As one of the world’s largest emerging markets, India’s economy carries consequences far beyond its borders. Its ability to root out corruption is a test case for how other economies can tackle the problem.
For decades, a corrupt and inefficient bureaucracy has crippled foreign direct investment (FDI), infrastructure development, and business creation in India. This is why Prime Minister Narendra Modi campaigned on a neoliberal economic platform in 2014, promising to crack down on corruption, streamline the economy, and raise substantial foreign capital. After two years in office, Modi’s success in managing the world’s fastest-growing major economy is mixed. The country’s GDP is growing, having crossed the $2trn benchmark in 2014. With a growth rate of 7.4% in 2014, and a strengthening currency, India’s gross national income (GNI) per capita has risen from $1,560 in 2014 to $1,610 in 2015.
India’s GNI Per Capita, 2000-35 ($, thousands)
Though this data is encouraging, it has not impacted the country’s struggle with corruption, and a slew of outdated laws continue to hamper India’s ability to attract FDI. Modi’s surprise decision in November 2016 to ban 500- and 1000-rupee notes forced large numbers of Indians into the banking sector. It remains unclear whether this attempt to root out corruption and increase tax revenues will pay long-term dividends, but it is clear Modi’s government is willing to take difficult decisions when it comes to the economy.
There is one bright achievement in Modi’s efforts to streamline the economy. In the southern state of Karnataka, wholesale markets have become digitised. Under a long-established but unimplemented plan to root out middlemen in the wholesale agriculture trade, Karnataka’s markets – known as mandis – went digital in April 2016.
Combating corruption at the rural level
Online trading now dominates the state’s 155 main markets and 354 sub-markets, enabling them to connect with each other. The plan is to roll out the programme across the country and allow markets to connect at the national level, in a National Agricultural Market.
Under the old wholesale system, farmers were vulnerable to exploitation by middlemen who would artificially change prices of food commodities and deliberately withhold information about prevailing market prices. It was virtually impossible for farmers to ascertain market prices for their products in different states.
Now, farmers sell to a government-accredited agency that provides them with data about market prices across the country. The data is easily accessible and updated in real time. A trader who buys the commodity transfers the money online to an authorised agent who then pays the farmer (as noted in the visual to the left).
The transactions are visible for tax purposes, and the agency handling the transaction is responsible for the quality of the products. Additionally, farmers can choose to store their produce in warehouses, which strengthens their price risk management framework.
While Modi is taking credit for this profound change in India’s agricultural sector, the idea for the change originated in Karnataka itself, according to Agriculture and Farmers’ Welfare Minister Radha Mohan Singh. Before the changes were implemented, farmers were prohibited from choosing where to sell their produce, but several amendments to the State Agricultural Produce Committee Act (which amount to a repudiation of the Act) removed those restrictions, effectively allowing farmers to bargain for better prices.
The end of artificial economic barriers and the updating of infrastructure to streamline the process of selling have come together in the e-mandi initiative. So far, the project has been a success, clearly demonstrating the desperate need for similar action across the country.
Like other economic provisions, especially those prohibiting FDI in certain sectors of the Indian economy, mandis were created to protect farmers (and the Indian economy). But, over the years, they became magnets for corruption. As such, the humble mandi is a clear representation of the outdated systems that govern the Indian economy.
Need for reform
In a recent interview with The Wall Street Journal, the Indian prime minister laid out additional strategies for upgrading India’s economic infrastructure. According to Modi, the proposed goods and services tax, designed to simplify indirect taxes across the economy, would become a reality after his personal lobbying efforts won the backing of all political parties.
Additionally, he reaffirmed his support for increasing competition within states (especially in agriculture and manufacturing) to boost overall economic growth. At a time of drought and endemic pressure on India’s agricultural sector, this will be difficult. But Modi’s comments _ and his actions _ demonstrate the political leadership understands the economic barriers that exist inside the country.
For example, India could end the exploitation of its agricultural and manufacturing sectors in a manner that promotes FDI and includes the removal of the country’s bureaucratic roadblocks. While it has been able to attract FDI in construction development, primarily in urban areas, there has been remarkably little investment in manufacturing and agriculture. Job creation is another area that requires sustained state assistance.
By giving farmers better access to markets, farming can become a more popular form of employment, and possibly an engine for job growth. Indeed, the government has set targets to double farm incomes by 2020. But that is only one piece of India’s economic puzzle.
Modi’s government has attempted to reform the farming sector by making amendments to land ownership laws that would make it easier for private companies to purchase land. Farmers have generally rejected Modi’s efforts for fear that they will be left behind in the rising tide of privatisation. While this issue will require delicate political manoeuvring, Modi could continue a push to remove archaic tax laws that allow the government to retroactively collect capital gains taxes from foreign companies. Such laws hinder FDI inflows and remain in effect despite promises of imminent reform.
India’s future economic growth relies in large part on its ability to upgrade its rural infrastructure, and create more jobs in farming and manufacturing. Despite not being the most glamourous of economic moves, the e-mandi initiative demonstrates the Indian government can turn rhetoric into reality.