TOUGH TIMES AHEAD

While IBC and GST are game chang­ers, most pol­icy moves of the Modi gov­ern­ment in four years are work in progress

Business Today - - COLUMN - By Pros­en­jit Datta

AT THE END OF FOUR YEARS in of­fice, how does Prime Min­is­ter Naren­dra Modi’s re­port card look like? He took charge when the econ­omy was pretty much in the dol­drums, and took a se­ries of decisive steps over the next four years. He made a great many an­nounce­ments, and some of his min­istries did sig­nif­i­cant work. Two ma­jor eco­nomic laws were passed while one risky ex­per­i­ment was con­ducted with very lit­tle plan­ning. In the first three years, Lady Luck also smiled on him – crude oil prices, which stood at over $100 a bar­rel in 2014 when he took charge, started fall­ing sharply soon af­ter, giv­ing him an un­ex­pected fi­nan­cial bo­nanza. But as he en­ters the final year of the gov­ern­ment’s term, he is prob­a­bly fac­ing as many – if not more – eco­nomic prob­lems as he did when he took charge. In fact, one would say if the BJP re­turns to power, Prime Min­is­ter Modi will have to work even harder than he did in his first term to keep the econ­omy on an even keel.

The prob­lem with most as­sess­ments of Modi’s four years in of­fice is that the po­lit­i­cal is­sues tend to over­shadow the eco­nomic ones. But the eco­nomic steps taken by his gov­ern­ment

In spite of at­tract­ing a lot of FDI, the Modi gov­ern­ment has failed to en­thuse the pri­vate sec­tor into set­ting up green­field pro­jects

were also sig­nif­i­cant and some of them will have a long-term im­pact. I would say that the two most im­por­tant laws the gov­ern­ment had passed in these four years were the In­sol­vency and Bank­ruptcy Code (IBC) and the Goods and Ser­vices Tax (GST). While IBC will have a far-reach­ing im­pact on cor­po­rate bank­ruptcy res­o­lu­tion, GST is still a work in progress, but it is the big­gest tax re­form since, per­haps, In­de­pen­dence. Both IBC and GST have prob­lems, but these will set­tle down. A year or two down the line, the real ben­e­fits will start show­ing.

There are other no­table achieve­ments. The pace of in­fra­struc­ture de­vel­op­ment, es­pe­cially road build­ing, has been sig­nif­i­cant. The power sec­tor, too, has seen pro­duc­tion ramp up and an ef­fort to sort out the prob­lems of the state dis­tri­bu­tion com­pa­nies through Ujwal DIS­COM As­sur­ance Yo­jana, or UDAY. Also, there has been sig­nif­i­cant progress on the so­lar en­ergy front. The ru­n­away in­fla­tion that the gov­ern­ment in­her­ited has been tamed. The fis­cal deficit was firmly brought un­der con­trol but not per­haps to the full ex­tent that the gov­ern­ment would have liked. The last two were helped by cool­ing crude oil prices, but the gov-

ern­ment took full ad­van­tage of it.

The flip­side is that there were as many eco­nomic mis­steps by the gov­ern­ment as suc­cesses. De­mon­eti­sa­tion was a whim­si­cal ex­per­i­ment, and de­spite all the apol­o­gists of the gov­ern­ment, it is hard to see what could jus­tify such a big step. At any rate, it did not achieve any of the goals that the Prime Min­is­ter had men­tioned while an­nounc­ing it.

Then, in the first two years, the gov­ern­ment paid lit­tle at­ten­tion to agri­cul­ture or ru­ral dis­tress even though the coun­try saw two bad mon­soons and they led to un­prece­dented prob­lems. While the gov­ern­ment is try­ing to make amends now, the ef­forts are too lit­tle and too late in the day. Ru­ral wages re­main stag­nant, and farm­ers’ dis­tress has not re­duced.

The gov­ern­ment also an­nounced an am­bi­tious Make in In­dia plan, but the coun­try has not be­come a man­u­fac­tur­ing pow­er­house in any in­dus­try seg­ment. This also shows up in our dis­mal ex­port per­for­mance over the past four years.

Defence man­u­fac­tur­ing is an­other area where the gov­ern­ment made am­bi­tious an­nounce­ments, but they have not picked up due to pro­cure­ment pol­icy is­sues. Fi­nally, al­though the Prime Min­is­ter has per­son­ally charmed many global lead­ers, it has not led to any ma­jor eco­nomic ben­e­fit for the coun­try. Even the US, where Modi’s trips have been ma­jor suc­cesses, has turned against In­dian ex­ports. China has paid lip ser­vice to In­dian wor­ries about dump­ing but has not taken any sub­stan­tive step to ad­dress the bal­ance of trade. Even the EU re­mains a dif­fi­cult mar­ket, and all these show up in our lack­lus­tre ex­port fig­ures.

The trade prob­lems are par­tic­u­larly wor­ry­ing. Ini­tially, ex­ports fell be­cause crude oil prices were drop­ping and a ma­jor chunk of In­dian ex­ports in­cludes re­fined petroleum prod­ucts. Al­though ex­ports started pick­ing up last year, we are still be­low what we used to ex­port in 2014 de­spite robust world trade growth over the past few years. As men­tioned ear­lier, In­dia’s mer­chan­dise ex­ports are not what a fast-grow­ing coun­try needs.

More­over, in spite of at­tract­ing a lot of FDI, the Modi gov­ern­ment has failed to en­thuse the pri­vate sec­tor into set­ting up green­field pro­jects. Much of the in­vest­ment – both for­eign and do­mes­tic – has come for buy­ing ex­ist­ing as­sets. In turn, this has led to dis­mal job cre­ation. Now for­eign in­flows are slow­ing down and in some months, also turn­ing neg­a­tive. In the last two years, cor­po­rate per­for­mance was also fairly lack­lus­tre with a large num­ber of com­pa­nies strug­gling un­der debt. Mean­while, banks are still try­ing to clean up the NPA mess that tripled since 2014.

As the cur­rent Modi gov­ern­ment en­ters its final year, eco­nomic wor­ries are grow­ing once again. In­fla­tion, though still low, is hard­en­ing. Crude oil prices have hit $80. The cur­rent ac­count deficit is ris­ing again. And a tech­nol­ogy rev­o­lu­tion up­turn­ing the en­tire in­dus­try, large-scale job cre­ation is go­ing to be dif­fi­cult.

True, many of the num­bers now seem much bet­ter than they did in 2014. But the favourable tail­winds have re­versed di­rec­tion and the go­ing can be ex­pected to be tough from here on.

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