Modinomics versus Sharifnomics

The world eager to take advantage of a huge Indian market and to promote sale of products to a foreign exchange reserve flush government is visibly taken with Modinomics defined as the age-old capitalist mantra: minimising state control while supporting a free market - an economic vision that played a crucial role in the electoral victory of the Bharatiya Janata Party (BJP). Nawaz Sharif's economics, in theory at least, is broadly similar, however, differences are patently evident that can be partly explained by the state of the economy the two men inherited from their political rivals. Modi became India's Prime Minister on 26th May, 2014. He inherited the eleventh-largest economy by market exchange rates in the world - at 7.277 trillion US dollars - and the third-largest by purchasing power parity (PPP). India was the world's fastest growing economy with average annual Gross Domestic Product (GDP) growth rate of 5.8 per cent over the past two decades reaching 6.1 percent during 2011-12. But there is another side to India - a side that Pakistan can relate to: poverty, unemployment and an economy creaking under pervasive state rule, which accounts for India's 140th place in the world in nominal GDP per capita and 129th in GDP per capita at PPP.
Modi's election slogan was increased growth through 'make in India' strategy' which requires appropriate policy changes to facilitate investors. Three major decisions have been made in this regard. First, Modi has resorted to a time bound ordinance (that must be endorsed by parliament within six weeks of its new session) amending the land acquisition act and allowing a large industrial project to set up business without 80 percent of landowners consenting to the land purchase and without undertaking a social impact study. It is however, unlikely that potential investors would be interested given the short life time of an ordinance.
Secondly, the Modi administration is committed to amending labour laws governing the Micro, Small and Medium Enterprise (MSME) sector, which forms' the backbone of the manufacturing sector. The new labour laws are designed to facilitate doing business in India by effectively managing labour unrest and industrial strife.
And thirdly, the Modi administration has taken measures to introduce new licensing laws as well as timely clearance of project proposals. Department of Industrial Policy and Promotion (DIPP) recently cleared as many as 33 applications and deregulated defence products list thereby excluding a large number of components from industrial licensing. India also increased the cap on Foreign Direct Investment in defence manufacturing to 49 percent due to which German firms are interested in high-end electronic manufacturing in India.
Modi's Finance Minister Jaitley in his budget set a growth target of 7 to 8 percent (a rate that was below 5 percent during the Congress administration), lower government debt (domestic), lower subsidies and inflation, splurging on infrastructure and a massive rural jobs scheme. However, Jaitley remained vague on how these targets were to be achieved, reminiscent of our own Finance Minister Ishaq Dar, and was silent on how he would raise revenue and boost internal trade.
Historically speaking, during the early decades of independence, India in sharp contrast to Pakistan, proactively followed a policy of attaining self sufficiency in food, infrastructure and industry; and its close ties with the Soviet Union allowed it to have few foreign exchange glitches. However, India's economic development emanating from a closed economy and a pervasive bureaucracy began to be seen as a weakness and an impediment to growth with the collapse of the Soviet Union and the Gulf war in 1990 that led to a foreign exchange crisis with remittances declining sharply. India was compelled to secure a 2.2 billion dollar loan from the IMF by pledging 67 tons of gold reserves as collateral and airlifted 47 tons to Bank of England and 20 tons to Union Bank of Switzerland. In the early 1990s, there was violence over two domestic issues: the reservation of a proportion of public sector jobs for members of Scheduled Castes and the eruption of Hindu-Muslim conflict in Ayodhya, which had serious economic implications. India however, never abandoned its policy of self, sufficiency and the 'Make in India' policy is simply another name for it.
Pakistan's economy is much smaller than India's - the 44th largest in terms of nominal GDP and 26th largest in the world in terms of PPP. Growth rate was high during 2000-07 but before becoming enamoured of the Musharraf era policies it is necessary to consider the geopolitical context in which Pakistan experienced a growth spurt. The 9/11 tragedy allowed the till then international pariah Musharraf to get international recognition together with significant economic assistance in return for joining the war on terror. The US alone has extended 28 billion dollars during the past 12 years (with the bulk of the amount disbursed during the early years of the Musharraf era) and played a critical role in proactively supporting multilateral loans to Pakistan post-9/11. Such a large inflow of assistance, money not backed by domestic productivity, fuelled growth based on consumerism, and was unfortunately little used for energy sector projects or water projects even though research papers gathering dust in the relevant ministries had forecast a looming energy and water crisis. This is supported by the fact that private consumption contributed 7.1 percent to GDP growth in 2003-04, 8.7 percent in 2004-05 and with a decline in foreign assistance in the next year to 0.8 percent in 2005-06. Public consumption contributed 0.1 percent in 2003-04 and 2004-05 and negative 1.1 percent in 2006-07.
Growth rose to 4.7 percent in 2002-3 (the first year US assistance was disbursed after 9/11) from a mere 2 percent the previous year when Musharraf's coup was denounced internationally and rose to 7.5 percent the following year to achieve 9 percent in 2004-05. Thenceforth there was a decline in growth to 5.8 percent in 2005-06 to 7.7 percent in 2007-08. Manufacturing growth plummeted to negative 2 percent in 2001-02 and thereafter peaked at 6.5 percent in 2004-5 during the Musharraf era never reaching the 6.1 percent rate of 1999-2000 the year of the coup.
According to the Economic Survey national savings peaked at 20.8 percent of GDP in 2002-03 - the first post-9/11 year when foreign assistance disbursements began - however total investment was 16.9 percent of GDP or in other words Pakistan was unable to utilise the entire savings for investment. Total external debt and liabilities were 39 billion dollars in 1999, 46.2 billion dollars in 2008, 57.8 billion dollars in 2013 and 58.4 billion dollars in 2014. Clearly loans replaced grants after 2004-05 and both the PPP led and the Dar led Finance Ministry increased reliance on foreign loans. However, by 2010 till 2013 programme/budgetary support by multilaterals and bilaterals dried up as the PPP government refused to implement the politically challenging tax and power sector reforms.
The difference in the state of the economy of the two neighbours today can simplistically be attributed to three factors. An obvious and consistent difference between India and Pakistan's political history is the fact that while democracy took root in India it remained elusive in this country. Democracy did not imply a corruption, free environment in India but it did imply that the Indian governments were not allowed to influence the judiciary and hence justice was perceived to be fairer by the general public including businesses (relative to Pakistan) - a critical factor for dealing with concerns of domestic investors as well as the tax payers. 2015 regarded as the seventh year of democracy in Pakistan has failed to convince the public that a 'soft coup' is not in place given that a poorly performing executive accounts for the military taking decisions on foreign policy, budgetary allocations for its operations as well as performing judicial functions (after the assembly approved the setting up of military courts).
Secondly, governance is visibly better in India relative to Pakistan, which many source to democracy. The bureaucracy in Pakistan is highly politicised and this partly accounts for one seldom hearing of such issues as circular debt or indeed such high sustained transmission and distribution losses in India as in Pakistan year after year after year. And the ongoing issue of lack of availability of petrol in upcountry areas simply takes the level of appallingly poor governance to a stage that defies imagination; while children continue to die of malnutrition in Thar months after that news surfaced courtesy the media.
And thirdly, Indian government's focus on self-sufficiency and hesitation to seek foreign assistance even for natural disasters accounts for low foreign debt. In contrast from Shaukat Aziz to Ishaq Dar the focus has been on steadily rising foreign assistance, whenever and from whereever it was accessible - assistance linked to geopolitical considerations of the lending governments and standard politically challenging conditions of multilaterals - which has disabled successive governments from reducing the annual budgetary allocation for debt servicing/repayment of past loans. India has graduated to medium income country not eligible for concessional funding from multilaterals unlike Pakistan, which remains a perennial borrower.
The new mantra of the two countries is market freedom and lower government control. In Pakistan however, the mantra is severely compromised by the pervasive control exerted by the Ministry of Finance on institutions that should be independent: (i) the State Bank of Pakistan needs to be autonomous (in spirit as well as in letter) and focus on lowering inflation; and (ii) Pakistan Bureau of Statistics should be allowed to present credible macroeconomic data to enable appropriate policy making.
The foregoing explains that while Modinomics is in use internationally there is no such word as Sharifnomics though the word accountant due to jugglery of data from one head to another without synchronising the data components as opposed to economist is increasingly being branded about domestically.
Next week's article would focus on the Planning Commission's role in India and Pakistan.