ON 27TH SEPTEMBER last year, a man who had presented five Indian budgets as a steadfast defender of economic reform stood at a pulpit at Stanford University and told around 500 students and teachers how his commitment to market-friendly policy making had only brought him grief. Yashwant Sinha took blame for the Bharatiya Janata Party’s epic rout in 2004. “Sometimes, I feel that I may have been responsible single handedly for the defeat of my party in the 2004 elections. I can never forget the lessons I learnt in that election,” said Sinha, a Member of Parliament, and the man who may be finance minister if the BJP wins the 2014 elections.
“During my tenure as finance minister I had raised the prices of kerosene oil from Rs. 2.50 to Rs. 9.50; kerosene oil is used on a large scale in the rural areas for both lighting as well as cooking. When I went campaigning in a remote village in my constituency, and asked an old woman for her vote, she said that that was fine, but was I not responsible for raising oil prices which had made her life difficult?”
A few years before Sinha’s mea culpa at Stanford, Gujarat chief minister Narendra Modi was preparing for the 2007 elections. With the cloud of the one of the most venomous Hindu-Muslim riots in history hanging over his head, he’d been dubbed ‘maut ka saudagar’ (vendor of death). His political career would perhaps be over had he lost. Senior journalist and BJP ideas man Swapan Dasgupta was asked to help with Modi’s election manifesto. Those days, the Gujarat State Electricity Board which suffered from rampant power theft as every other electricity board in India does was slowly recovering after a severe clampdown on pilfering by the government. “There were about 200,000 farmers against whom cases had been registered for stealing power. We had written in the manifesto that if returned to power, the government would waive off many of the cases,” says Dasgupta. Politicians like to pamper farmers: they are a huge vote bank and win elections. But when the manifesto went to Modi, he said he’d not allow the waivers. This even though the rival Congress Party had made farmer irritation at having to pay for power a big election issue. “Modi said not a single case will be withdrawn. He said we are just about turning the electricity board and this will push it back into sickness. He still won,” says Dasgupta.
These two approaches to subsidies, one direct, one hidden, from the near decade that the BJP has been out of power at the centre, what Dasgupta calls “years of darkness” lays bare an issue that’s intriguing everyone. What does India’s main opposition party, seen for years as the champion of free markets and small government, really think about the economy? The issue has taken sharper overtones over the last year. The ruling Congress has been in retreat, defeated by unending legions of scams, spiteful allies and a prime minister who’s seen as timid. Yet, the BJP has been unable to exploit these near perfect conditions to script its return. If the Congress has been in disarray, the BJP’s plight is no better. Part of BJP’s problems is due to the fact that its senior leaders demonstrate as much camaraderie as lions feasting on a carcass. But equally, the party has been unable to present a unanimous alternative, especially in the area of economic reform. With the national elections due next year, it’s a question that’s vexing India Inc. particularly.
Take the BJP’s flip-flop over foreign direct investment (FDI) in multi-brand retail. In its economic manifesto for the 2004 national elections, the BJP had indicated that it would allow limited FDI in multi-brand retail. This demonstrated foresight and a degree of boldness because the party has traditionally been backed by small shopkeepers who are popularly painted as losers when FDI is allowed. But despite having once proposed the idea, it fiercely opposed the Congress’ move this year to allow foreign investment in retail and even teamed up with the Left parties to prevent it from happening.
Even if some of this were sheer opportunism and partisan politics, it’s not as if the BJP shouted down multi-brand retail FDI unanimously. As Swapan Dasgupta points out, Narendra Modi may have made the right noises after being prodded by the party but he is certainly not fundamentally averse to the idea. Moreover senior leader Arun Shourie who was minister for disinvestment in the cabinet of Atal Bihari Vajpayee and currently Rajya Sabha member says that the party shouldn’t oppose matters they’d have to back if they were in power. In the age of coalition politics, when it is virtually impossible for any one party to win majority in Parliament, the BJP-led National Democratic Alliance (NDA) is also a divided house on FDI. In Punjab where the ruling BJP and Akali Dal combine won a big victory in the state elections last year, Deputy Chief Minister Sukhbir Badal, son of Chief Minister and Akali supreme Prakash Singh Badal, first supported FDI, and then under pressure from the BJP backed off.
To many the BJP’s ambiguity is baffling because during its one period of ruling India between 1998 and 2004, its economic agenda never seemed to be in doubt. Suffice it to say that it was the first government in the history of free India to have had a minister for selling off state-owned manufacturing companies, many of them doddering but trapped in socialist trade union ennui, called the Disinvestment Ministry (the minister was Arun Shourie).
But the BJP has always had a tussle on its economic soul. The founding father of the Bharatiya Jan Sangh, the precursor to BJP, Shyama Prasad Mookerjee, was a free market proponent. He was the industry minister in the cabinet of the first prime minister Jawaharlal Nehru, and differed with Nehruvian socialism. Economic freedom, Mookerjee argued, is one of the four key planks of nation building, along with national, political and personal liberty. “Freedom consists not only in the absence of restraint but also in the presence of opportunity,” he famously said on 27th November 1937 at the convocation of Patna University.
When Mukherjee fell out with Nehru and started the Jan Sangh in 1951, it naturally became a champion of the market. The twist here is that the Jan Sangh and Mukherjee were closely associated with their ideological parent, the nationalist Rashtriya Swayam Sewak Sangh (RSS), a strong advocate of swadeshi or homemade growth in every field—from Indian culture and clothing to Indian companies. The slogan for this homegrown-ism was given by the other stalwart of the Jan Sangh movement, the social reformer Deen Dayal Upadhayay who spoke of Antyodaya or caring for the poorest of the poor, a takeoff from Mahatma Gandhi’s famous advice - “Recall the face of the poorest and weakest man you have seen and ask yourself if this step you contemplate is going to be of any use to him”.
As Martin E. Marty, R. Scott Appleby, John Garvey and Timur Kuran note in their 1996 book Fundamentalisms and the State: Remaking Polities, Economies and Militance, by the 1960s, the Jan Sangh had a collaboration with the Swatantra Party, a liberal free market advocating party, which was created partly in response to the infamous Nagpur Resolution of the Congress in 1959 where cooperative farming was decided as a major agrarian reform.
Both the Jan Sangh and the Swatantra Party pushed for private enterprise and against what they feared could become Stalinist cooperative farms.
In fact the Sangh and the Swatantra Party for a while became so close that reporting the July 1959 meeting of the Swatantra Party held in Chennai, where a series of principles were adopted including restriction of state enterprise to heavy industries to promote private enterprise and rejection of mass cooperative farming on fear that it would reduce farm output and bring in excessive bureaucratic control, the Left-leaning Economic and Political Weekly worried about rumours that the Sangh and the Swatantra Party might merge. While this did not come to pass, it shows the intimacy in those years.
But in 1977 when the Janata Party coalition government was formed largely as a group of everyone opposed to Congress’ Indira Gandhi, and brought together by a former socialist Jai Prakash Narayan, the mood altered to an inward-looking policy-making with the focus firmly on the the farmer and the village and not on industry. As Fundamentalism and the State notes: “In fact, even though the Jan Sangh was the largest faction (30% of Janata’s parliamentary seats), the economic ideas and policies of the Janata was based mostly on the ideas of Charan Singh, the leader of rural peasants. He advocated the promotion of agriculture rather than large-scale industry, a self sufficient peasantry, and labour-intensive small-scale industry.”
This has given economic thinking within the BJP a history of confusion but political manoeuvrability to pick and choose which part of its history it wants to tap into at what point.
Atal Bihari Vajpayee, who left journalism to join politics inspired by Mookerjee, clearly choose his mentor’s path. He used to narrate the anecdote in the mid-50s when he was a young MP in a parliament overwhelmed by the Congress and led by charismatic Nehru himself. There was a debate on building The Ashoka Hotel which was to be India’s first luxury hotel. In one of the debates, Vajpayee said but the job of the government is to build hospitals not hotels. Nehru was furious at the intrusion of a junior MP from a virtually non-existent political party. He told Vajpayee you don’t understand anything - from the profits of the hotel we will make hospitals. Vajpayee used to joke that that hotel is still loss-making and you can see how many hospitals we have built. But Nitin Gadkari, the current BJP president, brought in the Antyodaya as the motto after he took over the chair in 2009 following the second successive defeat of the party by two Congress mantras aimed at the poorest - the Congress ka Haath Aam Admi ke saath (the hand of the Congress is with the common man) which trumped the BJP’s India Shining in 2004 and Mahatma Gandhi National Employment Guarantee Act which promised at least 100 days manual labour for the rural poor.
Today, as the BJP once again limbers up for the polls, there’s a feeling within that economics can be one of the main agendas to battle the Congress. A combination of low growth, high interest rates, fewer employment opportunities, food inflation - essentially issues that affect everyone, has made that possible.
There’s also the emergence of a New Dreaming Class, which cuts across every electoral boundary of caste, religion, region or even income. On the one hand, this class dreams of a corruption free India (and believes in what Anna Hazare and Arvind Kejriwal stand for), on the other it scrimps and saves to send its children to private schools, eschewing the dysfunctional state option. There are at least 150 million people in this class. Many of them voted for Manmohan Singh. If the BJP can tap into their imagination and organise even a fraction of them, the election maybe theirs. As Dasgupta says, 2014 will the election of dreamers and those who can make people dream.
TO UNDERSTAND WHERE THE BJP’s economic thinking is taking place, draw two parallel lines through the heart of India. The states that fall within these are, west to east, Gujarat, Madhya Pradesh, Chhattisgarh, Jharkhand and Odhisha. Two things are true about them: in recent years, all of them have been clocking growth of more than 10%, and all are BJP-ruled states, except Odhisha, where the BJP has a strong presence and had a successful coalition government with the ruling Biju Janata Dal (BJD) till 2007. Last year, Gujarat grew by 12.21%, Madhya Pradesh 10.73%, Chhattisgarh 18.12%, Jharkhand 10.76%, and Odhisha 14.80%. That’s not all. Bihar, where the BJP has a strong coalition with the ruling Janata Dal (United) (deputy chief minister Sushil Kumar Modi is from the BJP) grew by 21.59% last year; Karnataka, where incessant infighting within the party has repeatedly paralysed the state government, clocked in a growth of 15.73% and so on. The BJP also rules in Goa and Punjab. But the core of BJP’s economic thinking lies in the heartland states which account for more than 100 million people (Madhya Pradesh accounts for the bulk), and contributes to around 13% of GDP.
And as is becoming increasingly evident, it’s the states that are beginning to influence BJP’s economic thinking.
Arun Shourie says that the BJP-ruled states and its chief ministers are its showcase, and these states and leaders have emerged as the Petri dish of experimentation in governance and policy. “And this is percolating up all the way to BJP head-quarters at 11, Ashoka Road in Delhi.”
This is the key difference between the Congress and the BJP today. In the Congress, power still trickles down from party president Sonia Gandhi and son Rahul. In the coming elections, the economic outlook of the Congress will be shaped by leaders like P. Chidambaram, Jairam Ramesh, Kamal Nath, Salman Khurshid and Kapil Sibal, each primarily a part of the Delhi-based central leadership.
In the BJP, it’s folks like Gujarat chief minister Narendra Modi (on his third term after a recent re-election), Madhya Pradesh chief minister Shivraj Singh Chouhan, or Chattisgarh chief minister Raman Singh whose successful policies in their states will influence the party’s thinking at the centre. That both Chouhan and Singh look strong enough to perhaps swing a third term as chief minister each makes their voices even more ricochetting.
So, whether it’s the new capital being built by Raman Singh in Naya Raipur in Chhattisgarh, displaying key urban renewal skills at a time when cities across India are collapsing and barely any new ones are being built, or the measures by Shivraj Singh Chouhan to reduce agricultural interest rates or increase the minimum government procurement price for wheat that has led to a bumper crop in Madhya Pradesh, or Narendra Modi providing electricity to almost every household and creating a single window clearance for business, these are the invaluable inputs to the promise list the BJP wants to make for the next polls.
“States are becoming very important in the process of economic development,” says Yashwant Sinha. “A large part of our thinking is soaked up from the states. We have to agree that wisdom is not the prerogative of Delhi.” He argues that many of India’s urgent needs, from banking reform and financial inclusion to appropriate compensation for land acquisition is being better driven by the states than the centre. In land reform, for instance, last year the then Maharashtra chief secretary Ratnakar Gaikwad suggested that the new Land Bill will prevent development of 60,000 hectares in the state and states like Kerala have argued that development in power has been stopped due to central dithering. In Kerala, Chief Minister Oomen Chandy has said the crucial Athirapally hydropower project has been held up due lack of central clearance even though both the main rival political parties in the state agree on its need. In corporate parlance, think of it as best practices at subsidiaries or branches driving strategy at headquarters.
REGARDLESS OF ideology, deferring to states is new in Indian politics. But, as party insiders point out, BJP’s central leadership has now realised that if they lose the 2014 elections, the party would have been out of power for three successive terms, or 15 years; that’s a very long time in politics and no mainstream party in India has ever been out in the wilderness for so long. As Sinha pointed out in his Stanford speech, even arguably BJP’s topmost contribution to India’s development—building new highways—didn’t help it win the 2004 elections. BJP and its allies lost all 14 seats which it had won in 1998 along the arterial National Highway 2 connecting eastern and north western India. So, as a senior party man points out not for attribution, “If the party wants to win, it had better listen to the state leaders. Or, as Jaswant Singh, a senior BJP leader who served as finance minister and external affairs minister says, “We want a federal India where the states have more and more power. If we truly want that, how can we expect that they will always listen to us? They win elections there. Their knowledge is bottom-up.” Arun Shourie says: “I don’t speak for the party but our slogan is or ought to be—we’ve delivered in the states.”
A very senior BJP leader and former cabinet minister tells an illustrative tale of the relationship between the Delhi leadership of the party and regional satraps. Earlier this year, Narendra Modi reached out to former BJP president Rajnath Singh asking for help with the negative media reports coming about him from Delhi. “Rajnath Singh was in seventh heaven,” says the leader. “He couldn’t believe that Modi had reached out to him.” Singh has a right hand man who is a well-connected astrologer who he consults frequently. So he tried to help Modi. A few weeks after that the astrologer met a key Modi aide and tried to pitch for his master. Every prime minister needs a second-in-command, said the astrologer, and who better if Modi becomes PM than a rural leader from the biggest state in India, Uttar Pradesh, ie Rajnath Singh? “The Modi aide told him, see, with Narendrabhai, 1 to 10 is him. So there is no question of No. 2. After 10, we can see what we can do for you.”
This is not to say that there will not be inputs from central leaders. Sinha says if given a chance again, there are four things that’ll top his agenda—bring down the number of central government-funded schemes from the current 147 to 10, have these schemes fully financed by the centre and do away with the current method of joint financing with the states, and have stringent monitoring of the schemes. “At the moment, around 100 schemes have a budget of less than Rs. 300 crores. What we would apply are 10 really big ticket schemes in the areas of infrastructure, power, health, agriculture which will be on the basis of demand from the states, a bottom-up approach, instead of top down,” he says.
Both Sinha and Shourie also worry about the ballooning fiscal deficit which is estimated to be around 5.5% of the gross domestic product (GDP) of financial year 2013. Sinha’s formula to reduce the deficit to less than 3% hinges on what he calls “immediately implementable planning”. He suggests dismantling the current system of five year plans envisaged by the central Planning Commission, and reducing its term to two years to be able to focus on what can be implemented quickly. The idea of a Planning Commission with five year terms was borrowed from the Soviets and dates to Jawaharlal Nehru’s first prime-ministerial term.
Shourie says he despairs at the use of monetary policy to curb inflation which he says is like “using an axe to kill a mosquito”. “We are in this vicious cycle. Neglect inflation, fiscal deficit spins out of control, and we respond through increased interest rates. We have off-budget expenses each year of around Rs. 200,000 crore [in fuel and fertiliser subsidies] and no one talks about that,” says Shourie, who proposes a complete freeze on all hikes on government expenditure except in defence and internal security. “We must restrict the use of monetary policy and focus on fiscal policy. The focus must be on efficient delivery.”
Both Sinha and Shourie are also arguing against the Gadgill-Mukherjee formula of distribution of central funds to states. Created in 1990 by social scientist D. R. Gadgill and Pranab Mukherjee, the incumbent president who was then deputy chairman, planning commission, as per the formula, of every Rs. 100 sent to the states, 55% is on the basis of population (larger the population, more assistance), 25% on the basis of per capita income, 5% on fiscal management and 15% on special problems including disasters, crumbling urban spaces, etc. Shourie and Sinha argue that post liberalisation, with states often taking their own economic destiny in their hands, the formula is irrelevant.
The influence of the states is all but visible in this thinking. Six years back, Narendra Modi had already begun railing against the Gadgill-Mukherjee formula. He called it a formula that “punished” fiscally responsible, innovative and aggressively growing states. As a solution he suggested that each state be allowed to submit three critical areas for assistance, instead of the centre judging needs and allocating budgets accordingly. With a Congress government at the centre, predictably Modi’s suggestions were dismissed, but if the BJP wins, expect the Gadgill-Mukherjee formula to be re-crafted, if not scrapped outright. This will enable states to get a far greater control on their fiscal targets because demand for money will come from the state’s depending on their priority areas like health or education rather than population or per capita income.
Even on curbing fiscal deficit, the BJP knows that its states can show the way. According to a report by the PHD Chamber of Commerce in July, most of the heartland BJP states had reigned in their deficit at less than 3%. The report listed Chhattisgarh as ‘excellent’ with a deficit of 1.9% of the state GDP, while Madhya Pradesh and Gujarat were dubbed ‘very good’ at 3% (as did Bihar with a deficit of 2.9%) and even Jharkhand got a ‘good’ having brought down its deficit from 7.4% to 3.7%. For the record, Odhisha is also in the ‘very good’ category with 1.8%.
Mukul Asher, professor of public policy at the National University of Singapore who tracks the economies of Indian states feels that Gujarat, with massive investments in infrastructure, whether roads, electricity distribution or solar power, has the right ideas about balancing public investment and debt. “With debt, one has to see where the money is going and if there are going to be returns in the future,” says Asher. “If the money is all going into empty subsidies then there is a problem.” Shourie agrees that the focus on delivery as a method to curb fiscal deficit comes from “the relevance of Modi and the Gujarat model”.
Economist Bibek Debroy is the author of Gujarat: Governance for Growth and Development, a new book on the Gujarat model. He says the much discussed aspect of the economy under Modi like state GDP growth are less interesting to him than some more vital but often ignored things like decentralised planning, empowering the bureaucracy and using the private sector to deliver social schemes.
Debroy points to the Chiranjeevi healthcare reimbursement where the state reimburses private clinics and doctors for childbirth care and transport costs to the healthcare centre for below poverty line (BPL) or the poorest mothers. Using a BPL card to identify the patients, the scheme pays Rs. 1795 for every birth to gynocologists, Rs. 200 for the mother to travel to the clinic and also Rs. 50 to the person accompanying the mother for loss of daily wage. According to the Gujarat government, the infant mortality rate has fallen from around 60 deaths per 1,000 births to 44 last year and the scheme won the Asian Innovation Award by the Singapore Economic Development Board.
In education, Modi’s Gunotsav primary school grading scheme has improved attendance and quality, said Debroy. “Narendra Modi’s model breaks the idea of targeting the poor based on caste and religion. There is no doubt that his model is innovative but for it to work across India, it would have to work in states like Uttar Pradesh and Bihar. Now are these states ready to break out of the caste and religion based state support model? I am not sure and that will be his challenge,” says Debroy.
Meghnad Desai, economist, former professor at the London School of Economics, and Labour Party peer in the Britain, says Modi’s biggest challenge would be how many seats can Modi himself get the BJP if he were declared the prime ministerial candidate. The same would hold true for any other chief minister who has the same aspiration. “It is accepted within the Congress that Manmohan Singh’s image as a clean, elder statesman, middleclass, educated, honest man brought them at extra 30 to 40 seats in the 2009 election when he was declared the prime ministerial candidate before the polls,” says Desai. “At 180 seats and more, a government can start to come together. The BJP can maybe get 150 seats on their own and then the prime ministerial candidate needs to get them another 30 to 40 seats on his own merit. Can Modi’s explain his vision to the country to be able to do that?”
Prakash Javdrekar, Rajya Sabha MP and member of the economic cell of the BJP says, “The fundamental difference between us and the Congress is that we do not want the whole country on dole. So our focus, if we return, will clearly be on asset creation.” He is referring to schemes like the National Rural Employment Guarantee scheme, the Congress’s recent announcement that it will be building houses for poor, the various subsidies, etc.
He says the party will push for the implementation of the committee on agriculture headed by Dr Mankombu Sambasivan (MS) Swaminathan, pioneer of the Green Revolution in agrarian productivity in India, which suggested fixing government procurement of any agricultural commodity at production cost plus 50%.
This, says Javdrekar, will curb issues like hefty edible oil imports. Till the late 1990s, most of the edible oil consumed in India was produced in the country. But after liberalisation, consumption increased rapidly with a steady decline in production, due to a combination of cheap imports, low support prices and low spread of irrigation methods. This year till August India imported near 8 million tonnes of edible oil, around 50% of demand in the country.
Even in this, note the whiff of the states: Madhya Pradesh has already started increasing the procurement price of wheat leading to bumper crops. In Madhya Pradesh, Chief Minister Chouhan’s revolutionary farmer loan at one percent scheme and an extra Rs. 100 per quintal to the central government procurement price. Earlier in the year, Chouhan explained the core of economic thought to Fortune India as “firm focus on agriculture and fulfilling the needs of the poorest”. Like Modi, he also has a successful scheme in providing free ambulance service to low income pregnant women to boost girl child births in the state. But in a sense Modi and Chouhan represents the two biggest influences on economic thought within the BJP - Modi in the legacy of Shyama Prasad Mookerjee and Chouhan from Deen Dayal Upadhayay.
BJP’S IDEOLOGY CAN BE called free market nationalism—it believes in the free market, but only if it helps in the case of nation building. Deen Dayal Upadhayay’s Integral Humanism theory essentially says that India should shun Western ideas of capitalism and bring forth its own notion of holistic growth with a focus on the poor.
For example, in its term in power, it aggressively pushed for disinvestment of state-run companies which were gasping for funds and as a result weren’t able to function smoothly.
Free market nationalism is even reshaping how the RSS, the BJP’s ideological fount, thinks. Take the issue of swadeshi. RSS spokesperson Ram Madhav explains it best: “Earlier it was easy to say this is Indian and this is not. But now a company might have a foreign name, but the majority shareholder might be Indian: the reverse could also be true. So the way we look at swadeshi has also moved with the times. The focus is no longer on names or products but on what is really benefitting India. If it benefits India, we welcome it.”
Little wonder, Suresh Prabhu from BJP ally Shiv Sena who was environment minister during the Vajpayee government says, if returned to power, the BJP and its allies will “return actual policy thinking to policy making”. His priority areas—water, electricity, infrastructure and education.
“Look at all the stupidity about not privatising education: well, guess what, education is privatised! The poor man is scrapping and saving and sending his children to a private school for them to get good education and learn English. Why do we have such hypocrisies? Well, because there are vested interests!” says he, calling for an implementation of strict regulations on setting up schools and colleges and then letting private players come in.
JAYANT SINHA IS IN A UNIQUE position to observe all this. One of two sons of Yashwant Sinha, he is also the India head of the social business fund the Omidyar Network. He sits on the right-leaning policy think-tank of the BJP, the India Foundation. He says a big question is being asked across India today and the answer will probably come in the 2014 election.
“For a moment, let’s forget Right or Left. The problems of India have to be solved and no one can or should ignore the poor. If they do, they do at their own peril. So think of it like this – there is a crying child as known as the issues of India. It needs to be tackled – one way to tackle it is to mollycoddle it and pat it and give it a little food but keep cuddling it. The other way is to give it food but no cuddling. Tough love. Is India ready for tough love? That is the question.”
Traditionally, political parties associated good, responsible economics with bad politics (the food plus cuddle). In his first public speech once the elections results came in anointing him as chief minister the third time, Narendra Modi said his win demonstrates that the causality of good economics making for bad politics was broken. Now for the rest of the party to pick up his cues.
A key member of the Vajpayee government says recently he told Narendra Modi of the old joke in Indian politics that there are some state leaders and some stateless leaders, meaning leaders in Delhi who have little mass following. Modi roared with laughter. But even he knows that to become prime minister, he will have to carry both with him.
(A version of this piece was first published in the Indian edition of Fortune magazine.)