How Narendra Modi’s Economic Reforms Are No Better Than Previous Governments

Posted on August 28, 2014 in Business and Economy, Politics

By Jaimine Vaishnav:

PM Narendra Modi’s slogan “minimum government, maximum governance” is economically an expropriation of the ‘acting agents’ and is an intrinsic threat to the economic liberty of all.


What it is

‘Unity in diversity’ is a superficial phrase. In the Indian context, it is practically impossible to generate ‘unity from diversity’. The diversified culture in India is a natural blessing to the economy of India as it motivates the scope of division of labor and specialization. This also influences the scope of the rule of catallaxy in the market, making the functional role of big/socialist government structurally unnecessary. Catallaxy is an alternative expression for the word “Economy”. Whereas the word economy suggests that people in a community possess a common and congruent set of values and goals (“imposed order system”), catallaxy suggests that the emergent properties of a market (prices, division of labor, growth, etc.) are the outgrowths of the diverse and disparate goals of the individuals in a community (“spontaneous order system”). According to Nobel laureate F. A. Hayek, catallaxy is “the order brought about by the mutual adjustment of many individual economies in a market”.

“If the natural tendencies of mankind are so bad that it is not safe to permit people to be free, how is it that the tendencies of these organizers are always good? Do not the legislators and their appointed agents also belong to the human race? Or do they believe that they themselves are made of finer clay than the rest of mankind?” – Frédéric Bastiat

How it is

Minarchism, in the strictest sense, holds that states ought to exist, that their only legitimate function is the protection of individuals from aggression, theft, breach of contract, and fraud, and that the only legitimate governmental institutions are the military, police, and courts. In the broadest sense, it also includes fire departments, prisons, the executive, and legislatures as legitimate government functions. Such states are generally called night-watchman states. This, holistically speaking, massages PM Modi’s belief - “minimum government”. Whereas, statism is the belief that the state should control either economic or social policy, or both, to some degree. Statism can take many forms from minarchism to nazism. In my opinion, minarchism is the ‘diet coke’ of statism. The problem, I believe, with ‘minimum government’ is that it doesn’t stay limited because the organism of the state is driven by the animal spirit. The health of the armed state is dependent upon abundant production of unthinking disarmed agents. Minarchists also expropriate the liberty and privacy of all individuals, thereby intimidating the financial portfolios of the acting agents through the means of legal robbery, called taxation.

Actions in the past few weeks, however, have clarified that Modi’s vision of minimum government is very different from the classical liberal notion of limited government. For all heavy political rhetoric about smaller government, Modi has done little in moving towards reducing the role of the state. And judging by his policy decisions, the idea of “minimum government” in Modi’s lexicon seems to mean, at most, nothing more than an Indian state with a downsized bureaucracy. Thus, to those who had expected radical reforms, scaling back the size of government, what was offered was a mere restructuring of government ministries. A slimmer bureaucracy was envisioned to implement policies, albeit the same old regressive ones that strengthened the status quo of an economy with very little scope for the enrollment of catallaxy. With great pride, the finance minister said the government will not engage in retrospective taxation but recognized its legality. This, the finance minister believes, will get foreign investors brimming with confidence to invest in India and help growth pick up. But it is simply reminiscent of Jawaharlal Nehru’s buffoonish promise to foreign investors, “We want to encourage in every way private enterprise. We want to promise the entrepreneurs who invest in our country, that we will not expropriate them nor socialize them for ten years.”

Sadly, unlike Arun Jaitley, or Modi, who couldn’t care, but for the next general election, many investors do possess time horizons over five years. Given its sizeable contribution to government spending, even a partial rollback of wasteful subsidies could have counted for “radical reforms” in India. But the government earmarked Rs.2.51 trillion towards subsidies, more than what P. Chidambaram had estimated in February this year. The Mahatma Gandhi National Rural Employment Guarantee Scheme, the pet scheme of the Congress that was widely criticized for wasteful populism, was allotted a massive Rs.33,353 crore–up from Rs.33,000 crore last year. Adding to these, a massive Rs.37,880 crore has been allotted to fund a Keynesian government infrastructure spending programme, and, as usual, a lot more money has been splurged on a number of pet projects to satisfy every vote bank. To fund all of this populism, the government wishes to improve the tax to gross domestic product (GDP) ratio, sell public assets, and implement a nation-wide Goods and Services Tax (GST). The idea has been lauded as favourable to fiscal consolidation and helpful to create a single, uniform market across India. However, higher government spending , funded either through increased taxes or liquidation of assets, directly contradicts the fundamental principle of limited government, which is to cut down the share of government spending in the economy. A nation-wide GST, on the other hand, would once and for all end tax competition between states that is crucial to preventing draconian taxes. To fund all of this populism, the government wishes to improve the tax to gross domestic product (GDP) ratio, sell public assets, and implement a nation-wide Goods and Services Tax (GST). The idea has been lauded as favourable to fiscal consolidation and helpful to create a single, uniform market across India. However, higher government spending, funded either through increased taxes or liquidation of assets, directly contradicts the fundamental principle of limited government, which is to cut down the share of government spending in the economy.

Whether it is

PM Modi’s esoteric allegiance to India’s surveillance project Centralized Monitoring System (CMS) also reveals the government’s lethal and all-encompassing surveillance capabilities, which, without the assurance of a matching legal and procedural framework to protect privacy, threaten to be as intrusive as the U.S. government’s controversial PRISM project. This clearly indicates the fallacy of minimum government.

“Full government control of all activities of the individual is virtually the goal of both national parties.” — Ludwig von Mises

PM Modi’s “minimum government, maximum governance” requires critical reconsideration, because it camouflages the theory of liberty. Blessed with resources, but tortured by red tapism, India can culturally disintegrate “on its own, for her own, by her own” for the economic goodness of the acting agents because only an individual thinks, reasons and acts. It is naturally impossible to enhance maximum governance, without the facilitation of maximum government.

Where it is

Marginal cost-pricing is not dysfunctional, when the equilibrium is left to the market for decision. Problems begin when the state, be it any form, distorts the peaceful transactions processing in the market. So, it is immoral to trust individuals with liberty and moral to trust people with power? The urge to shield the ‘mass society’ against any external factor is nothing but a greedy motive to extend statism systemically. For example, Finance Minister of India Arun Jaitley set the military budget at 2.29 trillion Indian rupees ($38.35 billion) for 2014-15, 50 billion rupees more than what the previous government agreed in an interim budget earlier this year. India’s increased military budget, at just under $40 billion, is however still less than a third of China’s. So, while India continues to play catch-up, it still has a long way to go. Also, the expansion of the military budget certainly won’t ease relations between India and Pakistan, which already share one of the most militarized borders on earth. It is hobby of any form of state to add more fuel to the fire, and expecting government to honor liberties of all individuals is like seeing fire creating the wood.

The past two months have provided proof, that the so called ‘acche dinn’ (good days) are certainly amiss for the near and distant future. It seems as if we are back in 2004 at the start of the UPA term, with the announcement of various new social welfare programs, infrastructure projects, tweaking of existing programs, and SEZ projects. There is little proof that “Modinomics” is any different from the previous government’s “Keynesianism”. Any visible changes seem too small, around the edges which will have no significant on the Indian economy. A prime example of the continuing cronyism of the previous government is the latest announcement from the Commerce ministry regarding [new] Special Economic Zone “incentives”. The typical list of incentives includes tax holidays for a fixed time period for private firms to start new businesses, and increase investments in existing ones. A common theme that runs through the SEZ project is the acquisition of land, primarily farm land. The government at the center and states always run into the difficulty of convincing farmers to sell their land to the government at a “fair price”. The farmers are generally promised a market price for their sale of land, which most of the time turns out is a false promise, and a distorted price. Once the tax holiday ended, the firms had to bear the cost of paying a tax along with the existing taxes. If it is not profitable to produce goods and services, minus the crony benefits provided by government, does it not make sense to let firms bear the initial cost of setting up their respective businesses, and not tax them at all?

Special Economic Zones (or SEZs) seem to be part of a growing list of ‘reforms’ which are passed in the name of ‘liberalization’. But a closer inspection shows that these reforms (along with the rest of them) are in fact corporatist reforms. SEZ, far from being liberal reform, is a corporatist reform that cares mostly for the well-connected and should not be confused with free trade and free market, in anyway. Free trade is the freedom of all individuals to trade freely, SEZs are a travesty. Do the people who support the SEZ projects consider the fact that in the long run, sale of the large farm lands will drive the prices of land high, which leads to an unsustainable boom in real estate? Does the thought of directing away land as precious capital and a scarce resource to taxpayer subsidized activities in manufacturing and IT/ITeS cross their mind? Do we know if the firms in the manufacturing and IT sector are actually competitive, if it not for taxpayer funded subsidies? Do they even consider the impact this has on higher education, and creating an unsustainable boom in education? Can it be ignored that State intervention has created an education bubble in India, which has rendered a vast majority of students to mere low skilled employees? Subsidization of Air India, reservation policies (legal racism), food security act and appeasing certain religious schools are all/also another addition to India’s fiscal deficit. This all interventionist measures or minimum government in action is/are succinctly antithetical to catallaxy. Nevertheless, in the long-run, we’re all dead.

When it is

Concluding that ‘human action’ (acting agencies) is a purposeful behaviour. Or I may say: ‘Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life.’ Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary. What PM Modi fails to realize is that the various measures he suggests are not capable of bringing about the beneficial results aimed at. On the contrary, he is producing as well as sustaining, a socialist state. Now, if the government, faced with this failure of its first intervention, is not prepared to undo its interference with the market and to allow establishment of catallxy, it must add to its first measure more and more regulations and restrictions. Proceeding step by step, on this way, it finally reaches a point in which all economic freedom of individuals has disappeared.