Prime Minister Modi, in a rare interview to the Wall Street Journal, exclaimed that “no one in the government could categorize big bang reforms for him.” Well, it is indeed an unfortunate situation that the policy analyst failed to define the concept of “big bang” for him. Simply a “big bang reform” could imply a drastic transformation in the economy, including laws that free people from the retroactive taxation system, speedy resolution of distressed assets in the banking sector, revamping the traditional manufacturing industry or creating jobs within the economy.
The 2014 general election which marked the Modi wave becomes important in the analysis. The campaign of “Minimum Government and Maximum Governance”, spearheaded by the BJP, ushered in Modi, poised as the lone man for the transformation of India and the economy. The usual cocktail of issues had virtually stalled the economy – corruption, frustrating policy paralysis, (used by the PM himself), incessant price hike and widespread unemployment. Thus, the emergence of a figure with the promise of “acche din,” the expectation arose that Modi would be able to sweep away the remnants of India’s socialist class, eliminate corruption, strengthen weak institutions and place India on a high-growth trajectory.
With electoral polls priming for a second term for Modi, amidst the world’s largest election, the time is now to take stock of whether the reforms have actually managed to pull the economy out of the quagmire, as many analysts have suggested. Broadly, Modi has managed to accomplish some important technocratic reforms, including a new bankruptcy law, a monetary policy framework, capping of inflation (including consumer price inflation) and ease of doing business. But directives like the demonetization and Goods and Services Tax have left the fruit hanging from the top of the economy.
The Positives
The first major positive includes PM Modi dismantling and replacing the 64-year old apex policy making body, the Planning Commission, with a new institution (NITI Aayog) to address the emerging economic needs and strengthen the federal structure. Marking a break from the traditional, the institution also replaced the five-year plans, which were laboriously crafted with a vision document outlining India’s growth strategy. These changes reflected a shift in India’s economic thinking, away from the state-led planning, during the Nehruvian times, to a market-oriented approach of development. Launched in 2015, the NITI Aayog also forged a more equitable relationship between states and the Centre, by giving states more discretion to use their funds at 42%, up from the earlier 32%.
Another key factor performance indicator is the government check both on inflation and fiscal deficit. The UPA government has been severely criticized for its lack of fiscal prudence in 2004-05, when the fiscal deficit was down from 4.48% to 3.88%. In 2012-13, the fiscal deficit rose to 4.9% despite tightening, thus, suggesting a sense of fiscal profligacy.
In comparison, the Modi government has fared moderately well, by initiating the fiscal consolidation process. The fiscal deficit was brought in line and put on a trajectory to achieve the statutory requirement of 3% under the Fiscal Responsibility and Budgetary Management Act (FRBM), although in the interim budget it had to give its initial target of 3.3 % a miss (largely owing to government spending). In addition, low inflation has paved the way for the government to clean its balance sheet despite slowing rural growth, softening of international commodity pricesand erratic monsoons taking a toll on Indian farmers.
Source: https://www.theatlas.com/charts/ByIY117vV
Low inflation was in part largely attributed to a fall in crude oil prices in the international market, coupled with a contraction of food prices during its tenure. Barring the favourable international conditions, an institutional change was brought when RBI began the process of inflation-targeting, through which it aimed at keeping inflation levels within a predefined band for the economy.
Lastly, the implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 created a uniform and comprehensive framework to oversee the financial failure and insolvency of companies and individuals. The IBC aims to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individual in a time bound manner to enable maximization of insolvent assets for creditors, thereby providing relief to India’s distressed credit markets.
The roadblocks
PM Modi staked considerable personal capital is his “surgical strike against black money” a.k.a. the demonitisation. The aim of this exercise was to deal a death blow to the economy with the expectation that the illicit part of the money (used for funding terrorism) will not be returned to the bank in the fear of being penalized. As it turned out, almost all the demonetized notes (at 99.3 %) was returned to the central bank. This suggests that a large part of the 500 and 1000 notes in circulation were not counterfeit currency as the government had posited. An obvious corollary of this move was large economic losses, which in turn led to a contraction of the Indian economy, with the growth rate of the economic activity slowing down by atleast 2 percentage point in the quarter of demonetization.
Second, the Modi government, in his quest to free up the convoluted taxation system, launched the Goods and Service Tax in July 2017. The tax regime, which was proposed almost a decade ago, is expected to provide a fillip to India’s GDP growth, based on the concept of a unified tax structure, by removing multiple taxes and reducing the cascading impact of taxes. Even, though the GST does subsume the major indirect taxes including central excise duty, service tax, VAT, and others, it leaves out four critical state level taxes: taxes on petroleum products, electricity duties, excise duty on alcohol and stamp duty on immovable properties. This has hampered the GST’s envisioned aim to “streamline an enormously complex system of state and federal tax collections.”
Further, another component under GST includes filing of necessary GST compliances online for small and medium sized businesses. This has proven difficult for them as many owners do not possess the requisite technical resources for the same. Though the motive behind digitizing the entire process under GST is indeed laudable, especially to weed out inefficiencies and corruption, the rolling out of the GST reform implied that very little homework was done both at the operational and technical ends.
Lastly, since India faltered in terms of the industrial growth rate andjobless growth has become a bitter reality for the country’s masses. The situation has worsened too, as reflected in the recent study by the Labour Bureau, which estimates that employment growth in India fell drastically during the period between 2012 and 2016, with only a marginal improvement between March 2010 and March 2012. Further there has been an absolute decline in employment between 2013-14 to 2015-16, for the first time, with construction, manufacturing and the IT/business sectors, being the worst hit.
This scenario is in stark contradiction with Modi’s position back in 2014, where he appealed to the aspirations of young Indians with the promise of plentiful jobs. The reason for the low growth has been complex, but could be linked to low level of skill development among youth, poor infrastructure and antiquated labour reforms.
Thus, an examination of Modi’s core economic policies reflects successes in terms of incremental reforms. But, his economic record has hardly been transformational, a far cry from the “big bang reformer” image.
India Outbound
May 14, 2019
source https://indiaoutbound.org/has-prime-minister-modi-delivered-on-his-promise-of-big-bang-reforms/
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