Why India should adopt the Macron model of development
It may be the key to unlocking Modi’s vision of a ‘New India’ by 2022
Four years ago, India was enamoured by the Gujarat model of development. The state of Gujarat had experienced breakneck economic growth from 2002 to 2012 under the stewardship of then chief minister Narendra Modi, and many believed that his elevation to Prime Minister in 2014 would transform the nation’s economy. Although the jury is still out over the BJP’s macroeconomic performance, the country has struggled to achieve rapid economic growth, and familiar shortcomings in Gujarat have surfaced at the national level, in the form of under-investment in education and healthcare.
As Modi’s term in power comes to a close with an unfinished reform agenda, India should consider shifting its attention towards his Gallic counterpart’s model of development. In just over a year and a half in office, Macron announced a reduction in France’s corporate tax rate, liberalised the country’s restrictive labour regulations and overhauled the SNCF, France’s bloated state-run railways. Understanding and possibly emulating Macron’s reforms may be the key to unlocking Modi’s vision of a ‘New India’ by 2022.
Market-oriented vs pro-business reforms
India’s impressive rise to the top-100 countries in the World Bank’s 2018 ease of doing business report confirm the BJP government’s success in cutting red tape, implementing tax reforms and improving power supply, making it easier for businesses to operate in India. Despite this progress, there has been a distinct lack of market reforms under the BJP. Price controls and import duties have been introduced in many sectors, and restrictive labour, land, and banking regulations continue to act as a deterrent to economic growth.
In stark contrast, after just three months in office, Macron fulfilled his campaign pledge of overhauling France’s labour laws, injecting ‘hiring and firing’ flexibility for small and medium enterprises, slashing red tape for firms with more than 50 employees, and curbing the influence of the country’s notorious trade unions. Market-oriented reforms are essential to improve economic productivity and create a level playing field for small businesses. Macron’s technocratic background and past experience as the Economy Minister have likely contributed to his strong faith in the market to tackle the structural barriers that have stifled France’s economy for decades.
Structural reforms aren’t a popularity contest
The European Commission President Jean-Claude Juncker, once wisely commented about economic reforms, “We all know what to do, we just don’t know how to get re-elected after we’ve done it”. Modi’s positive first year in office was quickly dismantled by jibes from the opposition that he was favouring large businesses at the cost of farmers and the marginalised. Subsequent state elections made the BJP increasingly risk-averse and eventually abandon the pursuit of structural reforms. Although this cautious approach paid dividends in ensuing state elections, economic underperformance and the resulting lack of job creation arguably pose the greatest challenges to Modi’s re-election bid in the 2019 general elections.
Macron’s approval ratings have dipped following his ambitious labour reforms and measures to cut public expenditure. Despite being criticised as a ‘president of the rich’ by the left, Macron vowed to press ahead, recognising the long-term benefits of painful structural reforms. He is betting on economic growth and job creation picking up in the medium-term, limiting the political fallout of these reforms. Indian politicians must emulate this approach, and eschew populist policies in favour of structural reforms.
Public sector reforms are essential to boost underperforming institutions
Among Macron’s many reforms, overhauling the SNCF, France’s revered state-owned railways, is among the most daring he has attempted. His plan puts an end to perks like guaranteed jobs, automatic pay raises and generous social security benefits for new railway workers, and is designed to modernise the heavily subsidized and indebted railways. This reform is particularly challenging given that railway workers are one of the largest public-sector work forces in France. Although train services were disrupted following months of strikes from rail unions, Macron didn’t relent, and France’s Parliament eventually passed the rail reform legislation in June.
In India’s case, underperforming public sector institutions are a hydra-headed monster, with railways, civil services, police and state-owned enterprises, all in urgent need of reform. To his credit, Modi attempted to initiate reforms by announcing the lateral entry of private sector professionals in the civil services, as well as the creation of an independent regulator to increase politically-sensitive railway tariffs. However, both moves made little progress; the former, probably because of the bureaucracy thwarting lateral entry and the latter, due to policy paralysis in a pre-election year.
Investment in human capital is vital to sustain economic growth
Macron’s innovative approach to economic reforms has extended to France’s social welfare system. His education sector policies are designed to improve social mobility, by limiting school class sizes and improving teaching in poor neighbourhoods. This is a shift away from the traditional approach of tackling social inequalities through welfare payments and instead addresses the root cause of inequality. Even Macron’s much derided labour reforms are designed to provide ‘flexicurity’, a combination of greater labour flexibility for companies and improved worker protection through measures like health protection, unemployment insurance and vocational training for workers.
In contrast, government expenditure on education and healthcare in India has been inadequate and rarely targeted social mobility. According to a recent research study, low quality education and the high prevalence of diseases means India is risking its future economic growth due to limited workforce productivity. While policymakers are banking on India’s large youthful population to propel future growth, the study found that Indians work for just 6.5 years at peak productivity (compared to 20 years in China), ranking 158th out of 195 countries in an international ranking of human capital. As India’s economy becomes increasingly powered by digital technology, upgrading human capital through investments and innovative policies in the education sector is essential to harness this demographic dividend .
In the long run, only leaders who undertake strategic and sometimes painful reforms that lead to sustained economic growth and job creation, are likely to be remembered as visionary leaders in their country’s contemporary history. Macron seems to have bet on this, and hopefully India’s leaders will do so too.
