'Modi@1: It has been a good year for the economy'

The Modi government's first year was certainly better in terms of economic policy initiatives than any of the 10 under the previous government, notes Shankar Acharya

In less than a fortnight the National Democratic Alliance government led by Prime Minister Narendra Modi will complete its first year in office.

The flood of assessments in newspapers and other media has already begun. Here is my tuppence worth, limited strictly to the economic domain.

First, an important methodological point.

Much of what one reads offers judgments based on comparing the values of key economic outcome variables (such as economic growth, inflation, fiscal deficits, external imbalances, currency levels, sectoral performance indicators, etc) for the most recent year, 2014-15, with the previous one (or more) years.

This is too simplistic and misleading.

The performance of the Indian economy in 2014-15 was dependent on many factors, including, notably: the initial (inherited) conditions, the influence of past policies, exogenous factors (such as commodity price falls, rainfall deficiencies, global economic weaknesses) and last (and perhaps least!), the fresh initiatives launched by the new government.

Thus, it is well known that the National Democratic Alliance government inherited a pretty awful economic situation in terms of the usual metrics of growth, inflation, external imbalances, stagnant employment, infrastructure disarray, etc, as well as the backwash of massive scams in telecom and coal, serious stresses in public sector banks, widespread policy paralysis across government, the lasting burden of ill-designed, populist legislation, and long-pending structural problems in urbanisation, environment, labour and land markets.

Whichever government had come to power in May 2014 would have been seriously challenged to improve economic performance in the short run.

Therefore, the better way to assess the new government's economic record is to focus on its policy initiatives during the year.

In particular, let us focus on those policy initiatives which (a) reduce consumer price inflation (I, for short), (b) enhance the provision of central government services (S) and, above all, (c) revive the momentum of growth, investment and employment.

If these are wide-ranging, well-designed and effective, the likelihood of sustained, good economic performance outcomes will be high.

The Modi government’s array of first year economic policy initiatives has been impressive and broadly sensible. They include:

• Reasonable fiscal moderation, including through the abolition of the subsidy on diesel and a capping of the subsidy on cooking gas (I);
• Successful inflation control through deployment of excess public food stocks, scaled back increments in procurement prices, conservative monetary policy and the good luck of plunging international commodity prices (I);
• Significant thrust to railway investment, efficiency and financial viability (including the first increase in passenger fares in a decade) , though this is clearly a work in progress (S);
• Some advance in reviving the flagging programme for national highways (S);
• Major acceleration (through the Jan Dhan Yojana) in expanding the spread of household bank accounts nation-wide (S);
• Using this expanded bank platform to offer low-end life and accident insurance and a contributory pension scheme for unorganised unorganised workers (S);
• Sustained and ongoing efforts to constructively amend the unworkable new land acquisition act passed by the previous government in 2013 (GIE);
• Providing the necessary support to the Rajasthan (and later Haryana) government’s successful initiatives to reform existing labour laws in order to promote more and better jobs (GIE);
• Amendment of the Apprenticeship Act, reducing the labour laws “inspector raj” and moving towards online compliance (GIE);
• Initiation of the plan to integrate three key labour laws (the Industrial Disputes Act, the Trade Unions Act and the Industrial Employment (Standing Orders ) Act) into a single, jobs-promoting industrial labour code (GIE);
• Determined and ongoing efforts to bring the game-changing, nation-wide Goods and Services Tax (GST) into being by April 2016 (GIE);
• Broadly successful conclusion of the Supreme Court mandated auction of coal blocks, after enacting the necessary legislative amendment (GIE);
• Amendment of the old Mines and Minerals (Regulation and Development) Act to enable auctioning of licences and establishment of a National Minerals Exploration Trust to explore and promote non-coal minerals (GIE);
• Completing the long-pending amendment of insurance legislation to lift the cap on foreign ownership from 26 per cent to 49 per cent (GIE); nRaising the foreign ownership cap in defence industries to 49 per cent as part of serious effort to open up defence production to domestic and foreign firms (GIE).

However, there have also been lacunae and disappointments relating to the government’s first year policy programme. These include:

• A hesitant approach to rationalising some of massive, ill-targeted and corruption-ridden subsidies that plague India’s economy. The two biggest ones now are for food and fertilisers, each amounting to about one lakh crores (inclusive of arrears). This despite the government’s own reports (notably the Shanta Kumar report and the Expenditure Commission reports) favouring a phased transition towards direct cash transfers in these areas, especially given the technical feasibility provided by the “J-A-M” combination of the Jan Dhan Yojana, Aadhar and mobiles. The money saved from such rationalisation could be very fruitfully used to expand irrigation and other rural infrastructure (S, GIE));
• A willingness to tolerate the rupee’s over-valuation, to the detriment of both exports and import-competing domestic industry (GIE);
• Inaction, thus far, on the Shanta Kumar Committee report’s recommendations for broader reform of the food economy (GIE) ;
• Lack of a clear roadmap to deal with serious problems of balance sheet weakness, governance and performance of public sector banks, coupled with a reluctance to reduce majority government ownership (GIE);
• Little discernible progress in redesigning the faltering approach of private-public-partnerships in executing infrastructure (GIE);
• Avoidable errors in tax policy and administration, such as the recent flip-flop on the application of MAT to foreign portfolio investors (GIE);
• The draconian new bill against black money abroad, which may discourage legitimate economic transactions and increase the scope for harassment by enforcement agencies;
• A rising concern that an increasingly centralised system of decision-making, with a strong Prime Minister’s Office (PMO), may be encouraging a new kind of “policy paralysis”, where line ministries hesitate to take autonomous administrative decisions without seeking approval from PMO.

On balance, the Modi government’s first year of economic policy initiatives has been good, certainly better than any of the last ten years under the previous government.

Quite a few of these initiatives are still “work in progress”, battling constraints imposed by parliamentary politics, legacy problems or administrative/technical limitations.

Hence their impact, and even of the “enacted initiatives”, on future outcome economic variables will take time to bear fruit. The broad direction of policy is clearly sound.

The scale and timing of the yield in terms of higher growth, more employment, lower inflation and better services is, inevitably (and uncomfortably), uncertain and subject to the vagaries of weather, global conditions and the broader political dynamics.

Image: Prime Minister Narendra Modi. Photograph: Reuters

Shankar Acharya is honorary professor at ICRIER and former chief economic advisor to the Government of India. Views are personal.