It’s time to press the accelerator
Moody’s rating is recognition of the Modi government’s reforms
The Narendra Modi government has received a lot of flak in recent months for the way it has managed the Indian economy. Economic growth in the June quarter slumped to its lowest level in three years. The twin shocks emanating from demonetisation followed by the overdue shift to the new goods and services tax (GST) came at a time when the economy had already begun to lose momentum, as the benefits of the sharp decline in global oil prices dissipated.
Far less attention has been paid to the hard work put in by the Modi government to introduce reforms that will pay off in the medium term. These include the shift to GST that will unite the Indian economy, a new monetary policy framework focused on keeping inflation under control, subsidy reforms based on the Aadhar system of biometric identification, and the recent recapitalisation of ailing public sector banks. The two recent pieces of good news — the sudden jump in the Ease of Doing Business rankings by the World Bank followed by the decision by international credit rating agency Moody’s to upgrade India’s ratings — should be seen as recognition for the reforms that have been put in place over the past few years. The ratings upgrade is all about the sustainability of public finances. The rise in the ease of doing business rankings is about the business climate for enterprises. However, it is important to see that both the improved credit rating as well as the higher ranking on the ease of doing business are the end result of policy reform, rather than a policy goal in themselves. What this means is that the Narendra Modi government needs to focus on the next round of reforms.
The GST system needs to be streamlined; a new fiscal policy framework that complements the monetary policy framework is needed; the direct tax reforms agenda is still unfinished; land and labour markets need to be liberalised, the banking sector needs deep governance reforms, if not outright privatisation. However, a comprehensive reforms agenda that ties it all together is still missing.