Modi’s window of opportunity to bring in big reforms is closing fast

This is my latest livemint column

When Prime Minister Narendra Modi assumed power in May 2014, many analysts debated whether he would follow the footsteps of Margaret Thatcher or Ronald Reagan, leaders who, for better or worse, showed a steely determination in following their chosen path of economic and administrative action. Modi’s admiration for the Chinese model, his homage to Singapore’s former prime minister Lee Kuan Yew were held out as signs of things to come. Long overdue administrative reforms were deemed imminent and the bureaucracy was getting ready for a massive shake-up.

Today, things are a bit different. In spite of the heady adulation abroad (admittedly selective though, now with the Nepal backlash), and the unending electioneering back home, the government seems to be on the defensive. Modi and his advisors are complaining that Indian companies are not playing ball. Those outside the government (including the industry) are instead complaining about credit constraints, an unpredictable tax regime, lack of labour reforms, the government’s silence over state-owned banks’ non-performing assets, and the forgotten promises of disinvestment. Again, for better or worse, the overwhelming demand is for the government to act decisively, for many would take a sure-footed action-oriented government, and not one that seems frozen in its steps when it comes to concrete reforms. The social sector too—which would have been highly encouraged by the early rhetoric over housing, sanitation, roads and micro-enterprises—has been waiting.

Many of the early promises are linked critically to the maxim of “minimum government, maximum governance” in at least two distinct forms.

One, we need less of the central government—the Government of India needs to cede more to the states and do so fast. On this, we have seen some action, especially on fiscal transfers, but nowhere at the level that was promised. In turn, the states themselves by and large have shown very little in terms of their own ability to leverage this fiscal windfall. But even there, if Narendra Modi had lived up to his promise, a few redundant central ministries should have shut down by now—the ministry of information and broadcasting would be my prime candidate.

Two, we need governments everywhere to improve governance by establishing a rule-based system, and reducing literally, the size of the government by cutting back on the functions government ministries and agencies are required to perform, and improving the efficiency with which the tasks that then remain, are discharged. However, as this government has discovered for itself, “minimum government” is difficult to achieve in practice, for which many factors are responsible.

Elected leaders prefer the status quo, or even expanding the reach of the state, since this empowers them further in a framework that operates on patronage dispensation. Given the elections calendar in India, we unfortunately have political parties that are always in campaign mode. Thanks to the Bharatiya Janata Party’s campaigning template, Narendra Modi is thrust into electioneering roles that sometimes come at the cost of the responsibilities he is supposed to shoulder in his role as the Prime Minister, and the even-handed treatment of states that should go along with it. The temptation of, say, winning Bihar, will always trump prudent governance and the urgency for reforms.

But even when political leaders want to initiate reforms, the bureaucracy wields an enormous amount of influence in determining the fate of such reforms, and this should be no surprise. It is useful to go back to theory to understand the role bureaucracies were meant play in the first place. In the Weberian model, the struggle between the political leadership and the bureaucrats is an inevitable outcome. Whether as “experts” or as the masters of “processes”, bureaucrats spend their entire careers honing their skills to protect at all times (and expand when possible), the power and prestige of their organisation. Bureaucrats, therefore, will resist overtly and covertly, significant reform proposals.

As researchers Merilee Grindle, John Thomas (both Harvard University) and Francis Rourke (York University) have pointed out, reforms that look to trim the size of government usually impose a high cost of the bureaucracy, either in terms of size (manpower) or their jurisdiction. Further, bureaucracies are not homogenous structures, and as Patrick Dunleavy (London School of Economics) points out, there is a constant tussle between the interests of high-level and lower-level officials. High-level bureaucrats are often more interested in policy work and, therefore, are likely to accept (and sometimes advocate for) trimming large bureaus into smaller elite outfits with enhanced advisory power. In contrast, bureaucrats at lower levels usually resort to collective bargaining strategies to promote their interests, which lie in increasing their discretion on the ground. Balancing these interests and designing reforms that enhance efficiency is, therefore, a political prerogative and cannot be left to the bureaucracy alone.

Take, for instance, the finance ministry. Whereas Arun Jaitley’s own ability to address the key issues facing the economy are under attack, as a minister he mostly needs only to manage his departments better, and they are certainly not lacking in technical competence. But somehow he runs a ministry where the tax mandarins were running amok (imposing retrospective taxes on foreign institutional investors, an unrealistic black-money hunting expedition, increasing individual tax compliance requirements, etc), and where critical legislation like that on the Goods and Services Tax suffers from fundamentally poor design. Remember that left to its own devices, the bureaucracy has no reason to cut back on its own reach or powers of arbitration, and this comes through very strongly in the functioning of the finance ministry, in particular.

This institutional view of the bureaucracy might be a pessimistic one, but it is also a realistic one. The onus for pushing reforms, therefore, rests on the political leadership. This is where Narendra Modi faces his biggest challenge. The longer he goes without initiating big reforms, the harder it will become to get the bureaucracy on board. We will be saddled in perpetuity with a bleeding Air India, an inefficient Coal India, and a predatory tax department, to name a few. The bureaucracy had seemingly abandoned UPA 2 in its last days, and there is no reason why it won’t do the same to Modi.

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