed significant cognitive costs on the leadership who spent substantial time and attention in its planning and implementation, even as the GST was in the works. The cognitive effects of multitasking can be severe.

It leads to “tunneling” — a narrowing of attention and cognitive bandwidth — and the resulting temporal scarcity leads leaders into a constant firefighting mode, pushing them to focus largely on the most immediate, but often low-value tasks, rather than those more meaningful tasks that require longer horizon strategic thinking with higher payoffs.

In this case, firefighting the aftermath of demonetization resulted in limited attention to the GST. Warnings to avoid a complex GST were given short shrift and undermined one of the government’s signature achievements.

Another example is the power sector. The travails of India’s power sector have continued for decades and various attempts, beginning with the Electricity Act 2003, have had limited success. The states have packed their Regulatory Commissions and undermined their autonomy, while continuing to own and micromanage their distribution companies (discoms).

In 2015, the central government unveiled a bail-out package, UDAY, under which the state governments took over 75 percent of the debt of the distribution companies (or discoms), and serviced the remainder with lower-interest bonds. Four years later, power producers’ total outstanding dues, owed by distribution companies, has again ballooned (to ₹81,010 crore in October 2019).

The surprise was that the central government could not even get Bharatiya Janata Party (BJP)-ruled states to copy and implement a rare success in electricity sector reforms, namely Gujarat, when PM Modi was chief minister. That model separated feeders, which took electricity for irrigation, from those that went to village settlements, subsidizing the former while villagers got unsubsidized, but uninterrupted, electricity supply in their homes.

The costs of subverting power reforms have been much more than financial. They have blocked reforms in agriculture, undermined the financial viability of generating companies, added to the financial stresses of the banks that have extended credit to them, and undermined the government’s laudable goals on renewable energy, energy security and its flagship “Make-in-India” campaign. Financially stressed discoms have repeatedly blocked the open access promised to consumers and generators, limiting supply by cheaper renewable energy sources and undermining the sector’s growth.

Moreover, if investors had seen a strong predictable growth path in renewable energy without being subject to the vicissitudes of actions by discoms, that could have led to more upstream investments in renewable energy manufacturing, boosting the government’s “Make-in-India” campaign.

After his re-election, PM Modi, as reported by the Hindustan Times, expressed his unhappiness about the civil service and its role in the implementation failures. He is correct in his assessment that there is much that is wrong with the civil service. But at the same time, if loyalty trumps expertise in senior-level appointments, this should not be surprising. There is a big gulf between a cowed bureaucracy and a competent bureaucracy and the former does not lead to the latter.

Instead of an Arjuna-like focus on the critical task at hand — the economy — the government first tried to undermine the reputation of those who were asking hard questions, then came up with dubious numbers, and only when the reality is palpably manifest, has it woken up. From the media to courts, from business to civil society, criticism has been countered not by evidence and corrective actions, but intimidation and fear.

When might is right, learning will be wrong. Infallibility can be ascribed to the gods but not to man. Admitting mistakes and moving on would have made recovery faster.

The government might feel that the external criticism of events in Kashmir and the combination of the Citizenship Amendment Act (CAA) and National Register of Citizens (NRC) is par for the course. Whatever one’s views on the revocation of Article 370, the subsequent treatment of the population there is hardly a matter of pride.

To paraphrase an American gangster, you can get far with a gun, but much farther with a kind word and a gun. But if that can be dismissed because it’s a foreign saying, why not listen to Tulsidas for whom compassion was the root of religion, and pride the root of sin.

If Kashmiris are Indian, even if they are not seen to be deserving of Tuslidas’s compassion, they are surely entitled to all the privileges of civil liberties that every Indian is guaranteed under the Constitution. Unless of course one believes that Indians themselves are not.

For the government to ignore global unease about its actions would be to wilfully blind itself to its implications. The CAA and NRC have undermined the goodwill it so arduously built up with Afghanistan and Bangladesh, and further West in the Gulf. Yes, China may be treating its Uighur Muslims worse, but India hardly has comparable economic and political heft to silence its critics.

But even more, the government is severely underestimating the implications of its actions on the one constituency it has been so assiduously trying to build relations with — the Indian diaspora.

No foreign leader has courted his country’s diaspora as much as PM Modi — from Australia to Canada, from the United Kingdom to the US, from Dubai to Israel. But underneath the surface bonhomie, there are deeper undercurrents that are flashing warning signs.

First, the second generation in crucial countries like the US will have an increasingly dominant share among the voting population of the diaspora. This group is much less engaged with India and more liberal than their parents. The fact that only one of four members of the so-called “Samosa Caucus” of Indian Americans in the US Congress showed up for the “Howdy, Modi!” rally in Houston, and some have even been involved in calling for hearings on Kashmir, is a sign of times to come.

Second, the government’s actions are dividing the diaspora across generational and denominational lines, and instead of being a force multiplier for the country, its divisiveness will be a handicap. And third, these actions provide needless grist to the mill to hardliners calling for a proposed referendum on Khalistan.

That India’s global image has suffered is without doubt. One could argue that its implications are modest — soft power’s power is possibly much exaggerated.

That might be valid if, instead, India was growing its hard power. But with defense spending as a share of GDP at a historic low and the amount spent on salaries and pensions at a record high, India’s hard power is falling further behind its global aspirations.

Some of the resource limitations could have been redressed through meaningful defense reforms, but there has been little of that as well.

A different approach would be to build serious domestic technological capabilities like Israel or China. The latter is today poised to be a leader in technologies that will fundamentally shape the future, be it quantum computing or nanotechnology, artificial intelligence or neurosciences, the result of systematic resolve and core belief in the importance of science and technology, not just for its economy but in its relentless drive to make itself a global power.

Meanwhile, in India, the government wants to drive into the future by looking only in the rearview mirror. Giant statues and temples, changes in citizenship laws or the NRC might be good politics — but they will do little to deter a massive cyber attack or revive the stalled engine of economic growth. Indeed, the cancellation of the summit with the Japanese Prime Minister Shinzo Abe in Guwahati is emblematic of the low priority to forward-looking goals such as building the economy, strengthening ties with key partners or giving priority to building the country’s human capital.

With global interest rates at historic lows — and poised to remain so for the foreseeable future — India’s huge market and burgeoning labor force should have made it the top destination for manufacturing investment. But that is not occurring.

For a variety of reasons, many foreign companies are shifting investments out of China and seeking alternative destinations. India should have been the natural alternative. But it cannot even compete with Vietnam. Understanding why this is the case should have been an obsession if this moment was to be seized. But closing one’s mind to criticisms is not the ideal pathway to understanding.

India is at a crossroads. It is severely underestimating its longer-term challenges, from the relentless pressures from climate change to burgeoning unemployment due to rapid technological change, from an international environment that is becoming less hospitable to a giant neighbor that is racing ahead.

But the hardest challenge the government faces is itself. Can it exercise self-restraint in the exercise of power? Or will its obsessions over its social agenda undermine the more pressing challenges, and in failing to address it, undermine the country itself? It is time for the government to have Arjun’s focus and reorient itself to the one thing which matters — the economy.

Devesh Kapur is the Starr Foundation South Asia Studies Professor and Asia Programs Director at the Paul H Nitze School of Advanced International Studies (SAIS) at Johns Hopkins University, Washington, DC. He is a CASI Senior Fellow and was the Director of CASI from 2006-18.

This article is published with special permission from Hindustan Times, where it was first published on December 22, 2019

India in Transition (IiT) is published by the Center for the Advanced Study of India (CASI) of the University of Pennsylvania. All viewpoints, positions, and conclusions expressed in IiT are solely those of the author(s) and not specifically those of CASI.

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