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Change agent.
APPRAISAL

The good, the bad, and the ugly of Narendra Modi’s economic legacy

By Amit Kapoor & Chirag Yadav

Narendra Modi, the prime minister, was a product of the mass exasperation against the misdeeds of the previous government. The regular revelation of corruption scandals, the frustrating policy paralysis, the incessant price hikes and the widespread unemployment in a virtually stalled economy had made the average voter restless for change. So, when a figure emerged making expansive assurances to revive the moribund Indian economy by eliminating corruption, creating millions of jobs and extricating millions out of the depths of poverty, the choice was hardly a complex conundrum for the voters.

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The scale of the electoral victory for BJP (Bharatiya Janata Party) in 2014 restored the power centre back in the national capital. It gave the BJP government a mandate to follow through on its policies without restraint.

While in office, one of the first acts that Modi initiated was to dismantle the long-standing relic of economic planning, the Planning Commission, and also eliminate the distinction between planned and non-planned expenditure in the country’s annual budgets. These changes signalled the completion of India’s ideological shift in economic thinking, away from the state-led planning of the Nehruvian era towards a market-oriented approach of development. A major drawback of the Planning Commission had been that it created rigid national schemes, which required states to implement them by setting aside a significant share of funds. This left the states grossly disempowered.

With the dismantling of the institution, the states were now left with more discretion over how to use their funds. The government also accepted a proposal of the Finance Commission to give state governments 42% of central tax receipts, up from 32%. 

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India has leaped to the 50th place on the World Bank’s Ease of Doing Business rankings by the end of Modi’s five-year term.

In a similar spirit of allowing market forces to define outcomes, the government also managed to deregulate diesel and petroleum prices, which formed a substantial part of the subsidy bill. As a result, India joined the club of select countries like USA and Australia where fuel prices are revised on a daily basis. Deregulation was also partially achieved in case of natural gas, but has yet to be taken up for fertilizer and kerosene. The use of the latter two commodities by people at the bottom of the pyramid makes it more difficult to tick them off the subsidy bill.

Advancing further on the reform process, the private sector was given further leeway in sectors where the state was proving incompetent. A cap on foreign investment in the defence sector was lifted from 26% to 49%. Similarly, furthering Vajpayee’s initiative to allow private entry into the insurance sector, the cap for foreign investment in it was raised to 49% as well.

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These moves were a concerted attempt to signal to the world that India was becoming more welcoming of private capital. But a more direct attempt at developing a business-friendly image on a global stage was in Modi’s ambitious promise of advancing India to the 50th place on the World Bank’s Ease of Doing Business rankings, by the end of his five-year term, from a lowly 142 when he joined office.

The World Bank noted in its 2018 Doing Business report that India had adopted thirty-seven reforms since 2003 and nearly half of them had been introduced in the last four years.

Game-changers

A few of the key reforms that the World Bank alludes to have been game-changing in their expected long-term impact on the economy. The first arose from a strenuous legacy of rising non-performing assets (NPA) with public sector banks that the BJP government had inherited. The Insolvency and Bankruptcy Code, 2016, was passed in parliament to address the issue. The code allows either the creditor or the borrower to approach the National Company Law Tribunal (NCLT) to initiate insolvency proceedings. It further lays down provisions for debt resolution within a span of three to five months.

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The second major reform by the BJP government on the economic front came in the form of the biggest tax reform in Indian history with the implementation of the goods and services tax (GST), after well over a decade in the making. The tax, which aims at simplifying the tax structure of the country by replacing the erstwhile multilayered complicated tax system, was introduced in 2017

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The new tax system eliminated the maze of check posts at state borders, where lorries transporting goods typically used to languish for hours. It is expected to transform into higher ease of doing business in the economy and translate into facilitation of a high-growth trajectory.

The tax, however, has not been free of criticism. First, the tax was introduced with five tax slabs to have the minimum effect on the price of the goods compared to the previous tax regime. But this was said to defeat the very purpose of simplification of taxes.

Second, the tax was expected to have deleterious effects on the unorganised sector, which does not pay taxes by definition. Considering it employed over 90% of the Indian workforce at the time of the implementation of the GST, there were expected concerns on its impact on small informal businesses and on the overall economy itself. Too little time has passed since the implementation of the GST, in 2017, to pass a definite verdict on this front.

Finally, the haste in which the tax was implemented without ironing out the complexities has often been criticised as well.

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Therefore, the BJP government has been proactive in kickstarting India’s stalled reform process in sharp contrast to the previous one. There are at least three other cases where this is true for the economy as well. One has been its take on fiscal deficit. After a profligate regime of the UPA government, a sense of fiscal responsibility was imperative, and, as luck would have it, global crude oil prices began to fall since 2014. This allowed the government to collect higher excise taxes on petroleum products. The increase in tax revenue and a focus on achieving predefined fiscal targets allowed the deficit to narrow down to 3.5% of GDP in 2018 from 4.5% when the UPA left office. Notably, the FRBM Act target of a fiscal deficit of 3%, which was to be achieved by 2008, has not been met since the Act was implemented.

The other varied approach from the UPA government came in tackling the problem of inflation, which had been sharply impacting the purchasing power of consumers. Again, the falling crude oil prices played a significant impact in bringing down inflation across Indian markets. But an institutional change was brought about when the RBI (Reserve Bank of India) began the process of inflation-targeting, through which it aimed at keeping inflation levels for the economy within a predefined band.

The third major contrast in the BJP government to the previous one has been in its approach towards combating corruption. While the second term of the UPA had been mired in corruption scandals right at the top, the complete absence of any such cases since then has been refreshing. The government has also been focused on addressing the problem of black money in the economy. A successful effort has been made in managing to end the data secrecy of money stashed in Swiss banks, which has long been perceived as a haven for illicit wealth.

The missteps

A more controversial step by the government against black money has been the move to demonetise 86% of India’s currency overnight, with the expectation that the illicit part of it will not be returned to banks for fear of being penalised. As it turned out, almost all of the demonetised currency returned to the central bank.

Jobless growth has always been an uncomfortable reality for the country’s masses and the situation has worsened of late.

The other motive of the move to shift the economy towards a less cash-based society also come to naught as people began to prefer cash as their primary currency soon after the circulation was normalised. The only long-term impact it had was to create a cash crunch in the economy which slowed down India’s growth to its lowest level since the BJP came into power and set the economy back by at least a few months.

Despite such setbacks, the economic record of the BJP government has been fairly satisfactory.

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However, since India missed its industrial boom phase, jobless growth has been an uncomfortable reality for the country’s masses. The situation has worsened of late. According to a recent study, latest Labour Bureau estimates show that there was an absolute decline in employment between 2013–14 and 2015–16, probably for the first time since Independence. Even though claims of job growth are always contestable in India, since most of its workforce is employed in the informal sector where employment becomes difficult to track, for a country in which 10 million people are expected to join the workforce annually for the near future, dismal job prospects could prove disastrous.

Excerpted with the permission of Penguin Random House India from Age of Awakening by Amit Kapoor with Chirag Yadav. We welcome your comments at ideas.india@qz.com