Why PM Modi’s leadership is historical: analysis
The second stimulus package announced by Prime Minister (PM) Narendra Modi has exceeded expectations. His speech to the nation on May 12 will perhaps mark the day that India embarked on the path of turning a global crisis into an opportunity to accelerate its economic transition and build on the solid foundations laid in this government’s first term. This will involve eliminating poverty, improving equity and raising the standard of living of the population in accordance with their aspirations. It promises to be historical.
The Prime Minister announced a package of Rs 20 lakh crore or almost 10% of GDP to trigger economic growth in the period of the post-coronavirus-induced pandemic (Covid-19) to protect the interests of those affected by the prolonged blocking, which was critical against the pernicious virus. In doing so, he overcame conservative impulses within the establishment and laid the foundation for a paradigm shift. It is clear that we cannot continue to operate within self-imposed fiscal constraints. All over the world, these are discarded in response to the deterioration of the economic situation. Fiscal prudence must be understood from a dynamic perspective. It can be achieved by reversing the decline in the rate of economic growth, rather than by continually reducing public spending in response to declining revenues. That would be the sure path to a vicious downward spiral of growth from which it would take years to rebuild the economy.
But the unexpectedly large fiscal stimulus package is just one component of the Prime Minister’s speech on May 12. For me, the promise to undertake bold structural reforms and drop the incremental approach holds even greater promise for India to regain its growth momentum. Without these bold reforms in areas such as land, labor, liquidity, and laws, the fiscal stimulus was at risk of being wasted on a single consumption surge, the growth momentum of which would shrink rapidly. With bold structural reforms, the proposed increase in public spending will help attract new private investment to develop new production capacities, increase productivity by absorbing cutting-edge technologies, and promote equity through greater efficiency in service delivery public. The states governed by the Bharatiya Janata Party (BJP) have taken the lead in introducing a series of labor market reforms that will give investors flexibility to adapt their workforce in line with seasonal changes in demand and production.
These bold reforms will also support the Prime Minister’s call for a self-sufficient, but not self-centered and protectionist India. He made it clear in his speech that India will continue to participate even more aggressively in global value chains on the basis of increased competitiveness of its national companies and industries. This will require promoting local production, building local brands, improving logistics, and reducing energy costs for national companies. This will allow them to achieve economies of scale and technological sophistication to successfully compete in world markets.
The Prime Minister’s emphasis on India’s continued commitment to global trends in trade, finance and technology is undoubtedly an effective and decisive response for those who express fears that India will become protectionist. Self-sufficiency with continued participation in world markets and value chains will be the mantra for the future.
His call to promote local products so that they become global brands and capture part of the international markets is timely. As new capabilities are created at the local level, consumer support will drive them to achieve global qualities and scale. The domestic market, while large and growing, is still not sufficient to pay for global scales of production and economies of scale.
India’s software industry has come of age and reached global scales and competitiveness with the Y2K phenomenon, mentioned by the prime minister in his speech. Tariffs on hardware imports were lowered and software companies were supported to achieve this breakthrough. Similarly, the Indian garment industry reached its current scale and competitiveness only through global demand. It should now be evident that Indian consumers are a picky group who are well aware of prices and quality. The bold reforms emphasized by the prime minister in his speech will help Indian companies meet the demands of local consumers while gaining market share in global markets.
We must not lose sight of the fact that the challenge has just begun. There is a difficult road ahead with the global economy showing signs of a dangerous downward slide that could well be as steep as in the Great Depression of the 1930s.
The full impact of the pandemic on the global and domestic economy is not yet fully understood. In the coming days, we need to be constantly on our guard, monitoring emerging risks and opportunities and responding swiftly and focusing on these emerging trends. We have begun a paradigm shift, which will take us in the direction of becoming a global player by focusing on our strengths and rooting our policies in our own basic realities. We will thus update the Prime Minister’s call to turn this crisis into an opportunity.
Rajiv Kumar is Vice President of NITI Aayog
The opinions expressed are personal.