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Modi promotes nationalist voice in economic policy

Key appointment may signal disturbing shift from liberal approach that has benefited India

"Jobs for the boys" is about as old as politics itself. And India has been no stranger to governments packing public organizations with fellow travelers of the ruling party.

Still, there was a buzz this month when Prime Minister Narendra Modi's government announced the appointment of Swaminathan Gurumurthy -- a nationalist ideologue -- as a non-official, part-time member of the central board of the Reserve Bank of India (RBI), the country's monetary authority.

The post is little more than a sinecure because the board has no role in setting monetary policy. It is more a debating forum than an executive body, with its part-time directors being mostly non-controversial worthies from the corporate and professional worlds.

More important than the main board is a subcommittee that overseas credit, and it remains to be seen whether Gurumurthy secures a seat here or not.

Is Modi shifting to a nationalist India-first approach? The answer is unclear, but at the least he is looking for a more nationalist voice in policy-making. With the government announcing successive tariff hikes, the economic liberalization that has served India well since 1991 has been put into doubt.

Gurumurthy is a professionally qualified chartered accountant with strong links to the ruling Bharatiya Janata Party (BJP). He is a co-convenor of the Swadeshi Jagran Manch, which pushes economic self-reliance. The Manch, like the BJP, is an offshoot of the Rashtriya Swayamsevak Sangh (RSS), the nationalist outfit which wants to convert India into a nationalist Hindu majoritarian state.

Gurumurthy has been an especially vocal RBI critic. He has criticized the severity of its drive to clean up balance sheets of government-owned banks, and its opposition to the creation of a single-purpose bank focusing on small enterprises (the RBI saw regulatory challenges).

He has opposed hikes in interest rates and stringent capital adequacy requirements. On what has usually been a clubby board, he can be expected to push unconventional ideas that he says come from an "Indic" way of thinking. This has led him, for instance, to argue for an Indian accounting system, and the benefits of caste-based business affinities for improving creditworthiness.

Gurumurthy's thinking may be a departure from the mainstream but his appointment fits a pattern. Joining him on the RBI board is Satish Marathe, who comes from cooperative banking. Marathe also happens to have been, in his university days, treasurer of an RSS-linked student body.

Meanwhile, those already on the RBI board include Manish Sabharwal, who runs a manpower development company and is another of Modi's informal advisers. Another is Sudhir Mankad, the former chief secretary of Gujarat, the prime minister's home state, one of a line of Gujarat officials who have found influential perches.

Their qualifications to be on what is largely an advisory board are easily defended, but nobody should miss their alignment with the government, and their links to the prime minister and/or the RSS. They now comprise 40% of the 10 non-official, part-time members of the 17-member board.

There is an ideological subtext. Since market-opening economic reforms were launched in 1991, policy-making has been dominated by economists educated at leading British or American universities, most of whom have also served in the World Bank or International Monetary Fund. Their policy template, followed only fitfully because of the inevitable vagaries of politics, has been the so-called "Washington consensus" -- a package that includes fiscal discipline, market-determined interest rates, deregulation, opening up to foreign trade and investment and so on.

This has never sat comfortably with organizations like Gurumurthy's Manch, which are suspicious of globalization and argue for a more nationalist policy thrust. Throw into the mix a subaltern worldview that is different from that of the foreign-educated, English-speaking elite bunch of globalisers, and you start seeing some policy departures.

A notable case was the prime minister's decision in late 2016 to demonetize 86% of the currency overnight, acting against the advice of the then (foreign-educated) RBI governor. Gurumurthy was among the fiercest advocates of demonetization, which is now seen as having failed to meet almost all its declared objectives.

Demonetization was in some ways an aberration that hurt economic growth, because the Modi government's record on macroeconomic management has been good -- inflation control aided by a new monetary policy framework, a significant fiscal correction, and a comfortable external account.

But the economists who were at the helm in the initial Modi years have gone. Raghuram Rajan's term at the RBI was not renewed and he is back at Chicago University. Arvind Panagariya, who came from Columbia University to head the Modi government's newly created think tank, Niti Aayog, is back in academia. Arvind Subramanian, who joined as government chief economic adviser, has returned to the U.S. on the grounds that he is becoming a grandfather!

Their place has been taken by others who too have foreign education or work histories: Urjit Patel, the current RBI governor, has worked in the IMF; Rajiv Kumar, Panagariya's successor at Niti Aayog, has an Oxford doctorate and worked at the Asian Development Bank. But these are not seen as foreign birds of passage, and they have a personal line to Modi -- Kumar wrote a flattering book on the prime minister.

Meanwhile, the thrust of trade policy has changed. The government has reviewed free trade agreements with East Asian countries and concluded they have not benefited India. New Delhi has recently announced tariff hikes on hundreds of products (steel and aluminum, mobile phones and solar panels, consumer goods and agricultural products) that the finance minister acknowledged marked a reversal of policy after more than two decades.

The shift comes amid stagnant merchandise exports and a growing trade gap (the external situation remains comfortable because of large forex reserves and capital inflows), and also a declared intent to encourage producers of imported goods to manufacture in India. Many mobile phone assembly lines have been set up in recent years, and the hope is that such successes can be multiplied.

Some investment is likely to materialize, given the attractions of the world's sixth largest market that is growing at a healthy clip. But the country tried protectionism before, before 1991, and the result was an uncompetitive autarkic system that faced perennial shortages of foreign exchange. The story changed when the economy was opened and tariffs slashed. Now the clock has been turned back, not massively but enough to be significant.

Linking all this to Gurumurthy's post may be overdrawing the big picture and risk getting it wrong. But "jobs for the boys" is not the complete explanation since Gurumurthy, to his credit, has never hankered for office.

So it is entirely possible that the appointment does signal the government's intent to follow a more aggressive, nationalist, economic policy, and even perhaps break away from some conventional market-oriented international moorings.

T N Ninan is a columnist and former editor of Business Standard.

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