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This article was first published 8 years ago  » Business » Few pointers that suggest Modi's Bharat is away from major reforms

Few pointers that suggest Modi's Bharat is away from major reforms

By Shankar Acharya
September 10, 2015 11:58 IST
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To better understand what is going on, it may be useful to break up the problem into four different (but related) parts: setbacks to major reform efforts; slowdown in other reforms; inaction or back-tracking in some areas; and a revival of fiscal populism, says Shankar Acharya.

Four months ago I had commended the Modi government's economic policy initiatives in its first year in office.

A third of a year later the picture looks much less promising. Economic reforms have clearly lost momentum and there is a sense of drift in economic policy.

To better understand what is going on, it may be useful to break up the problem into four different (but related) parts: setbacks to major reform efforts; slowdown in other reforms; inaction or back-tracking in some areas; and a revival of fiscal populism.  

Setbacks to major reforms

By the government's own statements, amendment of the UPA's legacy land acquisition Act (2013) and passage of the Constitution amending Bill for the Goods and Services Tax (GST) were the two most important items on the economic agenda for the monsoon session of Parliament which was prorogued on Wednesday.

Neither has achieved success thanks, in part, to the highly disruptive and obstructionist parliamentary tactics adopted by the opposition parties, led by the Congress.

In the case of the land acquisition Act, most of the key amendments proposed by the government (and incorporated in earlier ordinances), were opposed by the Joint Committee of Parliament, including members from the National Democratic Alliance (NDA).

Against a background of rising opposition from its own members and various farmer organisations, the government backed away from its year-long efforts to amend the Act, instead inviting the states to legislate their own statutes to make land acquisition laws workable and fair.  

The GST Constitution amendment Bill had been cleared by the Lok Sabha in December 2014 and then referred to a Select Committee of the Rajya Sabha, which gave its recommendations last month.

The Bill was duly amended and introduced in the Rajya Sabha in the second week of August. Its passage was blocked by continuing disruptions of Parliament.  

Slowdown in other reform initiatives

There are quite a few in this category. For example:  

Hardly six months ago, at Budget time, the finance ministry had emphasised the opportunities for rationalising and reducing major central government subsidies (food, fuel and fertiliser) by shifting to direct benefits transfer (DBT) systems based on the trinity of Jan Dhan, Aadhaar and Mobiles ("JAM").

The Jan Dhan programme has greatly expanded the number of households with bank accounts, while the coverage levels of Aadhaar unique IDs and mobile ownership are now very high.

But, after the success with transiting to DBT for the cooking gas cylinders, there seems to have been little progress with the much larger subsidies for foodgrain and fertilisers.  

After some initial success with modestly relaxing labour laws in a couple of states and promising the integration and rationalisation of several major central labour laws, forward movement seems to have become mired in inter-ministerial committees.

The recent strike by trade union members may have also discouraged strong reform efforts in this area, which remains critical for nurturing rapid job growth.  

The serious governance and balance sheet weaknesses of public sector banks are well-known as is the growing problem of under-capitalisation.

Although the government announced a few steps last month under its "Indradhanush" initiative, they fall far short of the recommendations of the Nayak Committee as well as what needs to be done if these banks (which still dominate Indian banking) are to be put on a sustainable path towards having healthy balance sheets and realising their potential as efficient, well-governed financial intermediaries, contributing majorly to India's economic development.  

Inaction and back-tracking

Here, too, examples are not hard to find:

The Shanta Kumar Committee submitted its report in January, with recommendations for restructuring the Food Corporation of India and undertaking major reforms of India's food economy.

Not much seems to have happened in the eight months since.  

The Expenditure Commission was set up a year ago and has delivered numerous recommendations in several reports, which are yet to see light of day.  

The 2015 Union Budget had announced the resumption of strategic disinvestments (or privatisation) back in February and estimated receipts of Rs 28,500 crore or Rs 285 billion.

Not a single transaction has occurred since or is even known to be imminent. A K Bhattacharya (A forgotten promise?) wonders whether the programme has been abandoned.

Similarly, the plans to privatise the airports in Ahmedabad, Kolkata, Chennai and Jaipur appear to have been shelved.

The national carrier, Air India, continues to bleed losses and stagger under the weight of large debts, while government pumps in more equity.

Coal India's public sector monopoly continues. None of this sits well with the government's election slogan of "maximum governance and minimum government".  

The electric power sector continues to be crippled by the massive losses and outstanding dues of state electricity boards. Little is known of the government's plans for tackling these critical issues.  

Revival of fiscal populism

The surge in indirect tax revenues in the first third of the year and reduction in petroleum and fertiliser subsidies on account of slumping international commodity prices has bred a sense of comfort, even complacency, about our fiscal situation.

This may be premature, especially if one looks ahead to 2016-17.

That is when expenditures are likely to spike from recent decisions and predictable processes.

These include: the massive pre-election "special package" announced for Bihar; the impact of the recent decision to boost the pension bill of the armed forces by agreeing to the "one rank, one pension" formula; the first full year effects of the forthcoming Seventh Pay Commission recommendations; possible pre-election "special packages" for West Bengal, Assam, Kerala and Tamil Nadu, which are all due for polls by May 2016; obligatory increases in expenditures on food and rural employment entitlement programmes; and who knows what else.

The ship of fiscal consolidation will certainly be buffeted, if not blown off course, with obvious, unhappy implications for fiscal deficits and interest rates.  

In sum, economic reforms seem to be on a slow train, while good old fiscal populism is alive and flourishing. Against the background of a slowing world economy and slumping exports, this does not bode well for India's economic growth and job-creation.  

Photograph: Reuters

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

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