17 September 2015

More action, less talk - Narendra Modi has miscalculated the time needed for reform

S.L. Rao 

In its issue of August 29, 2015, The Economist asked, in "Lights, camera, inaction!", whether Prime Minister Narendra Modi prefers talk over deeds. The Modi government, however, did initiate many actions. Its serious mistake lay in misjudging the complexities and challenges of getting things done in a fractious democracy.

The Modi government was preceded by years of missed opportunities, large-scale corruption, and lack of coordinated action. Modi, however, is different from many earlier prime ministers. A great orator, he has mesmerized audiences everywhere, irrespective of education and class. His election speeches promised development, eradication of black money, modernization, improvement and building of new cities, a vast skills-development programme, creation of jobs in urban India, promotion of entrepreneurship, improvement and building of infrastructure, encouragement to massive foreign investment and making India a single market, with less government and more governance. All of this aimed at speeding India's economic growth.

The Modi government, it was promised, would move away from State control to more reliance on markets and private enterprise. Modi would eliminate tax harassment. The administration would be efficient, accountable and free of corruption.To reach these goals, the government would have a more holistic decision-making structure by combining ministries. For example, a single energy ministry to look at power, renewable energy, nuclear energy, fuel, especially coal. Transport optimization would happen by combining road, rail, waterways and shipping. Health, medical education, sanitation and water supply would be looked at together. India's mistake in separating public health, sanitation and safe water would be corrected. A more market-determined pricing mechanism would replace administered pricing in all sectors. By direct delivery of benefits to the needy, the country would save wasted and stolen resources. The removal of the heavy hand of the government on regulation of agricultural markets and prices would enrich farmers. There would be more private power generation, open markets for fuels, private investment in transmission, greater reliance on power exchanges to make power tariffs more competitive.

Modi, it was said, would help India shed Nehruvian socialism and Indira Gandhi's State control and orient itself to the market. This radical departure from a deep-rooted national ideology that had held it captive for over 60 years would be nothing short of a revolution. This was never explicitly stated for fear of the ruckus the Congress and the Left would raise. Clearly, Modi's ideas were different and well-articulated. He also gave his audience the impression that the promises would be delivered almost immediately. But given that all this would take time, is The Economist correct in claiming that the Modi government is all about talk and inaction?

In spite of his lack of foreign-policy experience, Modi has succeeded in evolving and implementing a foreign policy that gives India its rightful place in the Indian Ocean and the Pacific region. He has wooed the large Indian diaspora abroad for investment. He has got countries such as Japan, China, South Korea and the United Arab Emirates to commit themselves to investing in India in a big way. He has successfully built on India's relationship with Israel.

Modi has had much good luck and some bad luck. The severe failure of the monsoon will affect growth but ample stocks and low inflation will prevent this from spoiling the growth objective. China's current economic problems make India a strong magnet for foreign investment. The collapse of crude oil prices soon after the elections has reduced retail prices of petro-products. Commodity prices have fallen, making major imports - crude oil and gas, coal and many other commodities - cheap. This moderated inflation has improved the balance of payments and made the fiscal deficit more manageable.

Modi was the all-powerful chief minister of Gujarat for almost three terms. He had never held office in the Central government. Unlike Gujarat, a cohesive state, India is a minefield of vested interests, power centres, unscrupulous political and commercial interests, caste and communal groupings. Modi as prime minister forgot that even a numerically small Opposition could damage his legislative programme. Not having a majority in the Rajya Sabha has been a negative influence on his governance. Modi's overbearing personality and powerful rhetoric have become a disadvantage. He had been contemptuous of the Opposition in the lower house, but it has retaliated strongly. The Congress has almost used a 'scorched earth' policy in its attacks. The mass media have publicized Modi's errors. His extempore public speeches have led him to make promises that have not been carefully thought out.

And yet, Modi, certainly has not been a complete failure in managing the domestic economy as The Economist would have its readers believe. Certainly, the Indian masses do not seem to think so. One promise made before the general elections that has taken 15 months to deliver is the one rank one pension policy for the armed forces. The misguided promise to bring back unaccounted-for money stashed overseas by Indian nationals requires legislation and international cooperation. Promises to ease doing business in India require speeding government clearances and simplifying land acquisition. Introduction of the goods and services tax has been delayed by the Opposition, which goes to show that coordinated and holistic decision-making is a work in progress. The bureaucracy is yet to become more accountable. The government is yet to significantly reduce the cost of subsidies. In other words, the stated timeline to give effect to the promises has not taken into account the practical difficulties.

However, on all these matters, action has been initiated. The Supreme Court order on auctioning earlier allotted coal mines was implemented speedily. Coal production has risen. The 14th finance commission has backed Modi's promise to give more autonomy to states. Abolition of the Planning Commission and the creation of the Niti Aayog as a policy-evolution body that would consult the states assure states greater freedom in taking economic decisions. The 2015 budget transferred many social schemes to the states along with over 10 per cent increase in their share of Central tax revenues. The states have to efficiently run the schemes and deliver better value to the beneficiaries.

Legislation on black money is being worked on. Tax havens are also in the process of committing to disclose holdings by Indians. Coal, renewable energy and power have been brought under one ministry, which is a good step forward. Many large investors have promised to invest in infrastructure. A Rs 1,000 billion plan for interstate electricity transmission is attracting private investors. Domestic coal supplies have improved. A fuel supply policy has been evolved for large users. Actions are afoot to revive stranded power capacities. Electricity distribution is a state subject and with over Rs 200,000 crore in investments that are blocked, power supply, banks and the overall economy have been affected. Massive private investments in ambitious road development seem to be on course. Railways-restructuring is in progress. The national sanitation programme is making much headway with public and private participation. Crores of bank accounts have been opened, Aadhaar cards are being used for identification and these make it possible to rationalize subsidies. The collapse in prices of crude oil and gas has reduced subsidies on kerosene and fertilizers. Land reform will be left to state governments. The government is also showing willingness to listen to the states on the GST bill.

However, the Modi government has attracted little new talent. The cabinet has too many ineffective ministers. Modi's personality appears to overawe them. There is little sign of bureaucratic reform. Selection of statutory regulators remains confined to retired bureaucrats. There is little sign of privatization to improve the efficiency of public sector enterprises. The Reserve Bank of India has taken the first steps to regulate nationalized bank-lending and get tough on collections. Long term savings are yet to support long term investments, like infrastructure.

Mr Modi, quite certainly, has underestimated the time needed for action. But most of what he promised is under negotiation or is being implemented. His bombastic promises and his penchant for rhetoric have misled many (including The Economist). National politics does not allow quick domestication and results. Naturally, in just over one year, the Modi government has initiated but not completed many actions.

The author is former director-general, National Council of Applied Economic Research 

No comments: