Collapse in GDP means Modi has to push for sweeping reforms

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Published: May 31, 2019 7:28:41 PM

Amit Shah will be a tough home minister & Nirmala Sitharaman brings in experience, but how they perform depends on PM’s appetite for change

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Unlike most other ministries where the principal job is to bring about change in a particular area, the finance minister’s job has a larger remit. So not only does Nirmala Sitharaman have to ensure there are enough tax reforms so as to ensure collections start growing again – and unless they do, the government’s ambitious capex plan can no longer be funded – she also has to be the champion for larger reforms across the economy, from genuine privatisation to replacement of subsidies by direct benefit transfers.

From Manmohan Singh to P Chidambaram and Arun Jaitley, finance ministers have traditionally been the biggest advocates of reform; Sitharaman now has to emerge as this pro-reform voice and convince the prime minister to back her. Given her stints in commerce, industry and defence, she has the requisite experience to know both the problems of most parts of the economy as well as potential solutions. Her soft touch and persuasive skills will be critical if states are to agree to further reduce the number of items in the higher GST brackets; unless this happens, it is difficult to see GST taking off as planned.

But what is critical to Sitharaman’s performance, more than anything else, is the extent to which prime minister Narendra Modi is prepared to back her. If Modi is not willing to expend political capital on privatisation, for instance, not only can she not do anything about it, she will find it difficult to even meet budget targets for disinvestment since the past policy of asking PSUs to buy other PSUs and to deliver large dividends, and even buy back their shares, has played havoc with their balance sheets and has limited their ability to contribute to the exchequer in the future.

Similarly, if prime minister Modi is not willing to risk jibes like suit-boot-ki-sarkaar and proceed to slash the unacceptably high telecom levies, even an efficient minister like Ravi Shankar Prasad who has fortunately been given back the telecom ministry, can do little to revive it; in the bargain, the annual amounts the government hopes to get through fresh spectrum auctions as well as from the annual levies will continue to fall as it has over the last few years.

Anyone who thinks individual ministers, no matter how efficient, hold the key to reforms should look at how, even under someone as reform-minded as Manmohan Singh, reforms all but dried up when, after the first few years, PV Narasimha Rao no longer wanted to push as hard. Even Yashwant Sinha, who was one of India’s finest finance ministers, was frequently called ‘rollback Sinha’ due to the fact that prime minister Atal Bihari Vajpayee had second thoughts on several of Sinha’s reform measures.

While Amit Shah being made home minister will be critical in meeting various challenges such as containing the flow of illegal immigrants in different parts of the country, the fact that ministers like Nitin Gadkari and Piyush Goyal have retained their old ministries will ensure the large investment plans in both roads and railways will continue apace; indeed, both have been given other responsibilities as well in recognition of their ability to deliver.

Giving Gadkari charge of MSMEs is especially welcome since this is a critical sector when it comes to employment generation. The collapse in GDP, from 8.1% in March FY18 to 5.8% in March FY19 makes it clear that if prime minister Modi does not back sweeping reforms, India’s ability to meet a GDP growth of more than even 7% will be a stretch over the medium term. And the 17-19% unemployment rate among male youth that the latest labour survey shows, even if not comparable with past years due to a change in methodology, show that sooner rather than later, voters are going to pay more attention to the government’s economic performance than, say, to Hindutva or muscular nationalism.

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