LDN - Business

As 'foreign' economic advisers leave, a protectionist India returns

[July 12, 2018] By Manoj Kumar

NEW DELHI (Reuters) - When Indian Prime Minister Narendra Modi took power in 2014, he leaned on three Indian academics who had predominantly worked in the United States to drive a liberal, globalized economic policy.

Now, as Modi faces a tough general election next year to retain office, the last of them has quit.

At least a dozen government officials, policy advisers and members of the ruling Bharatiya Janata Party (BJP) told Reuters that policy making has mostly been handed over to Modi's own office and to a coterie of right-wing and nationalist economists.

The departures of the three economists underline the administration's rejection of free trade and open market approaches to policy in favor of protecting domestic industries and farmers, officials and academics said.

Modi's economic outlook is now a throwback to India's inward-looking policies of earlier years, they said. And it appears similar to U.S. President Donald Trump's agenda to support domestic industry, raise import tariffs and put restrictions on foreign companies, they said.

A spokesman for the finance ministry declined comment.

The prime minister's office did not reply to requests for comment.

Raghuram Rajan, who was retained by Modi as governor of the Reserve Bank of India in 2014, left when his contract ended in 2016. He returned to the University of Chicago, where he is a professor.

Arvind Panagariya, vice chairman of the Niti Aayog, a government policy think tank, quit in 2017 when his sabbatical leave from Columbia University ran out.

And last month, India's chief economic adviser Arvind Subramanian, who was formerly with the International Monetary Fund, announced he would quit to spend more time with his family and in research and writing.

"We expect that with the exit of Arvind Subramanian, the Modi government will listen to domestic experts," said Ashwani Mahajan, head of Swadeshi Jagran Manch, a nationalist group linked to the Rashtriya Swayamsevak Sangh (RSS), the ideological parent of Modi's BJP.

"The country would not lose anything if these foreign economists leave the country," he said. "Nation building cannot be done by people on sabbatical leave."

India's problems had to be understood by advisers "connected to the soil", he said adding that development in domestic terms meant providing basic necessities, health, education, housing and a reasonable amount of assets.

The Manch is critical of opening up the economy to foreign investors, and has opposed government plans to privatize loss-making national carrier Air India and the acquisition of e-commerce firm Flipkart by Walmart <WMT.N>.

The privatization of Air India was shelved last month for lack of bids. The Flipkart-Walmart deal awaits the approval of India's anti-trust regulator amid strong protests against the acquisition by bodies representing small shopkeepers and traders that are affiliated with the BJP.

Subramanian did not respond to requests for comment on this story. Panagariya and Rajan have declined repeated requests for comment on the circumstances in which they left.

No replacement for Subramanian has been announced so far, but in recent months, right wing advisers, associated with the RSS, are gaining more space within the government - pushing their agenda of imposing taxes on imports, stopping privatization of sick companies and of banks.

Like many Western economists, Rajan and Subramanian advocated privatizing state-run banks, cutting state subsidies and easing rules for foreigners entering the retail sector. But most of these suggestions were not implemented.

Panagariya had favored allowing genetically modified (GM) crops into India, which has been strongly opposed by many lawmakers from the BJP, who say they are a risk to the environment and public health and also lead to exploitation of small farmers because of repeated payments to seed manufacturers.

"HELICOPTERED" IN

Rajan was replaced in 2016 by Urjit Patel, who has worked in Indian banking for two decades, and Panagariya by Rajiv Kumar, an economist who has been based mainly in India, except for a stint at the Asian Development Bank in Manila.

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India's former Reserve Bank of India (RBI) Governor Raghuram Rajan, gestures during an interview with Reuters in New Delhi, India September 7, 2017. REUTERS/Adnan Abidi/File Photo

"Those who have networks in the system, those who understand the ground realities of this country, also know how to push those realities towards the change," Kumar said in a 2017 TV interview after taking over at Niti Aayog.

"But the others who come ... helicoptered from other places, those people, I am afraid are unable to make the sort of positive impact that you want in this country."

Sanjeev Kaushik, a senior finance official in Kerala state, who had earlier worked in the federal finance ministry, said policy-makers needed to have finance or banking experience and not "mere theoretical expertise."

"Our banking sector is suffering today because of insufficient awareness of operational consequences of regulatory action and lack of calibrated administrative response to a bad situation," he said.

Kaushik declined to name anyone but said the economy was in a mess because of "foreign-trained" professors with little field experience.

Several officials in the ministries of finance, commerce, industry and agriculture said unlike the previous government led by economist Manmohan Singh, Modi had little patience for "policy debates" and looked for actionable advice - mostly given by a few bureaucrats and local economists.

They said Modi has given charge to senior bureaucrats in his office to push and monitor key policy issues including raising of import tariffs against U.S. companies, putting price controls on medicines and "politics driven" bail outs for the farm sector.

Earlier this month, India announced it had raised the government-mandated price for summer-sown crops such as rice and cotton by the most since Modi came to power.

"BACK TO PROTECTIONISM"

A senior official who has worked with Subramanian said he was largely isolated by finance ministry officials although he enjoyed the confidence of Finance Minister Arun Jaitley.

But Jaitley has been ill for several months and has not been attending office as he recovers from a kidney transplant.

The official said Subramanian was kept out of the loop when Modi suddenly demonetized high-value currency notes in 2016, and that the adviser's recommendation to privatize some state-run banks was rejected.

"This government is not ready to listen to any independent voice and only wants yes men as its advisers," the official said.

This makes it easy for local politicians and lobby groups to push their agenda ahead of the national election.

Gopal Krishan Agarwal, BJP spokesman on economic affairs, said the Modi government was consulting party advisers and the RSS for key initiatives, including withdrawal of a proposed land-acquisition law and simplification of the goods and services tax. Farmers and small traders, the two sections most affected, are considered political vote-banks of the BJP.

"The government is now acting on the suggestions given by the party and the Sangh," Agarwal said.

"It is the political will of Prime Minister Modi, not the advice of consultants which is pushing Indian economic growth.”

Rating agencies have cautioned India about the risk of rising crude oil prices and a widening fiscal deficit - seen at over 6 percent of GDP collectively for federal and state government. But with nationalist advisers at the fore, populist schemes will likely prevail, economists said.

"It is not Subramanian so much as the return of a certain kind of economic thinking which informs our policy making," Yashwant Sinha, a former BJP finance minister, said in a television interview soon after the resignation of the economic adviser.

"We are going back to protectionism in our own way."

(Reporting by Manoj Kumar, Editing by Raju Gopalakrishnan)

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