The Modi paradigm

This month, Prime Minister Narendra Modi’s government completes three years in office. There will, no doubt, be a flurry of report cards from experts and from the media. Most of them will focus on the nitty-gritty of what has or has not been accomplished. Not many will paint the big picture. However, the larger canvas or the underlying philosophy of governance matters because all the nitty-gritty flows from it. The fact is that Mr. Modi’s economic policies are based on a radically different paradigm than that of previous governments.

The new canvas is brushed with two broad strokes: a new federalism (cooperative and competitive) and minimum government, maximum governance. Put together, the unambiguous messages are as follows. First, New Delhi alone cannot transform India — it needs a partnership of the Union and States, a point the Prime Minister reiterated by invoking the spirit of Team India at the third meeting of the Governing Council of the NITI Aayog on April 23.

Second, the government will have to do things very differently (less activity in some spheres, much more activity in others) if India is to advance rapidly, a point that the PM made at the Civil Services Day on April 21 when he exhorted bureaucrats to be enablers rather than regulators.

‘Minimum government’

This paradigm shift doesn’t lend itself to the kind of easy categorisation of ‘Right’ or ‘Left’ economists and commentators are used to. Minimum government, when understood as the kind practised by Margaret Thatcher in the U.K. or Ronald Reagan in the U.S., meant a complete retreat of the state from spheres of economic activity. Mr. Modi’s version means that the state retreats from spheres where it plays an obviously counterproductive role, like in making it difficult to do business through over-regulation (there is a commitment to improve India’s ranking in the World Bank’s Ease of Doing Business Survey from 130 to 50) or by overspending and busting the fiscal deficit, particularly on careless populism, with the end results being a crowding out of the productive private sector — which could use the same resources more efficiently — and the unleashing of inflationary pressures on the economy.

On the public sector, there is an attempt to weed out the underperforming enterprises which cannot survive without government dole while strengthening and giving autonomy to those which can thrive.

But it’s important to remember that minimum government is suffixed by maximum governance. At India’s level of per capita income, the state cannot retreat altogether. However, it has to be more efficient in carrying out its activities, whether it is the essential task of providing security/law and order or the provision of public goods like sanitation, primary education and primary health care or in the building of critical infrastructure like roads, ports and railways, all areas where private sector participation is bound to be limited.

The government must also, in a targeted and sustainable way, invest in the poorest — and this it has done through schemes like subsidised (but not free) insurance (life, accident and crop failure) and the Ujjwala scheme for giving LPG connections to the poorest households. The entire emphasis on maximum governance is to ensure that more transparent and accountable methods are found to effectively deliver these goods, services and interventions. Hence the emphasis on Aadhaar and on direct benefits transfer on the one hand and transparent auctions and bidding for large projects on the other.

Cooperative federalism

Ultimately, for India as a whole, the force multiplier for maximum governance will come from embracing cooperative and competitive federalism. The long history of independent India has mostly been about an unequal relationship between the ‘Centre’ (the correct constitutional reference is Union) and States. The centralised planning paradigm cemented the idea of New Delhi controlling the development trajectory of every State. A one-size-fits-all approach was deemed to be the best way forward despite obvious differences between States.

Mr. Modi’s long experience as Chief Minister (unusual for an Indian Prime Minister) gave him a different lens. The abolition of the Planning Commission, rationalisation of centrally-sponsored schemes and greater devolution of finances to the States by the 14th Finance Commission laid the platform for the new paradigm. For the first time, States have a say in Union policy — subcommittees of CMs have studied Skill India, Swachh Bharat, centrally sponsored schemes and digital payments. The implementation of the Goods and Services Tax is another excellent example of cooperative federalism. Also, for the first time, New Delhi is not creating or forcing down giant spending schemes where the States must implement the Union’s diktat.

The complement to cooperative federalism is competitive federalism. Competition should not and cannot be about a race to the bottom. What is envisaged is a race to the top as States compete with one another on various parameters, some explicitly measured, some not.

Constitutionally, several critical policy subjects are in the domain of States (either in the State list or concurrent list) including land and labour policies, education and health. On land and labour, which are in the concurrent list, the Union government is encouraging States to legislate liberal laws. Some States have begun working on these.

The NITI Aayog is facilitating the work on land through providing model land-leasing laws. There is now a ranking of States on the Ease of Doing Business. There will soon be indices for health, education and water outcomes. New Delhi’s role is limited to conceptualising the indices and monitoring their integrity and, of course, sharing best practices and model laws. The rest is in the domain of States. A demanding electorate across India will hold State leaders accountable for their performance just as they hold to account the Union government’s performance. Eventually, the transformation of India requires a transformation in each of its 29 States. It cannot be achieved without a partnership between New Delhi and each of the State capitals.

This philosophy of governance is radically different from the previous “Centre at the centre” and “maximum government” approach. Rarely do transformations happen overnight but in the right environment they can happen reasonably quickly. Critics will quibble about the nitty-gritty but the big picture is this: Mr. Modi has provided a unique opening for transformation.

Dhiraj Nayyar is Officer on Special Duty and Head, Economics, Finance and Commerce, NITI Aayog. Views are personal and do not reflect the views of NITI Aayog