In conversation with former Obama aide – Shailesh Kumar

Shailesh Kumar is currently a Senior Analyst on Asia at the Eurasia Group. During the Obama administration, Shailesh was the India economist at the US Department of Treasury. He worked on US-India economic relations and policies aimed at deepening India’s capital markets and increasing foreign investments. Today he closely follows the Indian government’s economic, security, and foreign policies, as well as its relations with the US and immediate neighbours.

India Ink: Since taking power in 2014, the BJP has made mixed outcomes on their economic and financial reform. Policies like demonetization and the recent implementation of Goods & Services Tax Bill have been discussed widely. What is your perspective on these reforms? Has the government been relatively successful or unsuccessful?

Shailesh Kumar: I think success depends on whether you are considering economics or politics because the answer may be different. This government is largely viewed as being centre-right on economic policy, but I think that’s a little bit of a mischaracterization. When Modi first came into office, there was an expectation among the international investor community, that he was going implement the reforms, especially in land and labour, that they expected of him. However, development for a domestic audience does not mean land and labour policies, it means making India more industrialized, cleaner, a safer country, a country with jobs. This is why I think the Western audience needs to come to terms with what his economic ideology really means, and that it does not necessarily translate into the types of reforms that they are looking for.

To answer the question on whether or not it has been successful, on the political front, definitely! According to me, demonetization was more of a political decision than an economic decision. I was always of the opinion that demonetization was not going to be as detrimental to his political fortunes as many in the media characterized it. More than what it did for the economy, it showed everyone – again, the domestic audience – that he was doing something to develop the country and get rid of corruption, and that is far more important to him, in his re-election, than anything else.

There are also some merits from an economic perspective. Demonetization allows the government to see the demand side of the economy better than it has ever been able to. It forced everyone in India to put their money in a bank and it allows the government to see the liquid wealth of almost every Indian. That’s never happened before. When GST goes into force, the government will also see the supply side of the economy, because almost every vendor and every person in the supply chain has to register with the government. There are a lot of complaints about GST with which I sympathize- there are multiple tax rates and they have not really resolved the issue of trucks and their ability to seamlessly move between states. But, GST is the most important economic reform the country has had – period. Within a year, the government is going to be able to see the economic transactions in India- they are going to be able to tax it better, and fix their fiscal health.

So yes, quasi-successful on the economic side of it, completely successful for the political agenda.

India Ink: What reforms do you think are still overdue? Do you think that these will come through before the 2019 general election?

Shailesh Kumar: There are likely some in the pipeline and there are some that may not be but are important anyway. Subsidy reform is on the way. Moving towards direct benefit transfer is important because it reduces fiscal slippage dramatically and ties into the ‘better governance’ mantra and the broader idea of universal income.

The electricity system – which is more of a state’s issue – is fairly inadequate. You should not have the issue where governments set tariffs on actual electricity because that will just lead to losses. FDI is also an area where some tweaks are still overdue; opening up multi-brand retail has not necessarily worked, so they need to figure that out. There is talk of opening up food retail and allowing food multi-brand retailers to procure products that are not necessarily fully made in India. There is also the Non-Performing Assets (NPAs) issue in the banking system.  I think in some sense, doing nothing is a reform in itself. It will send a strong signal that the government is not going to continuously bankroll bad behaviour by the public banks. This gives space for the private sector banks to come in and gain more market share. It is not an activist reform, but a form of a reform. There is also a whole lot of things they can do on CapEx. They are boosting capital expenditure on infrastructure which is hugely growth-inducing.. And finally, there’s digitization. If you can have most individuals in India using digital instead of cash, major progress can be made.

India Ink:  Just a day before the UP-election results were declared, you wrote a piece on how important that election would be. You also explored in the article whether Modi would be focus more on anti-corruption and improved governance or retrench back in populism and social conservatism. What direction do you see him going in? How do you think his decisions in UP will affect upcoming state elections in Assam, Himachal Pradesh, etc? What is your opinion on the selection of Yogi Adityanath as Chief Minister?

Shailesh Kumar: As I mentioned in the article, UP was a crossroads, because it would decide whether the BJP would take the direction of traditional populism – and this can be characterized in many ways – or whether they would continue with their reform agenda. Because they won, my view is that they are going to continue on the reforms. Not the big structural reforms, but the other types of reforms, that I already outlined. The one lesson the BJP learned, very harshly, in 2004, was that you can have a growing economy, but if you don’t focus on the rural economy, you will lose. In the runup to 2004, the economy, in some cases, was doing even better than it is today, at least from an American perspective, and so everyone thought the BJP would win, but they lost, because the rural economy was not feeling the effects of growth. There will still be some populism, in their message – the farm loan waiver was an example of that. It was something they had to deliver, because they had campaigned on that, but that is still an example of some of the populism. However the development part will still be more prominent, and that is why they will keep winning. It is largely because the electorate wants a new India and the BJP is most likely to deliver that.

With Yogi Adityanath – he was a fascinating pick. I think he was a very strategic choice and that the RSS did not force Modi’s hand on this. There are a lot of long-term implications to his selection, but the most important one concerns 2019. If the BJP wants to win they need to carry UP again. They carried it in 2014, in 2017, and doing it again in 2019 will be exceptionally challenging but important for a state whose anti-incumbency is so large. Every decision they have made comes down to 2019, and the fear of a centre-left coalition coming against them. We still have to see how this goes, but you are already seeing a lot of these signs, with Yogi Adityanath saying that he is looking for development for all. This plays into a broader narrative of the BJP, which is that the centre-left parties are not secular, and that the BJP and its version of political ideology is more secular than theirs.

This is why Adityanath was picked, because as a hardliner, if he is able to deliver for everyone, it burnishes the BJP’s argument that, as a party, they look out for all Indians, and not just some.

India Ink: You also wrote a piece about the BJP possibly replacing the Congress as the primary national party. You mention how the South of India is key to this. Do you think, then, that the BJP has what it takes to establish a foothold in the South, which has previously been controlled by mostly regional parties?

Shailesh Kumar: So if you go back in history, the Congress in the 70s and 80s held and controlled Southern states. They were a pan-India party, but at that time, they were not bound by language or religion or other characteristics that bind most parties. Indira Gandhi used to be able to hand-pick the Chief Minister of certain Southern states. That was pure power. In the interim, before the BJP gained prominence, there was really no other party that could do that. There were regional parties, or state-specific parties, or caste-specific parties, but they really never had a chance of becoming national. The BJP does, but their biggest roadblock has been their image of being a North Indian, Hindi-speaking party. If they want to deliver on their “Congress-mukt Bharat,” and supplant the Congress as the national party, they are going to have to break out of their Hindi-speaking base, and break into the South. This is for a number of reasons,

1. If you want to become like the Congress party of the 70s and have a power base in the South, you just naturally have to psychically be in the South.
2. If you want a Rajya-Sabha majority, you are going to need to win some southern elections,
3. If you want to build legacy and institutions like the Congress once did, then you cannot be divided on North-South lines.

We are already seeing signs of this. The BJP just had their big conclave in Orissa, which is going to be a very important place for them. A tough place, because right now there is a very powerful party in power. Karnataka is winnable, and they have won there in the past. Tamil Nadu is challenging, but with the AIADMK being in an uncomfortable situation right now, they may be able to break into that state. So yes, for the BJP, the South is where they have to go next.

India Ink: What does the BJP’s gathering momentum mean for the Congress? Can they offer any considerable opposition to the BJP and, if so, how?

Shailesh Kumar: Unfortunately, I think the Congress needs new leadership if it wants to turn things around. This is for two reasons, one, because they need to figure out strategically how they can win campaigns, and secondly, from an ideological perspective, a lot of people don’t know what the Congress stands for anymore. You can say secularism, you can say socialist, democratic, which is what they have always said. But I think people in India don’t care about secularism anymore, and I don’t think they feel the secularism from the party. So they need to define the ideology the Congress supports which is unclear at the moment.

The second part of this is, more than any other leader in India, Modi is the most attentive when it comes to his political understanding of what is happening in India. From a strategy perspective and from a campaigning perspective – it is shocking how good he is when it comes to feeling the pulse on the ground and delivering on it. The Congress has massively lost that. Unless they change their leadership, I don’t know where they go from here.

India Ink: The unrest in the Valley has continued for almost a year now, and action has ramped up on both sides, with Sabzar Ahmad Bhat, ‘successor’ of Burhan Wani within the Hizb-ul Mujahideen, calling for total war in the name of Islam and the Army adopting violent tactics. Where does this conflict seem to be leading? What do you think can be done to calm tensions and facilitate economic development in the Valley and the rest of the State?

Shailesh Kumar: Economic development is the key word here, and they are clearly trying. You saw evidence of that in the tunnel that they built. I don’t think BJP gets full credit for that necessarily, but they try to take full credit. I honestly don’t know where things go from here in Kashmir, because the signposts are not very optimistic. The voter turnout in the recent bypoll was abysmally low, so I don’t know what it will take for the government to turn things around. There were hints of this tension when Manohar Parrikar left. He’s been gone for a few weeks as Defence Minister, but one of the reasons he wanted to leave so badly was because handling Kashmir was such a painful experience, just in terms of coming to a consensus with the cabinet and taking action. So clearly, this is not a new issue. I honestly don’t know what the government’s strategy is, and they’re going to have to figure it out if they want to be successful.

India Ink: In the past two or three years, India has engaged with Asia like never before. What direction do you think engagement with Asia as a whole will take? Will SCO membership result in any changes in India’s relationship with the US and NATO? Will India’s increasing engagement with Vietnam, Japan, Mongolia and ASEAN act as a counterweight to China’s increasing influence in India’s neighbourhood?

Shailesh Kumar: Modi’s focus right now is America – he has made it very very clear. You see it through the frequency of the visits, you see it through the contact from his high-level officials, and you even see it in the appointments that he has made. His senior-most foreign policy advisor has a pro-US bent, others have a significant US experience. The reason for the US focus is due to a broader shift in Indian foreign policy from moralpolitik to realpolitik.

Equally or almost equally important are Japan and Israel. You see a lot of emphasis on developing these two relationships, in part because of Modi’s personal affinity for Japan, and how they have done economically. The interest in Israel is for defense and security reasons, and because of the perceived common threat from terrorism.

When it comes to Southeast Asia, I am not 100% convinced that India is going to be able to provide the alternative to China that the region needs, but they will try.  You see them ramping up defence ties in particular. There is a broader threat – we already know that India sees Pakistan as a threat, but at this point India is looking beyond Pakistan, and is starting to look at China as the biggest threat. The concern about China stems from China’s activity in the Indian Ocean, which is a big concern for India. India will do whatever they can to break out of this string-of-pearls strategy that China has. With Southeast Asia, however, I do not see India being a ‘second China’ in that region.

India Ink: It has been a quarter of a year since Trump took office. In that time, what are the significant engagements that have taken place between India and the US? What significance will a Modi-Trump meet, whether in the United States or India, have? Are there any stumbling blocks you see coming up in the bilateral relationship? Do you think the India-Russia, India-Iran and US-Pakistan relationships will influence the US-India relationship or do you see the respective governments working past it?

Shailesh Kumar: In terms of examples of outreach or proximity between the US and India, the biggest example is the frequent visits by Jaishankar, which should not be overlooked. This is the most profound outreach by an Indian government so close to an administration taking office. They have largely been setting the stage for a Modi-Trump meeting.

The second thing is McMaster’s visit to the region, including India. We have never seen such a high-level official making a visit to India so early in the administration, and there has been a lot of interest in closer ties from both sides. Economics is a part of this, but strategy and defence is the focus. To put it bluntly, America needs India as a hedge against China. India wants to work with America for a host of reasons, especially Pakistan and China.

Obviously, as the US-India outreach deepens, there will be concerns about the India-Russia relationship. I think we will just have to wait and see how that develops. It is possible that closer US-India and India-Israel ties push Russia towards Pakistan. If that happens, you will have seen the biggest strategic shift, from a geopolitical perspective, in 60-odd years. You will have a realigning of relationships, such that it becomes US-India and Russia-Pakistan, which will have long term implications.

It has to be seen how India manages this issue. They are going to have to balance the US and Russia without being to the detriment of either. Maintaining good relations with Iran despite US sanctions and pressure from the West is a good example of such a balancing act. I think they will be able to balance these relations, which they have done for a very long time. US-Pakistan relations, are deteriorating very quickly. There is a perception in the current administration that Pakistan is a threat to regional and global security, which triggers a desire in the US to foster closer relations with India. I don’t see an accelerating US-India relationship making things with Pakistan worse, simply because things were already on the decline.

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This article has been previously published in India Ink.

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