Sunday, 13 July 2014

Earth to Mr Jaitley: socialism is not pro-poor, markets are not anti-poor

So why did the Narendra Modi government, whose high-pitched pre-election rhetoric promised a decisive rightward shift in the management of the economy, debut with a budget that would have done the Congress proud? This is something both Congress president Sonia Gandhi and former finance minister P. Chidambaram have smugly pointed out.
This piece by M. K. Venu argues that the maiden budget was `socialist’ because Modi wanted to be seen as pro-poor. Venu quotes finance minister Arun Jaitley telling him in an interview done for Rajya Sabha TV that in a country with so many poor people, any economic philosophy which is totally market based will not work. Listen to the interview here.
That is the problem – the assumption that socialist policies are pro-poor and market-friendly policies are not.  This fairly widely-held assumption is itself based on two wrong assumptions, one about socialist policies and the other about pro-market policies.
That socialist policies are pro-poor flies in the face of evidence from India itself. India’s economic policies were overwhelmingly socialist before 1991. Indira Gandhi’s socialist agenda got an emotional anchor, as it were, with the Garibi Hatao slogan. Apart from the plethora of anti-poverty schemes, all economic policies supposedly had a pro-poor focus. And yet the pace of poverty reduction has been faster post-1991, once India embarked on pro-market policies!
All manner of subsidies have been rolled out in the name of the poor; any withdrawal is slammed as a move to abandon the poor to the vagaries of the market forces. But, barring a few, these subsidies really go to the better off. The poor are anyway left to the market forces. Take Delhi, where highly subsidised water and electricity supplied by the government go to the middle classes while the poor, who live in slums and unauthorised colonies, pay several times more for the same facilities supplied by the market. Yes, the rates are exploitative but the so-called pro-poor state is just not present in these areas peopled by the poor. Yes, the issue is that of governance, and that precisely is the point. Good governance is not about socialism or capitalism; it is about how efficiently the state goes about fulfilling its responsibilities.
Now for the other bogey that Jaitley seems to be mindlessly parroting – that a pro-markets approach necessarily neglects the poor. This stems from the trenchant criticism by the critics of socialism of the dole-centric approach to helping the poor, especially the rights-based entitlements legislations that the Congress initiated (and the BJP supported). But the question whether doles are more effective in helping the poor needs to be examined. This question came up last year when poverty figures released by the Planning Commission showed a sharp decline in poverty levels between 2009-10 and 2011-12 and also a decline in the absolute number of poor. The Congress party was quick to claim credit – not for the years of highest ever economic growth during UPA 1 (which they otherwise kept boasting about), but for welfare measures during its rule, especially the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). 
But economist Surjit Bhalla questioned this claim in this article. Using NSSO data, he pointed out that MGNREGA accounted for only 1 percentage point of the 13.1 percentage points decline in poverty between 2009-10 and 2011-12. In this second article, he gives a more direct link between growth and poverty reduction.
Now to the wrong impression about pro-market policies.
Venu’s article argues that Modi’s statements that government coffers are meant for the poor is `very socialist in its tenor and intent’. This reinforces the completely fallacious image of pro-markets ideologues as unfeeling cads who want the government to work for the well-off and the rich. Not even free market fundamentalists (except those in the loony fringe) argue against measures to help the poor. There will, they admit, always be disadvantaged people who will need the helping hand of the state. The point of divergence between socialist policies and pro-market policies is not about helping the poor; it is about how to help them.
The socialist approach is through price-distorting doles and welfare programmes (no matter how leaky and inefficient they are). The pro-markets approach is to get the state to stop meddling in, and micro-management of, the markets and to concentrate on providing public goods, thus ensuring high growth which will bring more people above the poverty line (no matter how high or low it is set).
Venu cites two new schemes in Jaitley’s budget - Deendayal Upadhyay Gram Jyoti Yojana and  Shyama Prasad Mukherjee Rurban Mission – as examples of BJP social sector schemes and calls this BJP’s own brand of socialism. But these are not welfarist schemes; these are schemes to provide physical infrastructure - clearly the role of the state even in a market economy – that will spur economic activity and growth. Socialist policies do not bring high growth; pro-market policies do. We have seen that in India.
High growth will not only help address the problem of poverty, it will, far more importantly, provide the resources for targeted interventions to help the poor and the needy. If there is no money in government coffers, even socialist states cannot help the poor. Such interventions should ideally be through income support and cash handout measures than inefficient welfare programmes that are liable to corruption and cornering by the better off, leaving the poor where they are. Even Amartya Sen has not argued against excessive state intervention in the markets; he too believes growth is necessary for poverty reduction. It is another matter that he prefers inefficient welfarism over more efficient income support measures.
The problem with the discourse on political economy in India is that words like socialism, pro-poor and market friendly are bandied about, especially by politicians, without adequate understanding of what they mean. Jaitley’s statements prove this.

Wednesday, 9 July 2014

India just published its most explicitly pro-markets policy document in history
Each year, the Economic Survey offers a snapshot of the economy and a glimpse into the government’s thinking on important policy matters. Along with the budget, it is the most important annual statement on policy made by the government of India.
This year, the Economic Survey tabled by finance minister Arun Jaitley in Parliament earlier today, is an emphatic statement. It is the first policy document in modern India that has explicitly pitched for a market-based economy and for the government to work on an enabling regulatory framework. It goes to the extent of saying that market failure should be demonstrated before the government considers stepping into any sphere of economic activity.
If this document is any indication, the Narendra Modi government intends to usher in an unprecedented policy push towards a markets-based economy and away from the welfare-centric approach favoured by all the previous governments, including the earlier governments led by the Bharatiya Janata Party (BJP) .
Since the mid-1990s, Economic Surveys have pitched for many reforms—of the labour market, real estate market, agriculture, the food economy and the subsidy regime. But none have set out a case for the market economy in such explicit terms as this one has.
Consider this: a chapter titled Issues and Priorities has a section called Foundations of a Market Economy. The opening paragraph says: “The biggest challenge today is improving state capacity suitable for a market-based economy. A long-term, careful and systematic effort is required for undertaking institutional change.” This is perhaps the closest a government can come to in moving away from a socialist legacy which has got enshrined in the Constitution. The Preamble to the Constitutions describes India as a sovereign, socialist, secular, democratic republic (the words socialist and secular were inserted in 1975).
And mull on this: “In a market economy, the economy thrives because the state interferes only when there is ‘market failure’, i.e. monopoly power, asymmetric information or externalities.” The Survey argues that any restrictions on private activity must be “part of a known and predictable regulatory regime unlike now where a lot of restrictions—well intentioned as they are—are not part of a stable framework.”
That is probably a veiled reference to the retrospective amendment of tax laws by the previous government, an issue that has been making foreign investors extremely jittery. It could just as well be interpreted as a reference to the ruling BJP’s opposition to foreign direct investment in multi-brand retail. One of the first actions that the BJP government in the state of Rajasthan did was to rescind the earlier Congress government’s decision to allow FDI in retail. There are differing schools of thought within the ruling BJP on economic matters.
Though the Survey speaks about the state intervention in the case of market failures, it insists on credible and strong grounds for such intervention. “Before a state intervention is initiated, it is important to demonstrate that there is a market failure. It should be shown that an intervention will solve the market failure. Further, the costs to society of government intervention should be outweighed by the benefits.” The significance of this is underlined by the fact that even a reformist government like the present one thinks it fit to impose stockholding limits on potatoes and onions and clamp down on exports when prices of these vegetables started heading north.
Will these issues influence the budget that is to be presented tomorrow?
Many of the issues that need to be addressed in order to lay the foundations of a market economy are not within the scope of the Union budget—they relate to other ministries and to state governments (state-level regulations do more to hamper economic freedom). Within the BJP itself there is a group that is not in favour of a genuinely free market economy; it prefers to protect domestic business against foreign competition.
How much of the prescriptions in the Economic Survey will be carried out by the government? This depends on the degree of consensus that differing factions within the BJP can reach. In the past, Economic Surveys have made bold and reformist suggestions. The governments of the day have not always closely followed the policy recommendations.
But as the Survey points out, this government may not have the luxury of inaction. Setting up legal and regulatory frameworks for a market economy is one of the three key measures it recommends to revive investment (the other two are ensuring a low and stable inflation rate and fiscal consolidation). There is hope, then, that this government will move—slowly—in the direction of a real market economy.

Monday, 7 July 2014

The Essential Commodities Act is essentially problematic
Perhaps it is not surprising that the Narendra Modi government has brought onions and potatoes under the Essential Commodities Act, 1955. After all, a committee of chief ministers that he headed on the issue of food prices had recommended that offences under the Act should be made non-bailable and cases should be tried by special courts.
That a committee which rooted for liberalisation of agricultural markets and reform of the Agricultural Produce Marketing Committee Acts should want an outdated piece of legislation strengthened is a bit of an anachronism, but the Indian political economy is full of such contradictions.
Yesterday’s move has come on the back of steady and rapid rise in the prices of these two items, throwing already stressed household budgets out of kilter. There have been reports of hoarding, which is what prompted the decision. But  is this the right way of going about it?
The Essential Commodities Act has its origin in a pre-Independence wartime measure - the Defence of India Rules of 1939. These were promulgated to address the problem of wartime shortages and consequent hoarding. Section 3 of the Essential Commodities Act gives the central government powers to control the production, supply and distribution of specified essential commodities listed in it. The list is drawn up after joint consultation between the centre and the states, and the latter impose stockholding limits on the listed commodities (these vary as conditions and food habits in states differ widely).
The intention may be noble – after all one cannot deny that hoarding and creation of artificial shortages does happen. The retail price of onions in Delhi has been double of what it is in the Azadpur mandi. Ahead of the Delhi assembly elections last year, tomatoes started disappearing from the market and prices headed north. Charges of hoarding were scoffed at, especially since tomatoes have a lesser shelf life than onions and potatoes, till the market was suddenly flooded with stocks and prices crashed the day after voting.
But invoking the Essential Commodities Act is problematic. Stockholding limits do not distinguish between food processing industries and food retail chains, which need to hold large stocks for their operations. Food processing industries especially need to keep stocks for a few months at a time so that fluctuating prices don’t throw their economics out of gear. But under the Essential Commodities Act, these can become liable at least for harassment. These are corporate entities with large, earmarked storage facilities which can be easily identified. So it is easy for inspectors to go after them.
On the other hand, identifying the actual hoarders is not at all easy. These may not be small traders but their operations are not corporatized and they have many avenues to spirit away and hoard supplies. The conviction rate under the Act is also abysmally low. So the hoarders go scot free and genuine players in the food economy are harassed.
The Act is not in tune with present times. It made sense at a time when the transport infrastructure across the country was poor and markets not integrated. So a production shock in one part of the country could lead to hoarding and black marketing. That’s not the case any more. Shortages in one part of the country can be countered if there is ample supply somewhere else.
So does that mean no steps should be taken against hoarding? Certainly not. The state has to step in where there is a clear case of market distortion. There is another legislation called the Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities (PBMSEC) Act, 1980 which the centre and states can invoke to check hoarders.
There is, however, a problem with this law – it is linked to the Essential Commodities Act. So action under the PBMSEC Act can only be taken against offences punishable under the Essential Commodities Act. The list of items that the PBMSEC can be invoked for comes from the Essential Commodities Act. And it is the stockholding limits under the Essential Commodities Act that defines hoarding.  It is this anomaly that needs to be addressed, not pushing more and more items under the Act whenever there is a price shock.
The Essential Commodities Act is out of tune with current realities and needs to be either scrapped or drastically overhauled to deal with crisis situations like supplies getting disrupted due to war, natural calamities and breakdown of law and order. But if even an otherwise natural reformist like Modi wants the Act to be retained and strengthened, looks like the country is going to have to live with an ineffective, harassment-prone law. And ordinary people will continue to suffer.

Do a FRBM on subsidies, Mr FM, put a cap on the subsidy bill
President Pranab Mukherjee, once the finance minister, has often been blamed for the mess the economy itself is in. Why, even his successor from his own former party, P. Chidambaram, has often hinted that the economy may have been in better shape if the fiscal easing that Mukherjee had done in the wake of the global meltdown had been reversed a year earlier than it ultimately was.
But one has to give credit to Mukherjee for one initiative in his last budget in March 2012, which has not got the attention it deserved. Dealing with the vexed issue of subsidies, Mukherji had said he would try to restrict the subsidy bill of the Centre to under 2 per cent of GDP in 2012-13 and bring it down to 1.75 per cent of GDP over the next three years.
It is another matter that the subsidy bill in 2012-13 actually shot up to 2.54 per cent of GDP, up from 2.41 per cent in 2011-12. Mukherjee could perhaps disown responsibility, using the excuse that he had moved to Rashtrapati Bhavan within a few months of that landmark statement.
But it is a pity – and a surprise - that Chidambaram did not take this ball and run with it. After all, he had, in his first stint in North Block in the United Front government backed by the communist parties, made bold to commission a discussion paper on government subsidies. He got an update done in 2004 soon after assuming charge during his second shift. In both his stints – and in between – he had constantly stressed the need to trim this bill.
Capping the subsidy bill is a sound idea and one that Arun Jaitley needs to push. It imposes a measure of discipline on the government, saying this is all the cloth you have, now cut it in a manner as to make the most of it. Decide which subsidies are more important, give more to those, less to the others but all within this limit.
Mukherjee took the initial step; Jaitley needs to take the next one and get legislative backing for this, something similar to the Fiscal Responsibility and Budget Management (FRBM) law. Once the cap is set – to be achieved in a phased manner over a period of time like Mukherjee suggested - any move to spend more than the cap will have to be get parliamentary approval. How will this help?
Right now the subsidy burden is a problem of only the government in power. When it attempts any trimming exercise, the rest of the political class comes together to force it to roll back subsidy cuts. Getting legislative backing for a subsidy cap will force Parliament to debate on an appropriate ceiling. Hopefully, it will be one that will not threaten macroeconomic fundamentals. Indeed, the very process of debating the need and level of the cap will reinforce the logic of reining in subsidies, highlight wasteful and unjustified ones, bring out hidden ones, strengthen the case for the necessary ones and focus attention on effective delivery. Importantly, the ownership of that cap will be that of Parliament as a whole.
Since breaching this cap will also require parliamentary approval – an exercise that will involve going through the legislative rigmarole – governments will not be so cavalier in infringing it. This might force more serious efforts at ensuring that only the really deserving get subsidies.
And even if a government does go back to Parliament, once again the entire debating process will again highlight its own inefficiencies and put a black mark on its fiscal performance. So it will try to come back on track soon.
This does sound too easy and good to be true. After all, Parliament did legislate the FRBM Act. And Parliament itself allowed it to be breached. But no party is denying the legitimacy of the milestones set in the FRBM Act and the fact that the UPA government breached it is something that it is constantly pilloried for. The whole process of legislating the FRBM Act – from the time the idea was floated to actual enactment – took a few years and intense debate. Thanks to this, Parliament is serious about it; there is no talk of raising the deficit caps or postponing implementation or even scrapping it.
In taking the initiative to legislate a cap on subsidies, Jaitley can show his party as a fiscally responsible one. It was Yashwant Sinha, during the NDA regime, who initiated the FRBM legislation. It just so happened that the Act got passed toward the end of the government’s tenure and the UPA government notified the rules, allowing it to take credit. But the sheen was taken away from that credit by the fact that first Chidambaram asked for a pause in its implementation (in 2005) and then Mukherjee amended it to relax the deadlines.
Jaitley can now do for subsidies what Sinha did for overall fiscal consolidation.  It will be a feather in the BJP’s cap both economically and politically.

Wednesday, 25 June 2014

Planning Commission should go, but its expertise should be used

This piece was published in That heading doesn't capture what I am saying- that it should go forever but giving the link anyway.
 So, for the first time since 1950, the country does not have a Planning Commission. The fact that the rooms of Yojana Bhavan, the building that houses this ode to a socialist economy, are still populated does not mean anything.
Technically, the Planning Commission is the deputy secretary and the various members. The denizens of Yojana Bhavan are merely the secretariat to the Commission. Technically, they are all jobless, as of now.
The Narendra Modi government may not have formally rescinded the March 1950 cabinet resolution setting up the Planning Commission, but by not naming a new commission, even a month after taking over, it has indicated that it has little use for the body that dominated the management of the economy for 64 years. Already one of its central functions – Plan allocations in the budget -- is being handled directly by the finance ministry. It was rather ridiculous for one body to sit and determine how much funds ministries and states should get and what they should spend it on.
This rather dismissive approach is not new. It was expressed in far more contemptuous terms by Rajiv Gandhi, who ridiculed the Commission as a bunch of jokers. But he stopped short of dismantling it. None of the post-1991 governments too questioned the Commission’s relevance. The closest anyone came to it was Bharatiya Janata Party (BJP) which, in its manifesto of 1998, said `the Planning Commission will be reformed and reorganized in light of the changing developmental needs of our country’. However, the revamp plan drawn up by Jaswant Singh, the deputy chairman during its 13-month first tenure, only attempted to expand the Commission’s empire. Subsequent BJP manifestos remained silent on this matter.
But the idea that the Commission needs to be recast in a different mould stayed. Singh’s immediate successor, K. C. Pant (in the National Democratic Alliance government of 1999), roped in private consulting firms to suggest what the Commission’s role should be. In the United Progressive Alliance’s (UPA) second stint, Manmohan Singh tasked member Arun Maira to suggest how to overhaul the Planning Commission as a Systems Reform Commission. We never got to know what this meant, though Maira has been vocal in complaining that nothing got done. Nevertheless, the proposed name change itself was a major gain; it showed growing acceptance of the irrelevance of the Planning Commission in a liberalised era.
So, the Modi government’s failure to name a new Commission is welcome. In fact, it is high time the cabinet passes a resolution quashing the 1950 one.
But should all the economist-bureaucrats in Yojana Bhavan be given a golden handshake and the piece of prime real estate be turned into a money-spinning office complex? (Incidentally, this was a suggestion given in the late nineties by a Congress ideologue before he took a  ideological left turn.)
Perhaps not. Over the six decades of economic management, the Planning Commission has built up some expertise and resources which could be put to good use. What could these be? Here are four possibilities:
* It will be silly to assume that economic policy making will be done in a vacuum, without any forecasts and projections on macro-economic indicators. Sure, there’s a chief economic advisor and a planning unit in the finance ministry but that need not preclude an independent think tank kind of body that will monitor economic developments, assess their impact on India and provide intellectual inputs for economic policy. During Pant’s stint as deputy chairman, a Delhi-based consulting firm ACOR had suggested something on these lines, comprised of experts on contractual appointments. It had said this could be called the Planning Commission Policy Research Institute or the Strategy Research Institute of the Planning Commission. The Planning Commission nomenclature will have to be dropped, though.
*  Why not, as former minister, Arun Shourie, suggested in a recent newspaper interview, replace the Planning Commission with a Reforms Commission? There is a slew of second generation reforms that are needed; there could be many more that are not evident right now. A Reforms Commission can suggest how to sequence reforms, how to implement them and also help in the political management of reforms. It could be something similar to the Productivity Commission of Australia which its website describes as the `government's principal advisory body on all aspects of microeconomic reform’. Its recommendations, which cover both private and public sector, are based on extensive research and public enquiries.
* Another option could be to have something like the Congressional Budget Office of the United States. The CBO, though it is part of the Congress system, provides independent assessment and analyses of the economic and other costs of every legislation. Its recommendations are taken with utmost seriousness. This is something that is completely missing in India. There is hardly any impact analysis of laws and the result is that the government is ill-prepared for the costs – economic and non-economic - that surface at the time of implementation. India sorely needs a  body that assesses the impact of our multiple regulations and laws both before they are passed and periodically when they are implemented.
* We have seen enough examples of inter-ministerial wrangles making for messy policy, policy paralysis and implementation problems. The Prime Minister’s Office is supposed to sort these issues out but sometimes it may need some expert inputs to work out a compromise. For years, the Planning Commission has played a coordinating role between ministries as well as between the Centre and the states. Why not institutionalise this in a new organization?
A body that replaces the Planning Commission can do any one of these or a combination of these. The basic idea should be that the idea of central planning is anachronistic and contradicts the spirit of a liberal economic order. It’s time to make a clean break from the past.

Tuesday, 17 June 2014

Some bad days are needed for good times to roll

This was published in Nai Dunia, 17 June 2014.
Giving below the English draft that I sent.

Prime Minister Narendra Modi’s remarks in Goa on Saturday that tough economic measures will have to be taken to put the economy back on track have invited predictable jokes about achche din and bure din. Perhaps the BJP brought these jokes upon itself by overdoing the achche din aane vaale hain message during the elections, but this is neither the time nor the subject for jokes.
Because the simple truth is that the economy is in a bad state and government finances are in even worse shape. It is true that the UPA government was not fiscally responsible. Former finance minister P. Chidambaram may have kept the fiscal deficit at 4.6% of GDP, but this has been done by postponing some expenditure (which the new government will have to bear) and getting some revenue in advance. So the Modi government’s first economic step will have to be to restore some order to government finances. Sound government finances are the foundation of a robust economy.
The other major problem facing the government is that of inflation, which is still not in the comfort zone. The Reserve Bank of India governor Raghuram Rajan has moderated his hawkish stand on interest rates to give the new government time to address the structural issues that are fuelling inflation. The government needs to get cracking on these to create an environment where he can bring down interest rates. 
So what are the tough measures that Modi is planning? It is clear by now that the only person who knows Modi’s mind is Modi himself, but if he is really serious about doing what he has indicated, these are some of the steps he could – and should - take.
One, on the revenue side, increase in tax exemption limits may not happen (though media reports say this is expected). The inflation monster has not been tamed yet and giving people more money to spend without addressing supply shortages and bottlenecks will not be a wise step. The economy certainly needs a demand push, but this has to be calibrated. Besides, an increase in the exemption limit to Rs 3 lakh is expected to cost the exchequer Rs 60,000 crore a year, according to the finance ministry. This is certainly not the time for such giveaways. The corporate sector, too, will have to reconcile itself to having some excise cuts given by the previous government taken away.
Two, on the expenditure side, there will be a drastic overhaul of the subsidy regime. The President’s address and Modi’s own statements during the elections show a welcome emphasis on infrastructure. This will mean that the bias towards revenue expenditure – which is 86% of total expenditure – will be corrected and capital expenditure will get the focus it sorely needs.
But revenue expenditure has one item that is committed expenditure – interest payments, which absorb over 40% of tax revenues. Defence and salaries too cannot be touched. That leaves subsidies, which eat up 25% of tax revenues. Interest payments do not affect people’s budgets directly, so it can be safe to assume that when Modi speaks of tough measures, he intends to cut the subsidy burden significantly. This is something the economy has been crying out for.
Subsidy reform will not mean withdrawing all subsidies or drastically cutting allocations across the board. What it will mean is better targeting, which means only the genuinely needy will get subsidies and a lot or undeserving people will not.
If Modi is really serious about subsidy reform, then the cap on subsidised LPG cylinders should go back to nine. That will not only result in a saving of nearly Rs 4000 crore, but it will still cover 89% of the population.
His government should also allow decontrol of diesel prices or at least allow price hikes. This will have an immediate inflationary effect, but that will fade out in time. Importantly, it will also moderate wasteful consumption and bring enormous savings to the government.
A far more tricky issue will be tackling the food subsidy, the biggest subsidy item at nearly 40% of the total bill. The BJP backed the National Food Security Act (NFSA) which could lead to the food subsidy bill ballooning. But this problem will have to be tackled. One way to bring down the food subsidy bill would be to bring down the cost of procuring foodgrains. This could mean not allowing huge increases in the minimum support price. There are other ways to reduce this cost – reforming the procurement mechanism and eliminating inefficiencies but that will be a long-drawn out process. The farmers will be up in arms, but the government will have to remain firm. 
There are a whole lot of other tough measures that the economy needs but these are the ones that will bite the people. That is why governments are generally loath to take them. The fact that Modi seems to be preparing the climate for these unpopular measures is a good sign. It shows two things. One, that he is not going to let politics prevail over good economics. Two, he has realised the necessity of explaining things to the people, something all reforming prime ministers and finance ministers from 1991 onwards have ignored.
People are not unwise. They know the need for belt tightening and cutting wasteful expenditure – they do it all the time with their household budgets. Surely, they will realise that if they want achche din forever, they will have to put up with bure din for some time.

Thursday, 29 May 2014

Modi’s government may be small; the state continues to be big

Narendra Modi’s 45-ministry government has attracted a lot of attention. It is also being hailed as the first step in what could be his signature style of governance – minimum government, maximum governance.
Sorry, but it isn’t.
Modi’s government is certainly a lean government, but it isn’t a minimum government. Let’s not confuse the two concepts. A lean government is about size and numbers. A minimal government is about a philosophy, a certain view of the role of the state.
A minimal state, as defined in the classical liberalism lexicon, is about the state confining itself to just a few areas. There is consensus on two – defence of external boundaries and enforcing law and order as well as upholding the rule of law. There are departures from this point on details. Some liberal streams include the provision of public goods as a responsibility of the state and there are differences on the definition of public goods as well. But the broad point is this: the state should not get into too many areas and most definitely not in areas where people are able to manage their own affairs through their own individual enterprise.  
India is not familiar with the idea of a minimal government. Before 1947, it was used to a colonial-feudal set up and post 1947 that got converted into a mai-baap sarkar. The state kept assuming more and more responsibilities till it was present in practically every aspect of the lives of individual and enterprises, riding roughshod over personal and economic freedoms. And yet the size of the government remained relatively small. Indira Gandhi, remember, ran lean governments. The unwieldy size of ministries is a post-seventies phenomenon. Remember also that gargantuan cabinets continued even after 1991 even as the command-and-control economy structure got steadily dismantled. 
It was only the Swatantra Party that came close to articulating the idea of a minimal state. The second of the 21 principles of the party stated: `. . . The party stands for the principle of maximum freedom for the individual and minimum interference by the state consistent with the obligation to prevent and punish anti-social activities, to protect the weaker elements of society and to create the conditions in which individual initiative will thrive and be fruitful. . .’ It is unfortunate that the party did not get much traction.
Modi’s government doesn’t quite pass this test.
It will if his government decides that the state should not be running hotels, airlines and providing telecom services and gets rid of the public sector in these areas. Instead, Modi talks about strengthening public sector undertakings. It is not clear if the government will pursue an aggressive disinvestment agenda.
It will pass with flying colours if the information and broadcasting ministry, steel ministry, culture ministry and the Planning Commission were disbanded. These are clearly, clearly relics of the socialist era. There are a host of other ministries that could make it to the axing list, but changing their role instead into a more of facilitating/regulatory role can be a subject of debate. Closing down these four is a complete no-brainer; no debate is needed.
There are some who argue that since the increase in the role of the state led to the unwieldy size of the government, limiting the size of the government will automatically result in a reduced role for the state, since administration will be a challenge otherwise. This argument is flawed. One, as already noted, Indira Gandhi ran a tight ship but one which was omnipresent and omniscient. Two, reducing the number of ministries and departments will not lead to shedding of work. On the other hand, technology can make it easier for the state to have its tentacles everywhere – far, far more easier than in the seventies.
Though Modi’s minimum government maximum governance idea does talk about the government moving from an interventionist to a facilitating role, the focus is more about using technology to speed up processes, clearances and permissions and make them transparent. It does not question the need for the myriad procedures that any interface with the government involves. It does not question the number of points of interface with the government. It is about making the government efficient in its current role, not about questioning its role.
Maybe that will come. Maybe Modi will realise that the problem with governance in India is that the state/government has taken on far more responsibilities beyond what should be its core responsibility of defence, law and order, upholding the rule of law and provision of public goods. Maybe he will realise the need for the state to focus on just these and do its job well.
Modi must be persuaded into making the 45-ministry government the first step of an ideological leap of faith. A small government must also mean a small, but effective, state.