India breaks the taboo of privatization

The need has driven Mr. Modi to embark on this ambitious reorganization of the economy. In his first term, he focused less on economic reform and more on broad welfare systems, including the bank accounts of the poor, subsidized cooking gas, and the construction of government-funded toilets. But in the face of collapsed growth and growing skepticism about India’s trajectory, the government has pivoted toward the more explicitly business-friendly agenda since the early 2000s, and possibly since independence in 1947. .

These are the elements of Modinomics 2.0: the Prime Minister is increasingly using his massive megaphone to praise private entrepreneurs as wealth creators who deserve the respect of the nation. The government has budgeted about two trillion rupees ($ 27.501 billion) over the next five years to boost manufacturing by providing “production-linked incentives” for domestic and foreign companies in 13 sectors, including those producing mobile phones, products pharmaceuticals, automobiles and automotive components solar batteries. In recent years, Apple,

Samsung and Foxconn have set up manufacturing facilities in India. The government expects Cisco and Tesla to follow, among others.

The government has also pledged to privatize a number of state-owned companies, including Air India and two unnamed public sector banks. At the end of last month, addressing the bureaucrats in charge of administering the privatization, Mr. Modi untied one of his old slogans: “The government has no business to do so.” In Parliament, he ridiculed the idea of ​​bureaucrats running from fertilizer plants to airlines.

In her speech on last month’s budgets, Finance Minister Nirmala Sitharaman pledged to reduce the public sector to the “minimum” in four “strategic sectors”. He also broke a taboo by repeatedly using the word privatization. Indian politicians have long preferred the euphemism “disinvestment.” Although modest in scope, the proposed bank privatizations directly repudiated one of India’s most damaging socialist legacies: Indira Gandhi’s 1969 bank nationalization.

At the same time, the Modi government has decided to allow the private sector to play a greater role in agriculture by competing with state-controlled marketing parks, has begun to ease heavy labor laws, has raised the limits of foreign investment in insurance and has spoken of establishing create a so-called bad bank to deal with unprofitable assets and streamline mechanisms for resolving notoriously slow territorial conflicts.

All this takes place in the context of four years of sustained tariff increases that have invested in part three decades of trade liberalization. In 2019, India exited negotiations to join the Regional Comprehensive Economic Partnership, a free trade grouping of Asia-Pacific economies. It has also annulled or renegotiated several bilateral investment treaties signed during the last quarter of a century.

How does all this add up? Optimists believe Mr Modi is about to deliver the industrialization India has been seeking for some time. In one opinion, Bangalore-based businessman and commentator Manish Sabharwal summed up the government’s ambition as “increasing the productivity of India’s regions, businesses and individuals by making them more formalized, urbanized, industrialized, funded and qualified ”.

Logically, companies looking to diversify supply chains outside of China will choose India for their large domestic market and broad supply of skilled labor. The maintenance of tariffs and the importance of production-related incentives will drive this change. Mr. Modi’s popularity gives him political capital to make radical changes that other politicians would not dare to contemplate. Recent agricultural reforms are an example.

These arguments cannot be ruled out. However, a fair amount of skepticism is absolutely justified among Modi’s proponents.

For starters, promising reforms are not the same as delivering them. Protests by farmers in Punjab and Haryana have already called into question agricultural reforms. The government has tried to unload Air India since 2017 without success. Quixotic courts in India, often ruled by economically illiterate judges with great powers, add another wrinkle to the process. As with any government bid to pick winners and losers, there is always the danger of benefiting well-connected peers rather than beating them in competition and defending the wrong industries.

Nor is it clear that the international environment is welcoming. In a telephone interview, Vivek Dehejia, a business economist at Carleton University in Ottawa, points out that India could not reach trade agreements with the United States and the European Union even before trade became an internal problem. explosive in the West. Close relations with China and India’s rejection of RCEP also affect India’s access to Asia’s larger markets. In many cases, India’s domestic market is too small to count. It needs to create a more stable regulatory environment, end “fiscal terrorism” by officials, and upgrade infrastructure to become a competitive export hub.

“You can try to compete with an ambassador car at a Formula 1 racetrack,” Dehejia says. “But you’ll have to be incredibly lucky for it to work.”