Shake a leg, and hands

56NarendraModi Friend request: Prime Minister Narendra Modi, Finance Minister Arun Jaitley and Urban Development Minister M. Venkaiah Naidu with former prime minister Manmohan Singh and Congress president Sonia Gandhi | PTI

Modi government needs to push reforms harder to win investors back

Four years ago, Kaushik Basu, who was the government's chief economic adviser, attributed the slow pace of reforms in India to coalition democracy. “The GST [goods and services tax] is a great reform. The opposition realised it was a good reform, and was reluctant to let it happen. A single-party majority government would not face this problem,” he told an American think tank in 2012.

Basu, it seems, was being overly optimistic. Narendra Modi led the BJP to a spectacular victory, and snapped his government of the need to observe coalition dharma. But the prime minister finds himself cornered when it comes to the Constitution (122nd Amendment) Bill his government introduced within six months of coming to power.

The opposition Congress, which wrote the Constitution (115th Amendment) Bill 2011 to pave way for the GST, knows it is too good a reform to let the BJP hog the credit. In fact, Basu knew it. He had told western economists that the GST was difficult because all parties realised it was good for the country.

That is the fate of the biggest of the economic reforms in India, initiated 25 years ago when the shackles of a closed economy were loosened improving quality of life in India. It is not just tax reforms that have got stuck in political quagmire. Land acquisition reforms initiated by the Modi government fell by the wayside in Parliament. In fact, implementing reforms has been like playing snakes and ladders—going up the ladder, till the snake makes the player fall many steps behind.

Widespread corruption in the allocation of coal blocks and mines between 1993 and 2011 made the Supreme Court declare the allocations illegal in August 2014. The allocation of 204 (of 218) blocks was cancelled a month later. The government promulgated the Coal Mines (Special Provisions) Ordinance a few months later to allocate the cancelled mines, and then notified the rules and provided guidelines.

Similarly, the allegations of corruption in the allotment of 2G spectrum, the Supreme Court's intervention and the subsequent re-auction of spectrum are another story of reform implementation gone awfully wrong.

Foreign investors have been crucial to India's development since the opening up of the economy. While the Modi government has been able to push quite a few reforms relating to foreign direct investment, it has steered clear of the contentious multi-brand retail sector. The parliamentary standing committee on FDI in multi-brand retail under Tiruchi Siva has suggested the setting up of a retail regulatory authority. But it is stuck there. While the prime minister and many chief ministers are said to be favourably inclined, the BJP and the RSS are against it. The government, however, effortlessly raised the equity cap on FDI in defence and insurance sectors to 49 per cent, and removed it in pharmaceutical, railway and construction sectors.

The reforms aimed at improving the delivery of subsidies, weeding out leakages such as theft and appropriation of subsidies by the ineligible. The UPA government came up with the idea of direct benefits scheme and implemented it for LPG subsidy. The Modi government added an Aadhaar card clause to it, but later dropped it. In an effort to make a small saving in the fiscal deficit, the government first appealed to the well-off to voluntarily give up the LPG subsidy, and then scrapped it for those with an annual income of more than Rs 10 lakh. The gains are yet to be computed.

Alongside, the government deregulated the price of diesel. But, in practice, much of the gains of the falling international prices have not been passed on to consumers, as the government kept increasing the excise duty.

No doubt the government has to choose between populist and sensible decisions. “There is a public discussion of whether India should postpone, yet again, the fiscal consolidation path it has embarked on. Clearly, the government will balance various compulsions in taking its decision,” said Reserve Bank governor Raghuram Rajan in a lecture at the National Council of Applied Economic Research in Delhi.

The government's decisions are aimed at building macroeconomic stability. “Macroeconomic stability will be the platform on which we will build the growth that will sustain our country for many years to come, no matter what the world does. Indeed, I am reminded today of the period 1997-2002 when India laboured and reformed with only moderate growth, only to see a decade of high growth after that,” said Rajan, suggesting that the next decade could see high growth.

But, with the reform push still not translating into jobs and the achche din (good days) that Modi promised, many people are wondering whether the reforms are headed in the right direction. “We are a nation of more than a billion, so we can get more than a billion brilliant ideas for anything, but unless administrative and judicial reforms are put in place, it will be one bottomless pit into which we are putting all efforts,” said policy analyst M.R. Venkatesh. A whole lot of complex laws, such as on patents, trademarks and money laundering, have been passed, but judges are not able to appreciate the new-generation laws, he said. “The law on money laundering was enacted in 2002. There is not a single conviction,” he said.

A big reform stuck somewhere in Raisina Hill is the one pertaining to the Central government's expenditure. In the Modi government's euphoria over the changes and reforms the prime minister wanted, an expenditure management committee was set up under former RBI governor Bimal Jalan in September 2014. The aim was to review major areas of Central government expenditure and institutional arrangements like budgeting process and suggest ways to meet development expenditure needs without compromising on fiscal discipline. It was also expected to suggest a strategy to meet a reasonable proportion of expenditure on services through user charges and consider issues concerning public expenditure management. Jalan submitted an interim report in January 2015. It is not in public domain.

Improving the ease of doing business is a primary goal of reforms. Though India has improved from 142 to 130 in the global ranking, foreign institutional investors are still unsure. They expect the government to push through the land acquisition law and labour law reforms, and be more reasonable with tax demands.

A reform that many people are awaiting pertains to transparency in election funding. But, for the government, it does not appear to be a priority.

The expectations of reforms are not just from foreign investors and captains of Indian industry. Small and medium enterprises also want the government to do better. “Despite its commendable contribution to the nation’s economy, the SME sector is still lagging behind. There is a need to remove the bottlenecks—discrepancies in incentive schemes, including taxation, subsidies and credit-based procurement of raw materials,” said Parveen Khandelwal, director of a company that makes cleaning products.

Clearly, it is not about one law or one session of Parliament. As the RBI's annual report states, “Incremental policy change is essential for strengthening the economy and putting it back on a high growth trajectory.”

And, the government claims it is committed to this. “From Make in India to Digital India, Skill India and Jan Dhan Yojana, they are all reforms. Reforms are not just about passing new laws that is just one of many ways,” said Environment Minister Prakash Javadekar. However, if the government wants to win back investors' trust, passage of the GST bill is crucial. It is time for Modi to play an Atal Bihari Vajpayee—reach out to other parties ahead of the budget session.

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