“Having inherited an economy with low growth, high inflation and large fiscal deficit, the government has successfully stabilized it," Panagariya, the Jagdish N. Bhagwati Professor of Indian Political Economy at Columbia University, said.
The professor’s remarks could bolster the claims of the Modi government of successfully managing the Indian economy. At the same time, they may invite criticism from opposition, which has persistently claimed that economic growth was yet to recover and the jobs outlook had worsened—especially after the disruption in the economy triggered by the demonetisation of high-value currencies and implementation of the goods and services tax (GST).
In a paper published on the Columbia University website, Panagariya claimed it was “the first comprehensive evaluation of the economy during the first three-and-a-half-years of the Modi government".
Panagariya was vice-chairman of NITI Aayog, the policy think tank that replaced the planning commission, between 2015 and 2017, a period overlapping with the Modi government’s tenure. The federal institution completed three years on Wednesday.
In his paper, Panagariya said the first three years of Modi’s National Democratic Alliance (NDA) government had seen a turnaround in economic growth and a reversal in the inflation trajectory. “During the three full financial years from 2014-15 to 2016-17, the GDP (gross domestic product) has grown at the annual average rate of 7.5%. This is 1.6 percentage points higher than the rate during the last two years of the UPA," he wrote. UPA is short for the United Progressive Alliance.
Panagariya also argued that the NDA (National Democratic Alliance) had successfully contained inflationary pressures and reversed the trajectory. Inflation, which averaged 10.1% in 2012-13 and 9.3% in 2013-14, decelerated to 5.9%, 4.9% and 4.5% in the subsequent three years.
India’s current account deficit also narrowed to 0.7% of GDP in 2016-17, compared with 4.3% recorded in 2011-12 during UPA’s term, although a declining trend had set in from then on.
In terms of attracting foreign direct investment (FDI), too, India has done well in the past three years with receipts steadily rising from $36 billion in 2013-14 to $60 billion in 2016-17.
Panagariya said the NDA regime had effectively tackled thorny issues such as retrospective taxation as well as paralysis in bureaucratic decision making and improved the ease of doing business. It also raised foreign ownership levels in sectors including defence production—full foreign ownership is allowed under the approval route—and took the bold decision of closing down or privatizing loss-making state-owned enterprises.
The Modi government did attract flak for what critics have called overestimation of growth under the new way of measuring GDP, introduced in 2015. Critics also argue economic growth has been characterized by joblessness and the cost of demonetisation outweighed its benefits.
Panagariya, however, differs. “Any claims of overestimation of growth rate on methodological grounds remain unsubstantiated," he wrote. Claims of joblessness, he said, were based on unscientific sources and “without sound empirical or logical foundation". The economist also noted in his analysis that claims of demonetisation causing severe inconvenience to people and displacing economic activity were “greatly overstated".
Panagariya’s paper pitched for more reforms during the remaining term of the government as well as thereafter. That includes privatization of state-owned firms, including Air India, that do not serve any public purpose. The other measures Panagariya wants the government to take forward include a clean-up of toxic assets in the banking system, estimated at Rs10 trillion, and infusion of fresh capital into public sector banks.
According to N.R. Bhanumurthy, a professor of economics at the National Institute of Public Finance and Policy, the government has to quickly come up with finer details of the bank recapitalisation programme so that banks could plan their future course and help stimulate private investment. “In the medium to long term, land and labour reforms have to be taken up. Also, agriculture market needs measures to address high volatility in prices. Price discovery in the agriculture market is a big challenge," Bhanumurthy said.
Panagariya’s paper suggested that once the NDA secures a majority in the Rajya Sabha, where it is outnumbered by the UPA, it should reform labour laws and revisit the land acquisition law. According to him, urbanization will pose the greatest challenge to Indian policymakers.