Real Modinomics: Why free market supporters could be in for a shock

Some classical right wing economic thinkers trained in American universities are already imagining that Narendra Modi would follow an economic policy template informed by the “efficient market hypothesis”. Arvind Panagariya , Professor of Economics at Columbia University who has publicly proclaimed his admiration for Narendra Modi’s Gujarat growth model, has already begun airing ideas for Modi.

These economists, anxiously trying to sell new ideas, will be disappointed simply because Modi prefers very pragmatic, homegrown economic modelling and may not have much patience for theoretical categories received from the west.

Modi could use market solutions if it suits him or he could even go for a completely State-led approach on key policy questions which might resemble some of Amartaya Sen’s prescriptions, shocking doctrinaire market economists. In short, Modi will defy known templates of economic theory and practice. This is because the starting point of Modi’s thought process will be the political economy framework within which the farmers, craftsmen, weavers, small businesses and the self employed operate.

For instance, his promise virtually at every public rally of providing creative employment to the bulging youth population is likely to involve the use of State apparatus on a big scale.

What really needs to be watched is how Modi uses the the State apparatus to drive new ideas. This is something classical liberal economists are deeply uncomfortable about. Manmohan Singh was inherently averse to using the State to directly provide employment. He was initially very uncomfortable with the rural employment guarantee programme. Modi wants to further institutionalise MNREGA by linking it to asset creation.

Modi explicitly promised last week at a public meeting in Varanasi that he would come up with a cost plus formula to provide the farmers a return of 50 percent over the total input costs incurred. This means if the total cost incurred by the farmer is Rs.100, he would get Rs.150 for the produce which the government will ensure.

Now market oriented economists dislike any economic activity carried out on a cost plus basis. They would simply want the market to dictate the price received by the producer, whether a farmer or a manufacturer. Modi has proposed a Market Stabilisation Fund for farmers to get optimum price for their produce. And Modi seriously believes he knows his agriculture economics after Gujarat’s high agriculture growth rate over the last decade. Though many economists are extremely uncomfortable with the idea of a market stabilisation fund, Panagariya has sought to propose some form of cash transfer to farmers instead of creating a fund. But Modi may think differently.

Panagariya and Jagdish Bhagwati are both staunch believers in the larger welfare benefits of removing barriers to free trade in goods and services. Modi’s bias may be to protect the domestic sector in critical areas, like retail, insurance, banking etc where BJP may argue further strengthening of the local industry before opening up.

Modi has said publicly he would follow the Gandhian economic model of Trusteeship which is passionately endorsed by BJP’s ideological mentor, the RSS. It might be interesting to imagine a conversation between Jagdish Bhagwati and a few Sangh Parivar elders on this subject. One clearly recalls what Bhagwati had said about a homegrown economist who gave regular inputs for policy making during Vajpayee’s NDA regime. Bhagwati had publicly tried to deride that economist by saying, “If he is an economist, then I am a Bharat Natyam dancer.”

Those were the days when reputed economists trained in the West would be wary of associating with the BJP and Sangh Parivar, describing them as non-modern in their approach. Of course, things have changed dramatically now. Top economists are lining before the BJP leadership with their CVs and ideas to revive growth. Indeed, some of them may not even mind doing some Bharat Natyam, if required.

Ultimately Modi will treat technical advice for what it is – just advice, and then proceed to do whatever is politically pragmatic and effective. Modi will attempt to deliver high GDP growth. But make no mistake, his bigger obsession will be to politically consolidate the new social constituencies he has managed to attract under his leadership, especially from the other regional formations in the 2014 general elections.