Finance minister Arun Jaitley hit the nail on the head when, at his first-year press conference, he said this had been a year in which the government had made clear where it was going. There hasn’t been even a whiff of corruption in the past 12 months, it has been a year of genuine cooperative federalism, there has been no complaint of the Centre using investigative agencies to get at rivals, it has been a year of greater transparency in allocation of mineral resources, the list goes on. While the big macros, like the current account deficit and inflation, improved—largely due to luck in terms of global commodity prices collapsing—it was heartening that, despite heightened political tension, the government managed to get a lot of legislative business done, an instance of cooperative federalism working.
It was a year in which the government took the UPA’s Aadhaar project forward by opening a mammoth 15 crore Jan Dhan bank accounts and promised a whole new financial inclusion since each account has a R5,000 overdraft as well—to the extent this would be backed by direct cash transfers of subsidies, it wouldn’t be unviable for banks. In another major shift, the government moved swiftly on increasing India’s pension and insurance cover—7.5 crore people signed up in just the first 12 days of the schemes being in operation. And yet, at the end of prime minister Modi’s first year, even if the mood is not as despondent as is being made out, it is certainly not as euphoric either—if the Sensex rose 14% from the day the government was elected to January 1, it rose a mere 1.6% since.
This is so for a variety of reasons. Hiking royalties on minerals while making their auction easier was intended to give states more money, but has ended up making Indian royalties the highest in the world. The telecom auction was transparent, but not putting enough spectrum in the kitty ensured it hit telco financials badly—capping power costs while auctioning coal mines has hit the winners. In the case of petroleum, the fact that Jaitley praised the oil ministry’s role in managing to reform subsidies, and not in getting more oil/gas exploration going, is telling—in this case too, the big changes in curbing subsidies, including on hiking diesel prices regularly, were made by the UPA. The 1% tax on supply of goods in the proposed GST regime threatens to derail what Jaitley said was the biggest indirect tax reform since Independence, and ending the inefficient EPFO monopoly is proving difficult. While the finance minister talked of how India’s growth is amongst the fastest in the world, most production/consumption indicators are at multi-year lows and the government’s biggest problem is that there is no demand stimulus on the horizon from either private investors or consumers. Which means, over the next year, the government has to move money out of leaky subsidies—R3 lakh crore annually, at the central level itself—to Aadhaar-based cash transfers so that private consumption can pick up; government spending on roads and railways, to begin with, has to increase meaningfully—while transport minister Nitin Gadkari has, very fancifully, spoken of giving R3 lakh crore worth of orders in 6 months, it is interesting that Jaitley spoke of how the government needed to increase the capacity to spend. Getting investor interest back needs privatisation of big PSUs, not the small stuff being talked of; and fast progress needs to be made on privatisation of railway stations to begin with, and railway operations later. While no agriculture reform has been done, bad rains could not only derail that, investors are worried it could lead to worse outcomes like loan waivers. Given it will be more difficult to get investor money—both China and Russia are attracting FII flows—the government will need to do more than indicate direction in its second year.