Column: What lies ahead?

By: | Published: May 30, 2015 12:21 AM

It is premature to judge the Modi govt for results. What it is to be tested for is policy vision—and it scores high there.

To assess the performance of the Modi government at the end of its first year is, in many ways, premature—at least in terms of economic management. The macroeconomic outcomes seen during the year, whether positive or negative, can mostly be traced back to events and actions that originated much earlier, or to conditions in the global economy, not acts of commission or omission of the government. Moreover, the translation of a policy or reform agenda into legislative or executive action is a drawn-out process, and the transmission from those actions to actual outcomes is an even longer process. It took several years before the ‘big-bang’ reforms of 1991 led to a sustained rise in India’s growth rate. The same was true of similar reforms that were launched in China from the late 1970s.

So, the most we could expect at the end of the Modi government’s first year is not results or even a long list of policy actions taken, but a vision, an approach and a clear programme of action for the next four years. Looking beyond the catchy slogans, we find the government has indeed laid out an ambitious action programme, and in some areas significant action has already been taken. What are the government’s strengths and weaknesses in implementing the programme, going forward? What are the opportunities and risks? What lies ahead?

Infrastructure development is the government’s top priority. In the absence of a revival of the private investment cycle, the government has adopted a strategy of public investment-led growth, with investment in infrastructure at its core. The assumption is that public investment in infrastructure will catalyse private investment and high growth. In the power sector, enactment of the new Coal Mines (Special Provisions) Act, enabling auctioning of coal mines, and the linking of domestic gas prices to international market prices will together eliminate the feedstock bottleneck for coal- and gas-based power supply. Additionally, several ultra-mega solar power projects under implementation will significantly increase the flow of clean energy. In other infrastructure, a huge step-up has been programmed for investment in railways, roads, ports, airports, inland waterways and urban infrastructure. Swachh Bharat and cleaning of the Ganga are part of this programme. Plans are also in place to supplement budgetary resources for financing these investments, e.g., an infrastructure investment fund and tax-free bonds, along with supporting institutional reform such as the 3P India (public-private partnership) model.

In social inclusion, the government has opted for direct benefit transfers as an approach to minimise the large leakages that occur. Under the Pradhan Mantri Jan Dhan Yojana, over 125 million accounts have already been opened for transfer of various direct benefits to disadvantaged target groups. These accounts will be linked to the Aadhaar database, under which over 1 billion persons have already been registered, to serve as the platform for transfer of all direct benefits, including assistance under MGNREGA, food security, etc.

In the area of monetary policy and financial systems reform, the signing of the monetary policy framework agreement is a landmark. It unambiguously defines the authority and responsibility of RBI vis-a-vis the government for inflation control. A new law to curb black money has also been passed. Together with RBI, the government has also rationalised the regulation of non-bank finance companies as well as the system of financial sector regulation itself.

The main initiative in fiscal policy is the goods and services tax (GST) that will bring a sea change in domestic market integration, giving a boost to both growth as well as revenue. Unfortunately, the required bill is still winding its way through Parliament. The proposed roll-back of tax exemptions and concessions is important. It could enhance revenues by upto 4% of GDP. However, it is yet to be implemented. So, is the decision to establish an independent public debt agency. On the expenditure side, subsidies on petroleum, diesel and gas have been compressed by linking their domestic prices to international prices. However, neither the Expenditure Management Commission nor its interim report find any mention in the current budget.

The fifth thrust area is the ‘ease of doing business’ in India, which is linked to the Make-in-India agenda. Allowing FDI upto 100% in railways and upto 49% in defence are significant measures. Other measures include the postponement of GAAR for two years and simplification of procedures for FDI and other businesses, e.g., the G2B portal eBiz for registration and commencement of business. A skills mission is being launched, and the Mudra Bank is being set up to refinance loans to micro units under the Pradhan Mantri Mudra Yojana.

In implementing the large agenda described above, the Modi government enjoys several advantages, especially the mood of positive expectations. The exuberance drummed up during the Modi election campaign and following his awesome victory, had led to wild expectations that somehow economic trends would be immediately turned around. With investment and growth yet to pick up, there has been a suitable moderation of such expectations, reflected in a stock market that remains where it was a year ago. Nevertheless, the mood remains positive, in sharp contrast to the despondency that prevailed earlier. This is an important opportunity the government can leverage to revive investment and growth with quick policy action in priority areas .

A related psychological asset is the absence of mega scams that hobbled the UPA government in its second innings. However, an important lesson from the UPA experience is that these assets can quickly turn into liabilities if some skeletons start tumbling out of the cupboard. Adverse reports of the CAG and other watchdog institutions should not be treated lightly.

Another strength is the profile of the council of ministers. A few seasoned and experienced political leaders have been joined by a large group of young, intelligent and, by all accounts, extremely hard working ministers hungry for results. Led by an equally energetic prime minister, there is a strong likelihood that this team will indeed get things done.

Offsetting these strengths are also some risks. Two controversial reform proposals could carry a heavy political cost. A market-distorting land acquisition Bill that would forcibly transfer land from farmers to business interests, and labour market reform based on the Rajasthan model, that eases doing business for employers but offers little protection to workers. These two reforms, that paint the government as being pro-business at the cost of other stakeholders, are facing resistance not only from opposition parties but also the BJPs own sister organisations. The prime minister has also been cautioned by his allies, the leaders of corporate India, his well-known admirers like professor Jagdish Bhagwati, and his friend US president Barack Obama that his economic agenda could be derailed if he is not more pro-active in curbing the fanning of divisive politics. Another potential risk is a deficit in capacity and depth of talent in the Union government bureaucracy to carry through the ambitious economic agenda. Finally, is it possible that a PMO-centric style of decision making, which has clearly driven the agenda so far, could become a constraint when implementation gathers momentum?

The author is professor emeritus, National Institute of Public Finance & Policy, New Delhi

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