The Key Areas
- Investors want clarity on tax issues, clearances. Manufacturing share must go up to create jobs, promote exports.
- He’s promised better infrastructure in neglected regions, so will have to ensure speedy implementation of good projects
- Many financial sector reforms need urgent focus to streamline revenue stream, improve ease of doing business
- Social development for inclusive growth needs resources, better governance to ensure services reach underprivileged
Don’t expect any miracles in the first 100 days of the new government. That may be a bit of a letdown to the millions who voted in the Narendra Modi-led government but his advisors stress that people will have to be realistic, consider at least a time horizon of two years for any reforms to deliver—there are simply too many governance issues that need to be tackled first.
This underplaying of matters is natural, given the extent of the expectations. “The first six months are going to be very difficult as aspirations are very high and the results are not going to come through as always there is a lag,” says Dr Rajiv Kumar of the Centre for Policy Research. Having tested the waters with proposals of tax reforms—which backfired badly—the BJP key team decided to defer the release of the vision document on economic and social development agenda till after the formation of government.
But some indications are already evident. Scores of economic, development and financial experts have been formally and informally consulted, some without even realising their opinion was being sought. The head of a government-affiliated think-tank recalls being asked about GST and DTC during a luncheon meet with Arun Shourie, tipped to hold a key economic portfolio in the new government. Many others like Dr Vinay Sahasrabuddhe, director of the Mumbai-based Public Policy Research Centre (a BJP affiliate), and many economists including Prof Jagdish Bhagwati, Prof Arvind Panagariya and Dr Rajiv Kumar have been part of round-table discussions and brainstorming sessions.
Finally, many of these proposals put forth by experts will figure in the BJP’s vision document—which is likely to be unveiled by June-end—and form part of the action plan of the next government. “A government plan of what it needs to do in the next six months to one year is just not there at present,” states Dr Rathin Roy, director of the National Institute of Public Finance and Policy (NIPFP). “The government shouldn’t be talking about the first 100 days. It should be talking about what it wants to achieve in between three and five years.”
On tax reforms like Direct Tax Code (DTC) and the Goods and Services Tax (GST), experts point out that while the first will have to start again as it has lapsed, in the case of GST “we are 90 per cent there. With a little political negotiation we should be able to have it in place”, points out Roy.
A key focus area will be administrative reforms. A common criticism is that now most junior- and mid-level government officials function from day to day and don’t know how to provide answers except to parliamentary questions. A major fear of experts is that instead of professionalism, we will see an onslaught of bureaucrats managing affairs, if the Gujarat model is replicated at the Centre by Modi. As in Gujarat, Modi is likely to give lots of functional freedom to bureaucrats but with more accountability. There is also likely to be motivational training for officials and staff to promote a work culture.
Sources agree that they would rather not see a repeat of Manmohan Singh’s tendency to set up expert panels to study all issues while coming up with no action plan. Of the dozens set up during upa’s two tenures, hardly any of the recommendations that would have improved the system or helped the rural masses got implemented. “We don’t need more of those. Instead, he has to strengthen existing institutions of the government like the ministries and agencies. At the same time, we hope we don’t see another IAS siege,” says Dr Kumar. The Planning Commission may see a diminishing role with a bigger role for the inter-state council if Modi’s promise of working with CMs as a team is to be relied on.
The new government takes charge at a time when there is optimism that economic growth-wise, the worst is behind us. Inflation, of course, remains an unconquerable factor just as the unpredictable summer monsoon. The Indian rupee has also gained in the last several weeks, which augurs well for reducing our import bill. Hopefully, the new government will work cordially with RBI governor Raghuram Rajan and not create more fissures that would send wrong signals to investors. As inflation slides, the interest rates should follow suit.
The Modi government inherits three international arbitration cases—two tax- related cases of Vodafone and Nokia and a third gas price-related case involving RIL and its two partners. In the effort to woo foreign investors, Modi may have to make some leeway in the first two but considering the tough stand being taken by the US, UK and EU on tax matters it wouldn’t be desirable to let MNCs dodge their dues, particularly at a time when the fiscal deficit has to be bridged. Part of the dues Nokia owes relates to state government revenues, which will be difficult to overlook.
The Reliance gas price arbitration case seems more of a show of strength by the corporate group considering the government has announced the hike (implementation of the new price was only held up due to the elections). On the larger issue of fall in productivity, hopefully the Modi sarkar will show more spine and seek accountability and not blame the national auditor for doing its job.
Meanwhile, a robust natural resources policy will hopefully promote proper utilisation/value addition to give a push to manufacturing, job and wealth creation in some of the otherwise neglected mineral-rich regions. Will it mean taking back the coal and other mineral blocks and allocating it in a transparent manner? Again, a tough decision!
Investments, even if they start flowing in, will have a gestation period. That would mean Modi will have a very hard first six months. He would be wise in using the time to lay the foundations of the next upswing rather than try any ‘shortcuts’ to try bringing the economy back to the growth trajectory.
The Modi sarkar will have a tough task at hand to revive industrial growth—which remained almost flat in 2013-14. Wholesale inflation eased in April to below 6 per cent but that could change in the event of the crucial summer monsoon failing to deliver. However, with India set to harvest a record 264.4 million tonnes of grains in the crop year that ends in June, the situation on the food front is comfortable. The election verdict has given a high to the BSE benchmark Sensex, while the rupee too has recovered, up to 58.68 against the US dollar. This tells us something—all said, Modi has got to steward an Indian economy that is ready to revive its animal spirits.