Narendra Modi had an incredible stroke of good luck in his first year as prime minister. The sudden collapse in global commodity prices has been a boon for the Indian economy. Lower commodity prices helped bring down inflation, fiscal deficit and the current account deficit.
Critics of the government have quite rightly pointed out that Modi cannot take credit for this but have then failed to use the same logic to see that he cannot be blamed for the uneven economic recovery either. His vocal supporters have played the self-serving game the other way, crediting the prime minister with the improvement in macro stability while trying to explain away the sluggish recovery on extraneous factors.
Neither extreme makes sense. A far more effective way to judge how this government has done in terms of economic management in its first year is to examine the actual policy record. The past few weeks have seen some embarrassing stumbles. The finance minister had to publicly step back on two issues: the creation of an independent agency to manage public debt as well as the minimum alternate tax on foreign portfolio investors. The Modi government has also been forced on the defensive in Parliament on changes to the land acquisition law and the goods and services tax.
All these setbacks do not take away from the clear progress on the economic policy front over the past year: reestablishing the primacy of the cabinet by doing away with the special groups of ministers the previous government depended on so heavily; deregulating diesel prices; using excess food stocks to cool down food prices; taking the tough decision to not announce lavish increases in minimum support prices; increasing foreign direct investment limits in insurance; successfully auctioning coal blocks as well as telecom spectrum; moving towards providing insurance cover to most Indians; a new monetary policy framework; a push for financial inclusion; shutting down the Planning Commission; a promise to switch public expenditure from subsidies to asset creation; putting political capital to use for pushing labour reforms; the commitment to fiscal federalism.
Only the most unsparing or obdurate of Modi’s critics will deny that this is an impressive list of policy decisions. It is also worth pointing out that there has been no major corruption scandal over the past year; the anecdotal evidence suggests that transactional corruption at the senior levels of government has come down significantly.
Yet, the Modi government has been more successful in such administrative decisions than it has been in the broader task of structural economic reforms that are needed to support the next round of economic growth. That is not surprising since the prime minister has played to his strengths.
He built his reputation on his track record as an effective administrator, and such administrative efficiency helps since it comes after several years of policy paralysis.
Yet, while better plumbing is important when the pipes are choked, it is no substitute for overdue structural repairs.
For example, India still needs tax reform, greater ease of doing business, rural transformation, fiscal consolidation, a strong industrial economy, urban governance reforms and better infrastructure. The government seems to have come around to the harsh reality that big bang reforms are tough in a complex democracy such as India.
There is a paradox here. Modi seems to be torn between being a free-market reformer and a believer in state-led industrialization of the Chinese variety. He is also constrained by the fact that his party has traditionally not been blessed with economic thinkers. Modi has gradually brought in an impressive group of economic advisers, but policy direction will have to come from the political leadership.
The administrative urgency is welcome but there is a clear rumbling of impatience in the financial markets, in the corporate sector and among foreign investors because of the lack of rapid progress on structural economic reforms. Meanwhile, the recent increase in global oil prices and the fresh round of rural distress suggest that the luck that served Modi well in his first years as prime minister could be running out.
Modi deserves credit for what has overall been a good year in terms of economic decisionmaking. But he is yet to live up to his reputation of being a radical economic reformer.
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