Shailesh Kumar is currently a senior analyst on Asia at the Eurasia Group. During the Obama administration, Shailesh was the Indian economist at the US Department of the Treasury. He worked on US-India economic relations and policies, aimed at deepening India’s capital markets and increasing foreign investments.
Nowadays, he closely follows the Indian government’s economic, security, and foreign policies, as well as its relations with the US and immediate neighbours.
India Ink (II): Since taking power in 2014, the BJP’s economic and financial reforms have had mixed outcomes. Policies like demonetization and the recent implementation of the Goods & Services Tax Bill have been discussed widely. What is your perspective on these reforms? Has the government been relatively successful or unsuccessful?
Shailesh Kumar (SK): I think success depends on whether you are considering economics or politics, because the answer may vary accordingly. This government is largely viewed as being ‘Centre-Right’concerning economic policy-making. But I think that’s a little bit of a mischaracterisation.
When Modi first came into office, there was an expectation among international investors that he would soon implement the reforms (especially land and labour ones), that they expected of him. However, development for a domestic audience does not mean only implementing land and labour policies. It also entails making India more industrialised, cleaner, safer, and more importantly, creating jobs. This is why I think the Western audience needs to come to terms with what his economic ideology really means – and that it does not necessarily translate into the types of reforms that they are looking for.
My answer to the question on whether it has been successful on the political front is a definite yes. According to me, demonetisation was more of a political decision than an economic one. I was always of the opinion that demonetisation was not going to be as detrimental to his political fortunes as the media had tried to portray.
More than what it did for the economy, it showed everyone (again, the domestic audience) that he was doing something to develop the country and get rid of corruption. He also showed that this was far more important to him than anything else, concerning his chances of being re-elected.
From an economic perspective too, there are some merits to this. Demonetisation has allowed the government to see the ‘demand side’ of the economy better than it has ever been able to. It also forced everyone in India to put their money in banks, which has allowed the government to see the liquid wealth possessed by almost every Indian. This has never happened before.
Furthermore, the implementation of GST will allow the government to see the ‘supply side’ of the economy, because almost every vendor and person in the supply chain will then have to register with the government. There are a lot of complaints about GST with which I sympathise- there are multiple tax rates and they have not really resolved the issue of trucks and their ability to seamlessly move between states.
But, GST is the most important economic reform the country has had – period! Within a year, the government will be able to see the economic transactions in India. Consequently, they will be able to tax these better – and fix the fiscal health, in the process.
So yes – these have been quasi-successful from the economic perspective but completely successful as political agendas.
II: What reforms do you think are still overdue? Do you think that these will come before the 2019 general elections?
SK: Probably, there are some reforms in the pipeline already. On the other hand, there are some which are not being planned – but are important anyway. Subsidy reform is on the way. Moving towards direct benefit transfer (DBT) system is important, because it reduces fiscal slippage dramatically and ties into the ‘better governance’ mantra and the broader idea of ‘universal income’.
However, the electricity system (which is more of a state issue) is fairly inadequate. You should not have a situation where governments set tariffs on electricity, because that will just lead to losses. Foreign direct investment (FDI) is also an area where some tweaks are still overdue. Opening up multi-brand retail has not necessarily worked – so they need to figure that out. There is talk of opening up food retail and allowing multi-brand food retailers to procure products that are not necessarily fully-made in India.
There is also the issue of non-performing assets (NPAs) in the banking system. I think in this case, doing nothing is a reform in itself, in a certain sense. This will send a strong signal that the government is not going to continuously bankroll public banks, if they choose to behave badly. Consequently, this will give space for private sector banks to gain a larger market share. It is not an ‘activist’ reform, but a ‘form’ of a reform.
There is also a whole lot of things they can do about CAPEX (capital expenditure). They are boosting CAPEX on infrastructure, which is highly growth-inducing. Finally, there’s digitisation. If you can induce most Indians to use digital modes of payment instead of cash, major progress can be made.
II: Just a day before the UP-election results were declared, you wrote a piece on how important that election would be. In the article, you also explored whether Modi would be focussing more on anti-corruption and improved governance or would retrench back in populism and social conservatism. What direction do you see him moving towards? How do you think his decisions in UP will affect the upcoming state elections in Assam, Himachal Pradesh and in other states? What is your opinion on the selection of Yogi Adityanath as chief minister?
SK: As I mentioned in that article, the UP election was a ‘crossroad’, because it would decide whether the BJP would take the direction of traditional populism (which can be characterised in various ways) or whether they would continue with their reform agenda. Because they won, my view is that they are going to continue with their reforms – not the big structural reforms – but the other types of reforms, which I have already outlined.
The one lesson the BJP learned, very harshly, in 2004, was that you can have a growing economy, but if you don’t focus on the rural economy, you will lose. In the run-up to the 2004 elections, Indian economy was performing better than it is doing today (at least, from an American perspective). So, everyone thought the BJP would win, but they lost, because the rural economy was not feeling the effects of growth.
There will still be some populism in their message – the farm-loan waiver was an example of that. It was something they had to deliver, because they had campaigned on that. But that is still an example of some of the lingering populism. However, the development agendas will still be more prominent, and that is why they will keep winning. It is largely because the electorate wants a ‘new India’ and the BJP is most likely to deliver that.
Yogi Adityanath was a fascinating pick. I think it was a very strategic choice. Moreover, I am also of the opinion that the RSS did not force Modi’s hand in this. There are a lot of long-term implications to his selection – but the most important one concerns the 2019 elections. If the BJP wants to win the 2019 elections, they need to have UP’s support again – as they did in 2014 and 2017. Doing it again in 2019 will be very challenging but important for a state where anti-incumbency is such a huge issue.
Every decision they have made comes down to the 2019 elections, and their fear of a Centre-Left coalition emerging against them. We still have to see how this works out – but you are already seeing a lot of these signs, with Yogi Adityanath saying that he is working for the ‘development of all’. In fact, this plays into the broader narrative of the BJP, which is that the Centre-Left parties are not secular, and that the BJP and its version of political ideology is more secular than theirs.
This is why Adityanath was picked. If he is able to deliver for everyone (even though he is a hardliner), it would prove the BJP’s argument that, as a party, they look out for all Indians, and not just a selected few.
II: You also wrote a piece about the BJP possibly replacing the Congress as the primary national party. You mention how southern India is key to this. Do you think, then, that the BJP has what it takes to establish a foothold in the south, which has previously been controlled by mostly regional parties?
SK: So, if you go back in history, the Congress in the 1970s and 80s controlled the states in southern India. They were a pan-Indian party – but at that time, they were not bound by language, religion or other characteristics that bind most parties today.
In those days, Indira Gandhi used to be able to hand-pick the chief Minister of certain states in the south. Now, that was pure power! In the interim period, before the BJP gained prominence, there was no other party that could do that. There were regional parties, state-specific parties or caste-specific parties – but they really never had a chance of becoming national. The BJP does have the potential, but their biggest roadblock has been the image of being a north Indian, Hindi-speaking party.
If they want to deliver on their ‘Congress-mukt Bharat (Congress-free India)’ and supplant the Congress as the primary national party, they are going to have to break out of their Hindi-speaking bases, and make inroads in the south. This is for a number of reasons:
1. If you want to become like the Congress party of the 70s and have a power base in the south, you have to be psychically present there
2. If you want to boast a majority in the Rajya Sabha, you will to need to win some state elections in the south
3. If you want to build a legacy and institutions (as the Congress once did) then you cannot be divided along ‘north-south’ lines.
We are already seeing signs of this. The BJP just had their big conclave in Odisha, a state which may prove to be very important for them. Right now, however, it will be tough for them since there is a very powerful party at the helm in Odisha. They can hold sway over Karnataka, as they have done in the past. Tamil Nadu is challenging, but because the AIADMK is in an uncomfortable situation right now, they may be able to break into that state. So, for the BJP, south India is where they need to go next.
II: What does BJP’s gaining of momentum mean for the Congress? Can they offer any considerable opposition to the BJP, and, if so, how?
SK: Unfortunately, I think the Congress needs new leadership if it wants to turn things around. This is for two reasons – one, because they need to figure out strategically how they can win electoral campaigns, and secondly, from an ideological perspective, a lot of people don’t know what the Congress stands for anymore.
You can say ‘secularism’, you can say ‘socialist’, ‘democratic’ – which is what they have always said. But I don’t think people in India care about secularism anymore – and I don’t think they feel the secularism from the party. So, Congress needs to define the ideology it stands for, which is unclear at the moment.
The second part of this is that Modi is more attractive than any other leader, when it comes to showing off his understanding of India’s current political situation. From a strategic perspective and from a campaigning perspective, he is shockingly good when it comes to feeling the pulse on the ground and delivering on it.
The Congress has massively lost in this area. And unless they change their leadership, I don’t know where they will be able to go from here.
II: The unrest in the Kashmir valley has continued for almost a year now. Action has been ramped up on both sides, with Sabzar Ahmad Bhat, ‘successor’ of Burhan Wani within the Hizb-ul Mujahideen, calling for total war in the name of Islam and the army adopting violent tactics. Where does this conflict seem to be leading? What do you think can be done to calm tensions and facilitate economic development in the valley and the rest of the state?
SK: ‘Economic development’ is the key phrase here, and they are clearly trying to do so. You saw evidence of that in the tunnel that they have built. I don’t think BJP gets full credit for that necessarily, but they are trying to take full credit.
Honestly, I don’t know where things will turn out in Kashmir, from now on. Unfortunately, the signs are not very optimistic. The voter-turnout in the recent bypoll was abysmally low. So, I don’t know what the government needs to do to turn things around.
There were hints of this tension when Manohar Parrikar left the post. One of the reasons why he wanted to leave so badly was because handling the Kashmir issue was a very painful experience, in terms of coming to a consensus with the Cabinet and then taking action.
Clearly, this is not a new issue. I don’t know what the government’s strategy is, and they’re going to have to figure it out if they want to be successful here.
II: In the past two or three years, India has engaged with Asia like never before. What direction do you think engagement with Asia will take us? Will membership in the Shanghai Cooperation Organisation (SCO) result in any changes in India’s relationship with the US and NATO? Will India’s increasing engagement with Vietnam, Japan, Mongolia and ASEAN act as a counterweight to China’s increasing influence in India’s neighbourhood?
SK: Right now, Modi’s focus is on America. He has made this extremely clear. You see this in the frequency of the visits, the contact from high-level officials, and in the appointments he has made. His senior-most foreign policy advisor has a pro-US tendency, while others have a significant experience in dealing with the US. The current focus on the US is due to the broader shift in Indian foreign policy – from the ‘moralpolitik’ to the ‘realpolitik’.
Japan and Israel are equally important. You see a lot of emphasis on developing the relationships with these two nations – partly because of Modi’s affinity for Japan, and also how they have done economically. The interest in Israel is for defense and security reasons, and because of the perceived common threat from terrorism.
When it comes to southeast Asia, I am not 100% convinced that India is going to be able to provide the alternative to China that the region needs – but they will try. You can already see them ramping up defence facilities. In fact, India is looking beyond Pakistan, and is starting to look at China as the biggest threat.
The concern about China stems from China’s activity in the Indian Ocean, which is a big concern for India. India will do whatever they can to break out of this ‘string-of-pearls’ strategy that China has. With southeast Asia, however, I do not see India being a ‘second China’ in the region.
II: It has been a quarter of a year since Trump took office. In this time, what are the significant engagements that have taken place between India and the US? What significance will a Modi-Trump meet (in the US or India) have? Are there any stumbling blocks you see coming up in the bilateral relationship? Do you think the India-Russia, India-Iran and US-Pakistan relationships will influence the US-India relationship or do you see the respective governments working past it?
SK: In terms of examples of outreach or proximity between the US and India, the biggest example is the frequent visits by S Jaishankar, which should not be overlooked. This has probably been the most profound outreach by an Indian government to an administration that has been at the helm, very recently. These visits have set the stage for a Modi-Trump meeting.
The second example is HR McMaster’s visit to the region, including India. We have never seen such a high-level official visiting to India, so soon after the installation of a new government. In fact, a lot of interest concerning having closer ties has been expressed by both sides. Economics plays a role in this – but strategy and defence are the major areas of focus.
To put it bluntly, America needs India as a ‘hedge’ against China. India also wants to work with America for a number of reasons, especially because its relations with Pakistan and China.
Obviously, as the US-India outreach deepens, there will be concerns about the India-Russia relationship. I think we will just have to wait and see how that develops. It is possible that closer US-India and India-Israel ties will push Russia towards Pakistan. If that happens, you will witness the biggest strategic shift (from a geopolitical perspective) in the past 60 years. You will have a realignment of relationships, along the lines of US-India and Russia-Pakistan, which will have long term implications.
It has to be seen how India manages this issue. They are going to have to balance both the US and Russia – without being detrimental to the interests of either. Maintaining good relations with Iran, despite US sanctions and pressure from the West, is a good example of such a balancing act.
I think they will be able to balance these relations, just like they have done for a very long time. Relations, between the US and Pakistan are deteriorating very quickly. There is a perception in the current administration that Pakistan is a threat to regional and global security, which triggers a desire in the US to foster closer relations with India. I don’t see how an accelerating US-India relationship will make things with Pakistan worse – simply because things have already been on the decline.