Five Questions for Professor Jagdish Bhagwati on the Indian Economy and Prime Minister Modi’s Next Steps

This post is part of a series on the Indian elections.

Jagdish Bhagwati, university professor at Columbia University and senior fellow for international economics at the Council on Foreign Relations, has been described as the most creative international trade theorist of his generation. He has been a leader in the fight for freer trade for decades. He is well-known in India as a champion of economic liberalization—and an early advocate for the reforms undertaken in 1991. With his coauthor Arvind Panagariya, he published Why Growth Matters last year, a book which makes the case for economic growth as the path to inclusive poverty alleviation. He is proudly Gujarati, and is likely to be an external adviser to Prime Minister Narendra Modi.

I had the chance to talk with him about his views on trade, economic reform, and what should be the Modi government’s next steps on the economy. A lightly edited transcript of our conversation follows, with Professor Bhagwati’s responses labeled “JB.”

1. You and Arvind Panagariya have argued that growth should be the priority for poverty alleviation in India. But it has not always been easy to make growth-oriented reforms politically appealing in India. How do you interpret the success of the Modi campaign and its implications for economic liberalization? In other words, is a freer market a concept that now resonates in India? 

JB: When policies are actually implemented that open up trade, free up foreign direct investment (FDI), and remove unnecessary restrictions, substantial growth starts. That’s what happened after 1991. When you have growth, you will also be able to offer opportunities to people to lift themselves up above the poverty line. Moreover, as I had emphasized almost twenty-five years ago in a lecture in Ahmedabad itself, when you grow—we know this from the United States as well—at every given tax rate you pull in more revenue. With more revenue coming in, you can undertake the social spending to give additional benefits to the poor, such as healthcare and education. So policies that promote growth represent a double-barreled attack on poverty.

Of course, the added revenues may be spent instead on guns and tanks. Here is where India has benefited from its democracy. As the poor see that they can do better, they want more: what I have called the Revolution of Perceived Possibilities. With a liberal democracy, which consists of a free press, an independent judiciary, NGOs, and opposition parties, the economic aspirations can be translated into politically effective demand. That is at the heart of the political success of leaders like Narendra Modi.

2. The Bharatiya Janata Party’s (BJP) campaign manifesto referred to restoring India’s role as a great trading nation—the language includes: “India’s contribution to the march of civilization goes back to several thousand years before the Christian era…up to the eighteenth century, India was respected for its flourishing economy, trade, commerce and culture…India had a much bigger role and presence in industry and manufacturing than any nation in Europe or Asia…India was also one of the greatest shipbuilding nations and consequently had an access to international markets.”  That’s quite a passage, one which would appear to prioritize trade as the window to the world. Is this the rise of a trade-focused government? 

JB: Yes, it is an astonishing statement after all the hesitations of the United Progressive Alliance (UPA) government on trade. It reflects the new prime minister’s Gujarati DNA: Gujaratis have always been traders worldwide. But it also reflects his success with trade in Gujarat during his tenure. He also has a strong set of advisers on trade: Hardeep Puri, who has now joined the BJP, is our most accomplished diplomat who has served at the World Trade Organization; and the prime minister’s favored economists include Arvind Panagariya, who also happens to be a renowned trade economist.

3. You have watched the transformation of the Indian economy over the long-term, and have provided advice to many Indian governments on economic reforms. What would you say is the most pressing reform needed as the new Modi government takes office? 

JB: He should unambiguously open up the economy to FDI, just as he did in Gujarat to great effect. The UPA has always put in restrictions; they have also worried about which sectors should be opened up. It was a half-hearted, weak-kneed opening. Prime Minister Modi can break that mold, as he did in Gujarat, and declare that all FDI is welcome. What Modi has to say is, “we welcome foreign investment and it doesn’t matter where (except of course in defense industries).” 

4. And to follow that, the second step?

JB: On trade, we have to really negotiate with the Americans. A moratorium by U.S. leaders such as Obama and Kerry, on protectionist talk about outsourcing (which is, in fact, a code word for "India") could be exchanged for Indian lowering of remaining trade barriers. All of this could be negotiated within a year, I believe.

 Also on trade, the prime minister has also to look at Asia—it’s huge market. India has to move into that market and put its oar into the water. But I don’t think the Trans-Pacific Partnership is necessarily the way to do that because it is saddled with several "side" conditions such as on labor that India correctly refuses to insert into trade treaties.

5. The UPA government developed a National Manufacturing Policy, and the BJP has included reference to developing manufacturing in their campaign platform. What do you think the Modi administration could do on this front? It seems critically important for jobs growth where most needed. 

JB: But this requires amending the labor laws which make it currently costly to hire labor and expand labor-intensive industries.

How much can you do with labor-intensive manufacturing when just as soon as you started growing you get into trouble with the labor regulations? We point out in the book (Why Growth Matters) that Indian growth has indeed been inclusive but could have been even more inclusive if it had included labor-intensive manufacturing. Labor market reform has to be tackled, along with reform of other "factor markets" such as for land acquisition. The Indian reforms since 1991 have been in "product markets," now the prime minister will have to extend them to the factor markets.

In addition, the new government will have to give up its opposition to the entry of large-scale retail stores. This is going to be an uphill task for the BJP as it has traditionally been a party of small retailers who fear the entry for large retailers like Wal-Mart. The prime minister understands that the large retailers will expand exports of farm products etc. and will therefore benefit the agricultural sector and therewith the small farmers and even landless labor, as the Green Revolution did. But he will have to proceed slowly, since he cannot take on the BJP frontally while he establishes himself.

Follow me on Twitter: @AyresAlyssa