What is India’s Economic Model? 

Many people ask me - what is the economic philosophy of the Indian government? It appears that many observers, especially economists steeped in conventional textbook theory, find some of our policies inexplicable even when they are clearly working. This is an attempt at a short explanation. 

First of all, most of India’s current economic policies are easily explained as “supply-side” in that they are oriented towards enhancing the productive capacity of the economy. This entails encouraging commerce, entrepreneurship, innovation, and investment; hence the focus on infrastructure, ease-of-doing business, “creative destruction” and so on. The large structural reforms of the last decade - such as GST, Insolvency and Bankruptcy Code (IBC) etc - are all directed to this. This is not a blind belief in pure free markets. When needed the government is willing to intervene in a targeted way, but only if it encourages entrepreneurial energy. Intervention that stalls creative destruction and innovation leads to the Ambassador car. 

Second, today’s policymakers believe that compounding GDP growth over long periods is the key to prosperity. This means that macro-economic stability should never be compromised for a short-term spurt as this jeopardizes the sustainability of the process. The inflation-targeting framework has been successful in bringing India’s “normal” inflation from the 8-12% range to the 4-6% range. Even in the midst of the Covid-19 crisis, this government did not sacrifice fiscal and monetary control. Keynesian demand management is useful for smoothening cycles, but it is not the real game. 

Third, some part of the fiscal resources generated from growth must be transferred to the very poorest sections of society in a targeted way. This concept of Antodaya is about helping the last person in the queue and not about trying to hold back the rich. This is about removing absolute poverty and not about indulging in the politics of envy. Thus, we have seen a large number of schemes ranging from building toilets and homes, to giving everyone an identity and a bank account. Those at the bottom-of-the-pyramid need both a safety-net and a ladder. 

All our policies can be understood from the above three-sided framework. However, even as we look forward to becoming the world’s third-largest economy by around 2027-28, we must recognize that we need to sustain high growth for the next 25-30 years to take per capita incomes to a level where we can call ourselves a developed economy. Growth is not pre-ordained and requires that we continue to do reforms. Two big areas of future reform relate to the judicial system and the bureaucracy. The cycle of reforms must address these two areas.