Liberal economy requires a strong but limited State

Speaking at a conference on March 2, Prime Minister Narendra Modi said that “in the last five years, we have persevered to strengthen the foundations of India, and it is on these foundations that the New India will be built”.

Cynics may dismiss the comment as one made by a politician gearing up for a general election, but the prime minister’s effort to augment the Indian state’s capabilities in three principal areas of welfare, economic governance and security will prove to be critical for India to make the leap from a $2.5 trillion economy to a $10 trillion-plus economy over the next decade.

Eradicating poverty has been an objective of all governments since independence, but the dogmatic and destructive socialism employed by the Congress party for the first four decades after 1947 landed India in a crater from which we are still climbing out. By embracing liberal economics, several Asian countries, which had ripped off the colonial yoke and gained control of their own destinies around the same time as India, experienced progress and prosperity even as India struggled. The physical and social infrastructure necessary to enable large sections of rural and “rurban” India gain access to the technologies and amenities of the modern world simply was not put in place until the 1990s, and, in this area in particular, the Narendra Modi government scores high marks. The scale of road and highway construction, the emphasis on sanitation, the significant capital expenditure and dramatic improvement in safety achieved by Indian Railways, the results achieved on vaccinations and deworming of India’s children, the unprecedented effort to provide bank accounts to all Indians, the significant capital expenditure and dramatic improvement in safety achieved by Indian Railways, among other initiatives, are all part of the welfare and poverty eradication push.

The second facet of economic governance requires providing consistent regulation and emphasising rules-based capitalism. The founder-chairman of Bharti Airtel, Sunil Mittal, put it most pithily, when he drew a distinction between being “less friendly to business” and “less friendly to businessmen”. Mittal said that “a rule-based economy is much better than a discretionary kind of economy,” and lauded the Modi government for “doing the right thing”. The government has cut no slack to corporate defaulters and economic fugitives. The bankruptcy code has provided an effective market-based resolution pathway for loans gone bad, and today powerful business owners who defaulted on loans have lost control of their prized assets.

The third facet of security and foreign policy has seen a shift that is perhaps most viscerally felt across India today. The contrast between the Modi government’s response to the Uri and Pulwama terror attacks and the Manmohan Singh government’s response to 26/11 Mumbai terror attacks could not be starker. By striking targets inside Pakistan at Balakot, Modi has shifted the proverbial Overton window for what Indians expect their government to do if the country faces another Pakistan-sponsored terror attack. By inaugurating industrial giant Larsen & Toubro’s Howitzer manufacturing facility in Gujarat, the prime minister has also indicated that the future of Indian defence production lies in indigenisation led by the private sector. While much remains to be done on defence modernisation, the strategic break from the past is unmistakable.

When the Modi government has pushed for broadening the tax base and improving tax compliance, it has been with a view to accumulate the resources necessary to augment foundational capacity in the three areas of welfare, economic governance and national security. This is a major shift, and remains a work in progress. The original sin committed by Indian governments was that our public sector involved itself in providing goods and services that were best left to a market system, while the private sector was squelched and strangled, because profit was a “dirty word”, according to Jawaharlal Nehru, the reigning pope of post-independent “secular-socialist” India.

As the economy was weighed down by the licence-permit-quota raj and society was ravaged by an extractive state, indulging in corruption and hiding income to accumulate black money became normalised. The all-powerful state acquired a deservedly terrible reputation, but at the same time an impulse took root in the Indian psyche that the Indian State is irretrievably predatory. There was little public discussion on restructuring the State and changing its focus to the provision of necessary public goods. This exacted a very high cost by undermining Indian society’s trust in government and political leaders. Modi, as a self-made leader not owing allegiance to any dynasty, has succeeded in rebuilding that trust.

The bias that against all governments is also visible among a section of public intellectuals and commentators who subscribe to a libertarian or economically liberal philosophy. But this is a mistake. This lazy, cutesy assailing of government as unnecessary or evil ignores the reality that a functioning market economy and free society in fact require a very strong, but limited, government. As we continue shedding the shibboleths of socialism and central planning, there is a need to invest in state capacity for regulatory bodies, judicial institutions, national defence, internal security and diplomacy capabilities. India requires fewer unionised public sector unit workers, and more foreign service officers, police officers, specialised regulators and judges. The next decade should build upon the foundation laid in the past five years to shore up capacity in these areas.

As investor and writer, Harsh Gupta, has formulated it, India needs to have “Thomas Hobbes before John Locke and John Stuart Mill”. Stated differently, without first establishing order and deterrence provided by a strong but limited state, we cannot have a liberal economy and liberal society. With a more robust state today, and, just as importantly, one that isn’t afraid to assert its authority for the right reasons, India is better placed than ever before to move forward on the path of liberalising its economy and protecting individual freedoms in society.

Rajeev Mantri is the co-founder of the India Enterprise Council

The views expressed are personal