BackAll eyes on economic reforms agenda of Narendra Modi govt
Narendra Modi's first six months as Prime Minister have been dominated by decisions that have played to his administrative strengths
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Mumbai: Narendra Modi built his reputation as a skilled administrator when he was chief minister of Gujarat for nearly a decade. His first six months as prime minister have been dominated by decisions that have played to his administrative strengths.
Modi began by dismantling the various cabinet committees that were the hallmark of the previous government led by Manmohan Singh.
A deadline of two weeks has been set for policy discussions between ministries. There have been very modest increases in the minimum support prices offered to farmers. The food mountain that was perversely allowed to grow in times of high inflation has been reduced through large liquidation of stock.
Farmers no longer have to sell fruits and vegetables in their local agricultural produce marketing committees (APMCs). Limits on foreign direct investment (FDI) in railways, defence and real estate have been increased. The way has been cleared for real estate investment trusts by allowing them pass-through status. Domestic prices of natural gas have been increased. Controls on diesel prices have been lifted. These are actual decisions taken by the Modi government, rather than the aspirational projects such as Make in India, Jan Dhan and Digital India.
There have been two sets of criticism of Modi over these past few months. Both deserve attention. First, some of his supporters argue that these administrative decisions fall short of the sort of radical structural reforms that India needs if it is to create the conditions for the next round of high economic growth. Second, his detractors say that these are mere extensions of the administrative agenda of the previous government as well as a far cry from the big alliterative promises that Modi made to woo voters. In a neat role reversal, former finance minister P. Chidambaram said at a function last week that bold decisions need to be taken while current finance minister Arun Jaitley explained that reforms are the art of the possible.
It would be wrong to be dismissive about the decisions that the Modi government has taken in recent months. They come after at least three years of administrative paralysis in New Delhi. They are also the sort of quick decisions that seek to address some immediate problems that the Indian economy faces. But the detractors also have a point: India needs several important structural reforms if the economy is to get back its lost dynamism. The end game is not the next Sensex target but removing mass poverty within the coming two decades or so.
It is in this context that the coming two sessions of Parliament are very important. The winter session opens on 24 November. It will be followed by the budget session. These two sessions will provide the Modi government an opportunity to bolster its reformist credentials. Its legislative agenda will also be closely watched by investors, businessmen and the credit rating agencies. Here are six issues worth tracking:
The goods and services (GST) tax: This is perhaps the single most important reform on the table. The GST will simplify the indirect tax structure as well as create a truly national market for all goods and services. New Delhi will need to close a federal deal with the states before the end of the current fiscal year if it has to move to a new indirect tax regime by April 2016.
Land and labour reforms: It is well known that India has had more success in reforming its product markets rather than its factor markets. The Modi government has already begun to chip away at some of the more bizarre parts of labour laws, while amendments are to be tabled in the winter session of Parliament to remove the most restrictive provisions of the 2013 land acquisitions law. What is being proposed now is not radical, but should be seen as a small step in the right direction.
Privatization: Jaitley had assumed an ambitious target for disinvestment in his July budget. The government is nowhere near that target. It remains to be seen if it steps on the accelerator in the last four months of the fiscal year, especially given the fiscal strain. He has indicated that the government is open to the privatization of loss-making public sector companies.
Public sector banks: A growing economy needs a robust financial sector. Indian banks—and especially the ones owned by the government—are in a spot of trouble. The lending spree over the past few years has left them with a severe bad assets problem. They need capital to both clean up their books as well as to meet the new global capital adequacy norms suggested by the Bank for International Settlements. Also, the government has to decide on the suggestions made by the P.J. Nayak committee on the holding structure and governance practices of public sector banks.
Monetary policy framework: India has one of the highest inflation levels in the world. The panel headed by RBI deputy governor Urjit Patel has said that India needs a new monetary policy framework with consumer price inflation as the nominal anchor. The finance ministry has not yet decided on this, but its July Economic Survey had some hints on why India needs a new monetary policy framework.
New fiscal law: The old Fiscal Responsibility and Budget Management Act was dumped by the second Manmohan Singh government after the 2008 financial crisis. Jaitley has shown admirable commitment to reducing the fiscal deficit, but India still has a consolidated fiscal deficit that is among the highest in the world. One of the stellar achievements of the Atal Bihari Vajpayee government was the old fiscal law that imposed legal limits on government deficits, and the current government would do well to begin work on a new version.
Jaitley underwhelmed with his first budget. He now goes towards his next budget with a new team. The February budget as well as the legislative work done till then will tell us a lot about the economic reforms agenda of the Modi government.
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