#33 The Relief of a Stimulus

The relief and reconstruction package is here. PM Modi mustn't repeat past mistakes in its implementation

This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

Last evening PM Modi unveiled an economic package that when added to the already announced measures will add up to Rs. 20 lakh crores. The details will be announced during the course of the week by the FM (hopefully). A stimulus package was already overdue, and the quantum announced seems to have gone beyond most expectations. The tone and the content of the PM’s message suggested this might be the last of his lockdown appearances. Unless, of course, things change dramatically. The past 49 days culminating in this final address for a self-reliant India are useful to understand and suggest changes that are needed in the Modi governance playbook.

Even his detractors will admit, PM Modi is a transformational political leader. He has an appeal that transcends ideological positions on both statism and recognition in Indian polity. His arrival coincided with a temporal phase in the Indian society that enabled him to shift the ideological position of the median Indian voter proximate to that of the BJP. This has meant a Modi coalition of voters which only exists because he has willed it. Unfortunately, he hasn’t been able to transplant his success as a transformation leader in electoral arena to governance. This is a surprise. The meticulous planning and the attention to details that mark his electoral success are conspicuously absent in many of the key decisions he has taken over the years. The multiple guidelines, clarifications, re-clarifications and a preference for rhetoric and big announcements over specific plans for the pandemic or the economy have further laid this bare. In Kahneman’s terms, he seems to use System 1 thinking exclusively while governing. He trusts his instincts to arrive at a solution in the broadest of strokes while leaving the administrative machinery to work out the specifics. The results have been, to be very lenient, mixed.

The magician and his big reveal

At the heart of his style is PM Modi’s desire to spring a surprise. The intent is mostly good, but the overriding calculus is how bold and decisive will it appear to the people. Lockdown 1.0 was an example of this. With the case count at 500, a complete lockdown at four hours of notice was an overreaction. More so when you consider the size of the unorganized workforce who were left stranded with no work or income, and nowhere to go. The stimulus package announcement followed the same script. The big reveal of Rs. 20 lakh crores was meant to stagger the critics who were accusing government of drift and inertia. Even keeping aside some extent of window dressing that will invariably be part of this, there will be enough fiscal ammunition left along with the avowed intent to undertake the necessary structural reforms in land, labour and law. This will need a detailed understanding of the existing solution streams in these areas and skillfully converging them into the political stream that has been initiated by the PM last evening with his usual rhetorical flourish. There is no dearth of deeply researched solutions in these areas that could be used as the starting point. The implementation of the solutions will need significant state capacity (both the union and the states) and some extraordinary programme management skills. Considering the state of the economy, the PM can’t leave this to chance. The reveal is just not enough. Maybe it is time to bring the ‘A team’ that micro-managed his electoral success to helm the finance ministry. The Home Minister (HM) anyway has done most of the ‘social reforms’ to last this term already. He has the strongest track record on implementation in this cabinet and bringing him in to steward this package will be the best utilisation of his talents. Additionally, it will keep him away from further ‘social reforms’ which India can live without at the moment. The HM’s move into the Finance ministry will take away the lack of System 2 thinking that has plagued other grand plans announced by PM Modi in the past.

Experts as lamp posts

The other suspicion the past 49 days have confirmed is how this regime uses experts. There have been too many instances where the expert views have been ignored in favour of instincts. Unlike election battlegrounds where PM Modi has conjured impossible social alliances and unlikely supporters by the sheer force of his will, policy decisions and their consequences follow a spontaneous order of their own. These decisions need experts to anticipate the unintended (pun unintended!). This government seems to restrict the role of the experts to providing inputs and then supporting policy decisions publicly by retrofitting economic or ideological frameworks to them. Experts seem to be often unaware of the policy decisions till the last minute. Just one example would suffice. The CEA has been talking about ‘no free lunches’ and other reasons why the India stimulus can’t be like the developed economies for the whole of last week. These include the low tax-GDP ratio of India, how the U.K. stimulus is inflated by including 350 billion pounds of credit guarantee in it and the limited fiscal headroom we have because of our sovereign rating. It will require expert yogic contortions on his part to use the same arguments this week to defend what the PM announced last evening. The scale and breadth of the structural reforms envisaged will need policy analysts and subject matter experts who speak their minds and for the government to actually involve them in policymaking discussions. This government uses experts like the proverbial drunk uses a lamp post. For support, not illumination. This will have to change for this economic vision to be realised.

The statist trap

Lastly, the nature of many policy actions that might emerge from this vision will mean significant encroachment of the state into the social and economic spheres. If the state backstops MSME loans, creates TARP like programmes to take on stressed assets of private lenders, supports DBT for large swathes of the population and fundamentally reforms land and labour laws, it is somewhat natural for it to play God. PM Modi ran his 2014 campaign on the anti-statist ‘minimum government, maximum governance’ agenda. Since coming to power, he’s moved significantly away from that ideological position. This isn’t a surprise. A transformational leader who controls the levers of the state finds it difficult to not use them extensively to centrally manage the economy and the society. There’s a clear and present danger of India losing the gains it has made over three decades in freeing its private enterprises and its citizens from the often arbitrary and coercive interventions of the state. PM Modi’s rhetoric on self-reliance and ‘local ko vocal’ are cut from the same ideological fabric as that of the Nehruvian state occupying the commanding heights of the economy with its import substitution and central planning dogma. The institutional mechanism to hold the state back is weak or has been consistently compromised over the years. PM Modi will have to rediscover his belief in markets, rein in the state and strengthen independent institutions. This will be the toughest of the challenges for him.

Use the window

The cynical view of this economic stimulus will only be strengthened when the details emerge. Of course, there will be elements that will be mere ‘packaging’. This newsletter has advocated for a relief and a reconstruction stimulus that’s well-directed and then followed through with structural reforms that make a difference on the ground. We think it is premature to call this out either as a gimmick or to bemoan the fiscal indiscipline this will engender with its long-term consequences. India needs a stimulus to breathe life into its economy at this moment. If the government uses this crisis and the stimulus to shift the Overton window for long-pending structural reforms, we should view it as a net positive for India. Our focus has to be on how best the government avoids the familiar traps of the past and uses state capacity optimally for implementation.