National

A cautious, but new beginning

HARISH DAMODARAN | Updated on November 25, 2017 Published on September 02, 2014

Narendra Modi

Narendra Modi

Narendra Modi

BL03_MODI_MODI2

No big bang reforms, but a shift in governance approach promises achche din ahead



The first 100 days of the Narendra Modi-led National Democratic Alliance Government has seen no big-bang economic reforms. What is unmistakable, though, is a shift in the overall governance approach promising better days – achche din – ahead.

Most investors and economy watchers believed Modi’s Government — the first one in three decades to enjoy an absolute majority without being hemmed in by coalition compulsions — would go the whole hog in the direction of liberalisation right from the start.

Just as the Congress regime under PV Narasimha Rao in 1991 boldly devalued the rupee, practically abolished industrial licensing, drastically reduced the number of industries ‘reserved’ for the public sector, and opened up all but a select ‘negative list’ of sectors to foreign direct investment within just over a month of assuming office, Modi’s Government was seen to be the harbinger of second-generation reforms from the word go.

Calibrated approach

That hasn’t happened. There hasn’t been any move so far to raise urea, LPG and kerosene prices or replace all wasteful subsidies with targeted direct benefit transfers. Far from bringing privatisation back on the agenda, the new Government’s first Budget has targeted a modest ₹43,425 crore from public sector disinvestment.

The Budget, moreover, did not repeal the controversial 2012 Income-Tax Act amendments that allowed retrospective taxation of Vodafone-type offshore transactions resulting in transfer of capital assets in India. The retrospective provisions had badly dented business confidence. There was widespread expectation that the Budget would sound their death knell, especially as the BJP’s poll manifesto had accused the UPA dispensation of unleashing “tax terrorism” and creating “uncertainty” among investors.

This Government has, likewise, hardly made any progress on labour reforms or easing land acquisition rules for setting up industries; the legislation enacted during the UPA’s term in 2013 has actually made acquisition for large projects virtually impossible.

The Modi Government’s reform initiatives have until now been limited to broad statements of intent. These suggest a measured and calibrated approach that views reforms more as a long-term project rather than knee-jerk actions forced by external circumstances. The emphasis is more on the direction rather than speed of reforms.

Thus, an Expenditure Management Commission has been constituted under former Reserve Bank of India Governor Bimal Jalan, which is to submit its interim report before the next Budget due in end-February. The panel’s report is likely to form the basis for any plans at dismantling the existing regime of untargeted and fiscally unsustainable subsidies.

Besides, Finance Minister Arun Jaitley in his Budget speech said the debate on introducing a Goods and Services Tax (GST) — the country’s most ambitious and far-reaching indirect tax reform — “must now come to an end”. He promised to take States on board and ensure passage of the enabling legislation for GST “in the course of this year”.

Reforming governance

But despite this seeming absence of reforms – of the sort confirming to market expectations – it is not as though the 100 days of the Modi Government have been marked by inaction and indecision.

The biggest and most significant change witnessed is that we finally have a functioning Government in New Delhi.

During the UPA rule, ministries acted at cross-purposes with every minister a law unto himself while accountable to none. There was no clear chain of command conducive to speedy and effective decision-making. The fear of being implicated even for pure errors of judgment meant that the bureaucracy, too, chose to play it safe and keep files pending.

This has definitely changed. We no longer have groups of ministers – ‘empowered’ or otherwise – deliberating on key policy issues and being under no compulsion to reach finality. All matters, instead, are now to be processed at the level of the relevant ministries. The ministers and bureaucrats are, in turn, required to submit detailed action plans to the Prime Minister’s Office, which will monitor implementation on a regular basis.

The creation of a proper structure of decision-making, wherein the Government represents an “organic unity” rather than an “assembled entity”, is a major achievement in itself. Given that this is a Government whose stability is not in doubt and which sees itself to be in for the long haul, the importance of putting in place the right systems of governance cannot be underestimated. And these, thankfully, are firmly in place today.

From dole to delivery

Another subtle but not insignificant shift discernable in the new Government’s approach is the focus on inclusion and empowerment in a market-based economy, as opposed to plain doles and subsidy.

The previous dispensation’s flagship welfare programmes were the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and Right to Food – both dole-based and distortive of the functioning of labour and grain markets.

This Government’s two mega intervention initiatives are Digital India and the Pradhan Mantri Jan Dhan Yojana (PMJDY). The first one aims at providing high-speed internet connectivity to all villages in India with a view to making Government services universally available to citizens using the ubiquitous mobile phone platform.

The second scheme seeks to ensure bank accounts for each of the country’s roughly 7.5 crore unbanked families in mission mode before the next Republic Day on January 26.

These programmes are different in the sense that their primary goal is to improve delivery of Government services and effectiveness of already-existing welfare schemes. The PMJDY is expected to eventually serve as a vehicle for transfer of all Government subsidies and welfare payments directly into the bank accounts of the intended beneficiaries. Such direct benefit transfers will in due course replace the present system of leaky, untargeted and market-distorting subsidies.

The Modi Government has also proposed to make MGNREGA a more productive Government intervention by linking guaranteed minimum wage employment to works that are genuinely asset-creating and connected with agriculture and allied activities.

This, along with its move to only moderately raise minimum support prices for this year’s kharif crop, signals a departure from the old beaten path of populism.

Future challenge

The Government’s real test of reform intent will come early next year at the time of presentation of the next Budget.

By then, elections to the State assemblies of Maharashtra, Haryana, Jammu & Kashmir and probably Delhi would be over, giving it extra leeway to take decisions that are politically tough but necessary in the economy’s long-term interest.

This Government was ultimately elected on the promise of development and creating jobs for the 12-13 million people joining India’s workforce every year. The last three years and more have been a painful period, with growth slowing down and investment activity grounding to a halt.

Reversing this would require more than just a turnaround in sentiment. Sentiment, at the end of the day, has meaning only if it translates into confidence among businesses to undertake actual investment on the ground. Moreover, sentiment is a fickle thing – investors aren’t going to wait indefinitely for the Government to take decisions on key policy reforms.

But it is not just investors. Even voters want results on the ground – new factories, jobs, better educational opportunities, clean water, 24/7 electricity, roads and proper public health and sanitation infrastructure. And they, too, will wait for the first 100 and may be the next 100 days, but not more.

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Published on September 02, 2014
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