The Narendra Modi government completed four years in office last week. Its last few months before the nation goes to the polls could be dominated by economic pressure points—rising inflation, a weak rupee, rural distress and a persistent banking crisis. Yet, it is likely to leave behind an economy that is in a far better shape than what it inherited in 2014.
Macroeconomic stability has been one of the biggest achievements of the Modi government on the economic front, though it did not move early enough to deal with the banking crisis. India had a mini currency crisis in 2013, primarily due to the economic mismanagement by the United Progressive Alliance government in the preceding years. Although the damage control started after P. Chidambaram returned to finance ministry, Arun Jaitley carried forward the process. The fiscal deficit has come down from about 5% of the gross domestic product (GDP) in 2012-13 to 3.5% of GDP in 2017-18. It would have been a lot more satisfying had the Modi government attained the medium-term target of bringing the fiscal deficit down to 3% of GDP.
The return of sanity in government finances helped contain inflation and the current account deficit. The government also benefited from lower crude prices, and did well to use the opportunity to improve its finances and push capital expenditure.
Apart from better fiscal management, the government also implemented a broad set of reforms that will help the economy in the medium to long run, though some of the measures were already in the works when it came to power. The Modi government used its political skills to push through the unfinished agenda it inherited. The adoption of inflation targeting framework has helped in anchoring inflationary expectations. After a long wait, India has finally become a single market with the implementation of the goods and services tax (GST). This will increase efficiency and compliance along with greater formalization of the economy. The GST Council has shown that the centre and states can work together to swiftly resolve issues. Similarly, the implementation of the Insolvency and Bankruptcy Code is an important step forward. It will improve credit culture in the economy and will no longer allow promoters to game the system. The code will also reduce the chances of accumulation of non-performing assets and avoid a situation like the banking system is currently facing.
Further, the Real Estate (Regulation and Development) Act, 2016, or RERA, is expected to bring transparency in the real estate sector. Since the implementation has not been as desired, this is an area where the centre should work with state governments for effective implementation. As we have argued above, some of these policy initiatives were inherited from the previous government. The Modi government needs to construct a policy playbook for the next decade.
The government has also taken a number of initiatives in the social sector which are worth noting. For instance, previous governments also worked in the area of financial inclusion, but the Modi government gave it a significant impetus through the Pradhan Mantri Jan Dhan Yojana. As a result, almost all households now have access to banking services. Although a large number of accounts are inactive, the fact that households have bank accounts would enable the government to significantly scale up the direct benefit transfer under various social sector schemes. Further, the Ujjwala scheme, which provides liquefied petroleum gas connections to poor households, has done well in terms of increasing the penetration in rural areas. The government has also increased infrastructure spending in rural areas, which should help improve the quality of life and economic activity. If implemented well, Modicare can significantly improve prospects for the poor, though its exact fiscal impact is not clear at this stage.
In its last year in office, while the government would want to build on the success of its schemes, it will also have to deal with a number of challenges. The rise in crude prices is the biggest challenge, as it could affect inflation, current account deficit and put pressure on government finances. In the emerging political situation, where the opposition has started to consolidate, there will be pressure from within the ruling party to loosen the purse strings in order to improve its re-election chances. Rural distress is also a big challenge. The government has announced to give minimum support price at 150% of the production cost, and has promised to ensure that all farmers get the benefit even if the government is not procuring from them. This could affect government finances. Further, the state of the banking system will continue to remain a drag. Therefore, the last year in office will also be the most difficult one for the Modi government, and the biggest challenge will be to protect macroeconomic stability by not compromising on fiscal discipline.
Will the last year be the most difficult year for the Modi government? Tell us at email@example.com.