"NDA 3.0 has been relatively quiet on reforms," says economist Richard Rossow

Richard Rossow, Senior Adviser and Chair on India and Emerging Asia Economics at Center for Strategic & International Studies, has been tracking India’s reforms trajectory and businesses for the past 25 years. He also does a 30 reforms tracker that is followed across the world. BT spoke to him about strategies that can fast-track India’s movement towards developed country status by 2047 and how it can position itself to take on China in manufacturing and other areas. Edited excerpts:

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How is Modi 3.0 performing on the reforms front?

When you look at the pace of reforms, whether FDI or domestic, it’s been the slowest of the three terms (of the NDA government) so far. The first term saw a bunch of big reforms, about 40 positive changes to the foreign investment list, and some big domestic reforms such as GST and bankruptcy. The second term was a little slow, but when Covid hit, the government knew it needed to trigger the economy. You saw some tax changes, some FDI reforms. But this time, it’s been relatively quiet. A part of that may be because they’re now in a coalition government. You’ve had some changes to key Cabinet officials. But in the (ongoing) Parliament session, a couple of big things are on the horizon, a range of insurance reforms, changes in the civilian nuclear liability law. The government has articulated its interest in moving ahead on some big things.

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Why do you think Modi 3.0 has had a slow start on reforms?

One reason could be coalition government, although I don’t know if that would be such a big issue, because when you look at the main parties that make up the coalition, the Telugu Desam Party has been probably more reformist than any party in India over the last 25 years that I’ve been tracking it. Even the Janata Dal (U) in Bihar doesn’t tend to put brakes on reforms. It is more interested in what’s happening in its state rather than national-level politics and governance.

So, I don’t want to chalk too much up to the fact that it’s a coalition government. It could be due to changes in several Cabinet portfolios, the fact that many of these departments are now run by regional parties that may be care less about what’s happening nationally and internationally. But you’ve also seen a slowdown in some of what Narendra Modi wanted to accomplish with competitive cooperative federalism. Now that regional parties have a little bit larger voice, the government feels a bit less able to push states towards reforms. I’d like to see that because if more of India’s 28 states start pushing reforms, the economy will take off, as the Union government doesn’t hold as many levers as it used to; it has decontrolled large parts of the economy.

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What can be a winning strategy for the 2047 goals?

The best news from somebody who’s been tracking how India reforms and how its politics works is that there’s going to be a natural flow towards modernisation and reform. That’s because between now and India’s 100th birthday, Indian states will change from being politically driven by rural voters to urban voters. Right now, cities tend to be the last things state governments think about while deciding their political priorities.

A second and related thing is empowering cities. That’s something the finance minister, the Reserve Bank of India and the Ministry of Housing and Urban Development are working on thoughtfully. Between now and 2047, urbanisation is going to be a big driver. When cities driver reforms, everything starts clicking.

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Can you talk about a couple of more trends that will be equally important?

India will become one of the largest economies. More openness on trade and investment will be important. India wants to become the next best investment destination. That’s going to take a lot of changes in how it looks at trade policy. Right now, it remains relatively protectionist. During the Modi government’s first term, you saw regular tariff increases and domestic manufacturing rules. Foreign companies also don’t always feel as welcome as they probably could. You still have almost three dozen sectors with foreign investment limitations. In 2047, India is going to be one of the three economies that are $10 trillion or more along with China and the United States. So, there’s a natural lean for companies to invest in India. Ensuring that India remains as open as it can, both for trade and investment, is going to be vitally important.

There are other big things that must be ironed out. Power grids don’t function effectively. Only three states, Gujarat, Haryana and Odisha, have high functioning grids. There are a lot of other challenges. Openness to trade and investment is one of the main drivers (of growth). You’ve seen countries like China that have turned the corner. A lot of that has been due to connectivity with international markets.

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Do you think there is scope to compete on some areas where China has massive strengths, including manufacturing?

China has some advantages, for example, the big investments it has made in infrastructure, implicit and explicit subsidies, which again, market economies like the United States and India can’t offer. China can also force groups to work together. There are certain ways that China functions which are difficult for economies like the United States and India to replicate. Some of those have inherent dangers. Therefore, interventions by the United States, India and aligned partners to block China’s ability to dominate certain sectors that have strategic value is in our interest. That provides an area of opportunity. India has seen success in attracting investments in manufacturing, in areas like automotive and pharmaceutical, where they’ve got real competitive advantages even against China. That gives us an idea that it’s not impossible to take advantage. It’s also important to remember that we talk a lot about manufacturing for obvious reasons, but India already is the workshop to the world when it comes to IT services, and now that companies continue to expand their global capability centres, we sometimes forget this real diamond that India has. India managed to do in IT services what China was able to do in manufacturing.

But a lot of times, India is happy doing work for global companies rather than creating own IP. And that’s got to snap and change. But does India have the talent and skill set to become the engineering design centre of the world? Absolutely.

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The world is at a pivotal moment in the global trade order. To serve the objective of India at 2047, what kind of trade architecture should it pursue?

Some of the work that the team at Invest India has done recently is deep and thoughtful. You take a product that India wants to be great at, like semiconductor. Semiconductor is the culmination of a bunch of different functions and features that different companies do—mining, research and engineering, design, fabrication. In some of those areas, India is already competitive. In some, it’s a little bit behind, but can catch up. And in some, it’s probably a decade or more behind.

So, approaching every product in a segmented way, what can India do today? What can India do tomorrow? And what is India going to have to import for the next 10 years? And then target a lot of subsidies. But the second avenue is investment in basic industries. When India first announced the Make in India programme, it was about being explosively great at some of the high-tech areas where the distance to frontier is quite far. But India is not competitive even with Bangladesh when it comes to ready-made garments and textiles. And that’s a big export earner and job creator. So far, we have not seen the same level of impetus in basic industries like textiles, paper mills, and such. I would like to see a much bigger push in basic industries.

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What does the rest of the world, particularly the United States, need to do to help the cause of India's growth? Because vis-a-vis China, you have a country with a lot of shared values. What can the United States do at this stage, despite what President Trump seems to be doing to the relationship with our country?

China’s economic domination of the world has been the financial impetus for the investments they have made in improving their own security situation at our peril. And when I say ours, I mean both the United States and India. And so, making sure that India is an alternative that has a strong, vibrant economy that is more bulletproof from China than the United States is right now, is strongly in our interest. Helping India insulate itself from China is strongly in our interest.

 

@szarabi