Message from Southeast Asia: Modi must step on the gas, 10 years is all that India has

Big bang or baby steps - what strategy should India adopt to put the zing back in the economy? The debate that has been dominating the political economy discourse played out at the two-day Delhi Economics Conclave that ended on Wednesday.

And for those who tried to make out a case for incremental change, as minister of state for finance Jayant Sinha did, there was a gentle but firm wake up call from the guest of honour - Singapore’s deputy prime minister and finance minister Tharman Shanmugaratnam.

India, he said, just does not have time on its side. All it has is 10 years - ‘a critical window of opportunity’ - to achieve the supply side transformation it sorely needs.

Describing India as the one economy in the world with the largest unrealised potential - a pretty damning indictment, actually - Shanmugaratnam said that on the external front, it had to race against other countries as well as against machines.

China’s appeal as a manufacturing base may be waning, he pointed out, but there were several other countries (Vietnam) and regions (Africa) which were ready to step in to the gap. The world was entering a new phase of the industrial revolution, in which technological innovation was transforming manufacturing. Labour-intensive manufacturing in its present form may not last more than 10 years, he warned.

This warning became particularly relevant in the context of the other race that he said India would have to face on the domestic front - the race against demography. India needs to work overtime to provide education and skills to its young population to enable them to participate in the global economy.

And if one thought why he’s flagging manufacturing as a focus area when the Narendra Modi government is already applying all its energies on this sector, he points out that there is a big difference between manufacturing and globally-linked manufacturing. “It is the latter that has a greater transformational effect on productivity,” Shanmugaratnam stressed.

An external orientation to manufacturing, according to him, brings in its wake technological process. Every order of a customer has specifications brings constant learning and will drive technological change and increased productivity.

While he said he understood the compulsions of domestically oriented production, Shanmugaratnam noted that this was more prone to rent-seeking and regulatory capture. Those words certainly ring true, but he did not deal with a related issue - the risks that accompany a heavily export-oriented strategy.

What happens when global demand dips and remains subdued for a fairly long period? Can a country with as large a population as India afford to pursue such a strategy? And if not, what should be the mix between the export-oriented and domestic demand-driven approaches?

Sinha had earlier bravely defended his government’s approach to economic management, which has received a lot of flak from people expecting a paradigm shift from the approach of the previous government. Saying that deep structural reforms were necessary because there is a “moral responsibility and political necessity” to create jobs, he said India needs to provide an alternative trajectory of growth to that of China, one that is more responsible and more oriented towards liberty and democracy.

The supply-side revolution that the government was attempting, he said, had four components - macro-economic stability, a major infrastructure push, unlocking entrepreneurial energies and building a world class social security system. The impact of all this added up, he said, is not additive but multiplicative. “This is not a T-20 game, where every ball has to be a sixer. We have to keep the scoreboard ticking . . . the net result will be transformative.”

Those words got some traction. Eswar S. Prasad, senior professor of trade policy at Cornell University, acknowledged that while Modi may not have done any big-bang reforms, the focus on getting the government to work better was well-placed. “Getting governance reforms in place is important,” he said. But, he was quick to add, there is no escaping supply side reforms.

The world, Prasad cautioned, is a bleak place. There will be volatility in capital flows and the risks will be large. But India has no choice, he made it clear. While accepting that throwing all doors wide open may not be good, shutting all doors is also not going to work. “Trade and finance integration has already happened. The only question before India is how to engage with the world and not whether it should.”

Finance minister Arun Jaitley was not there to hear Shanmugaratnam speak. His deputy Sinha was not there when Prasad spoke. Hopefully, they will be briefed properly. And hopefully, they will give serious thought to these ideas.

Seetha is a senior journalist and author