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Business News/ Opinion / Columns/  Opinion | Modi 2.0 should be about two ‘R’s: Reflation and reforms
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Opinion | Modi 2.0 should be about two ‘R’s: Reflation and reforms

A loosening of fiscal and monetary policies and some structural changes could boost the economy

Voters wait to cast their votes at a polling station in Kannur (PTI file)Premium
Voters wait to cast their votes at a polling station in Kannur (PTI file)

If the results of the 2019 Lok Sabha elections confirm what most exit polls have indicated—a second term for the National Democratic Alliance (NDA) under Narendra Modi—attention must inevitably focus on the economy, which is showing signs of strain. But the key to economic success is effective political management of allies and opposition, regardless of whether the Bharatiya Janata Party (BJP) gets a majority on its own or not. Sullen allies are worse than strong critics.

The two most important items on the NDA economic agenda should be reflation and reform—the two “R"s. Modi’s first term, despite official gross domestic product (GDP) numbers showing robust growth, had deflationary tendencies. The key factors impeding growth were rising global protectionism, the double balance-sheet problem, higher petro-fuels taxation, demonetization, the shift to a goods and services tax regime, the emphasis on higher tax compliance at all levels, the Monetary Policy Committee’s over-emphasis on fighting non-existent inflation, and the implementation of the insolvency code. All these forces exerted a downward pressure on economic activity.

What the economy needs now is a calibrated loosening of fiscal and monetary policies in the short term, and a focus on reforms. Action on both fronts needs to begin in the first 90-120 days of the new government, when the honeymoon period provides a tailwind.

First, given the slowdown in the economy and weak revival in the investment cycle, Modi 2.0 should focus on reflating the economy through monetary and fiscal tools. With retail inflation below 3% and real interest rates above 3%, a small recalibration of the fiscal road map for one or two years may be just the kind of Keynesian pump-priming the Indian economy requires, especially in a Trumpian world where trade wars shift the onus of growth to domestic forces. Some of the pump-priming has already begun with the PM Kisan cash doles to small and marginal farmers, and tax breaks for real estate and the middle classes in the interim budget. It needs to go further to boost consumption and investment.

Second, factor market reforms. If the Indian economy is still struggling to find its mojo five years after Modi took over, it is because factor market reforms have been delayed for too long. The land and labour markets need to be freed. Protection for labour should be given in the form of more generous compensations for retrenchment, with reskilling options thrown in. The Apprentices Act needs to be further liberalized, so that real skilling happens on actual jobs and not just in classrooms of Industrial Training Institutes (ITIs).

Third, the government needs to formally embrace privatization—the dreaded P-word—as a way of making the economy more efficient. While Air India must be privatized at the first opportunity, white elephants like Bharat Sanchar Nigam Ltd and several banks should also be on the list. One politically sensible way to do this would be to legislate a golden share, whereby economic shareholding can be privatized up to 74% or 99%, while vesting the balance public holding with enough voting power to block resolutions in clearly specified circumstances (such as war, financial crises, overwhelming public interest, etc). This golden share clause can be inserted in all legislation involving nationalized companies.

Fourth, it would help if key ministries—such as finance, education, health and agriculture—were manned by top talent from the private sector. In the last government, Modi opted for partymen and women who may have been the best choices politically, but technocrats with strong political backing could have done a better job, or at least given the Prime Minister early warnings on political decisions that may go bad economically. Ministries like health and education need dynamic heads, since the issues that need tackling (quality of primary and higher education, expansion of primary, secondary and tertiary healthcare) need policy interventions that politicians and bureaucrats may not be able to provide.

Fifth, statistics. It is a shame that our GDP and jobs statistics are being repeatedly questioned by experts. A country of the size and diversity of India needs a very sophisticated statistics ministry and a statistics commission that is headed by experts. It should be given enough resources to produce the best possible data to guide policy interventions. If market research agencies can poll 750,000 people for an exit poll and distil and display the relevant data for use by TV channels, one wonders why we need to use outdated National Sample Survey Office methods and data for jobs or consumption trends. Clearly, we must summon the national will to collect and disseminate good, high-frequency data, whether it is on jobs or consumption habits or demography. The answer could be the creation of a public-private partnership for data collection and dissemination, with the government playing the lead role in devising a methodology for it all. Unlike every other reform, this investment in good quality data needs nothing beyond political will and some resources to be implemented.

Modi 2.0 must not be a carbon copy of Modi 1.0.

R Jagannathan is editorial director, ‘Swarajya’ magazine

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Updated: 21 May 2019, 01:16 PM IST
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