On macrosta­bil­ity and push­ing struc­tural re­forms, In­dia seems on course. But pri­vate in­vest­ment and job cre­ation are big wor­ries

India Today - - 30 YEARS OF MODI GOVERNMENT | ECONOMY - By Sh­weta Punj

WHEN ARUN JAIT­LEY ad­dressed an in­vestor meet in New York last month on April 25, the re­sponse was luke­warm. “The In­dia story is good but not very ex­cit­ing, the au­thor­i­ties were a bit eva­sive about job cre­ation, NPAs. Noth­ing re­ally struck me as very ex­cit­ing to kick off pri­vate in­vest­ment,” said an econ­o­mist who was there. And that per­haps sums up Jait­ley’s fu­ture chal­lenge.

But back home, from a macro per­spec­tive, the In­dian econ­omy is in a sweet spot. The es­ti­mated 7.4 per cent GDP growth in 2017­18 is likely to be the high­est among large economies. The In­ter­na­tional Mone­tary Fund de­scribes In­dia as the “bright spot” amid a global gloom. With a 3.2 per cent fis­cal deficit and cur­rent ac­count deficit down to one per cent, we seem to have fixed what had been an en­demic is­sue. The ru­pee is sit­ting strong at 64.40 to the US dol­lar. CPI in­fla­tion is at 3 per cent while ex­ports, after a dismal show­ing over three fis­cals, are stag­ing a come­back. In­dia is the poster child for for­eign in­sti­tu­tional in­vestors with stock mar­kets at a record high.

The coun­try’s con­sis­tent ef­forts to push through struc­tural re­forms has bright­ened its fis­cal pic­ture and fu­ture prospects. Be it fis­cal dis­ci­pline in the bud­get or push­ing through the Goods and Ser­vices Tax or the bank­ruptcy code, they are all steps di­rected at re­solv­ing is­sues en­demic to In­dia’s polity and econ­omy.

The GST hopes to cor­rect In­dia’s skewed tax com­pli­ance. Con­sider this: just 37 mil­lion in­di­vid­u­als filed in­come tax re­turns in 2015­16. The gov­ern­ment claims that ef­forts through vol­un­tary dis­clo­sure schemes and a stronger tax ad­min­is­tra­tion are grad­u­ally widen­ing the tax base. The fi­nance min­is­ter says in­come tax col­lec­tions are up with num­ber of as­sessees at 42.8 mil­lion.

Macro sta­bil­ity (see graphic) re­mained elu­sive through much of UPA­II. The first three years then were char­ac­terised by high in­fla­tion, a grave twin deficit prob­lem and pol­icy paral­y­sis. In con­trast, the three years of the Naren­dra Modi­led NDA­II have been about restor­ing macro sta­bil­ity, fun­da­men­tal re­forms and a push to­wards greater trans­parency and ac­count­abil­ity.

Bat­tling to re­gain cred­i­bil­ity in the wake of widely pub­li­cised cor­rup­tion scan­dals and pre­car­i­ous macro­fun­da­men­tals, In­dia has re­claimed its po­si­tion in the world thanks to a very ag­gres­sive prime min­is­ter and a savvy fi­nance min­is­ter who has spent a life­time build­ing re­la­tion­ships within the coun­try and across the globe.

Ar­gu­ing that the cur­rent pace of fis­cal re­form is com­pa­ra­ble with the first big push dur­ing the Narasimha Rao gov­ern­ment in 1991, which slowed down by 1993,

Jait­ley in­sists “there is no fin­ish line for this gov­ern­ment”.

That said, de­mon­eti­sa­tion has been one of the most dis­rup­tive events in In­dia’s eco­nomic his­tory. And al­though the jury’s still out on whether it was an eco­nom­i­cally pru­dent mea­sure, the gov­ern­ment counts it as a ‘suc­cess’ and po­lit­i­cally the party has reaped div­i­dends for it. Jait­ley sees three sig­nif­i­cant pos­i­tives: “A mes­sage has sunk in that it’s no longer safe to deal in cash whether it is prop­erty or any­thing (else); there’s greater move­ment to­wards digi­ti­sa­tion; and our tax col­lec­tions, par­tic­u­larly in­come tax, have gone up,” he says.

Many, how­ever, dis­agree and say that the move caused grave dam­age to the in­for­mal econ­omy, which would re­veal it­self in fis­cal num­bers in com­ing quar­ters. Also, there is an in­ad­e­quacy of data in cap­tur­ing the im­pact on the in­for­mal sec­tor. The Na­tional Sam­ple Sur­vey Of­fice (NSSO), the main source of data, re­leases data with a year’s lag and data is cap­tured at a fre­quency rang­ing from two to five years, mak­ing it very dif­fi­cult to gauge the im­pact of de­mon­eti­sa­tion in the short term.

While In­dia is far from be­ing a black money­free so­ci­ety, the good news is that the real es­tate sec­tor, no­to­ri­ous for push­ing the shadow econ­omy, is show­ing signs of a clean­up. Econ­o­mist Sur­jit Bhalla is con­fi­dent that “de­mon­eti­sa­tion will go down in his­tory as one of the most in­no­va­tive ex­per­i­ments for com­bat­ing black money and mak­ing tax com­pli­ance go up”. Amid sharp dif­fer­ences on its even­tual out­come, there is agree­ment that de­mon­eti­sa­tion has changed the eco­nomic nar­ra­tive of In­dia. Economists con­cur that it can­not be viewed through the prism of a cost ben­e­fit anal­y­sis alone.

Fi­nance min­is­ter Jait­ley’s other big ticket re­form was bring­ing in the long­pend­ing Bank­ruptcy Code, a law that en­ables quicker and time­bound res­o­lu­tion of in­sol­vency cases for both in­di­vid­u­als and com­pa­nies. Ear­lier, mat­ters could drag on for years. “It is sow­ing the seeds of a longer term im­pact,” says Ajit Ranade, chief econ­o­mist at the Aditya Birla Group.

In tax­a­tion, In­dia will fi­nally have a Goods and Ser­vices tax in place by July this year. On sub­si­dies, there has been an ef­fort to curb leak­ages and pil­fer­age. Fi­nance min­istry data shows over Rs one lakh crore was paid out to ben­e­fi­cia­ries of var­i­ous so­cial sec­tor schemes un­der the Di­rect Ben­e­fit Trans­fer scheme dur­ing the past three years. The num­ber of cen­tral schemes was pruned to 300 from 1,500, and cen­trally spon­sored schemes from 66 to 28.

Dis­man­tling the For­eign In­vest­ment Pro­mo­tion Board, con­sti­tuted to eval­u­ate FDI pro­pos­als and em­power

in­di­vid­ual min­istries to clear projects, was an­other move to fos­ter ef­fi­ciency. FDI in­flows have shown a jump to $56 bil­lion in 2015-16, from $16 bil­lion in 2013-2014. How­ever, a con­sid­er­able part of FDI in­flow is in the form of merg­ers and ac­qui­si­tions and not to­wards gen­er­at­ing eco­nomic ac­tiv­ity.

On the gnaw­ing is­sue of stress on the bank­ing sec­tor, the gov­ern­ment has em­pow­ered the RBI to iden­tify spe­cific stressed as­sets in banks and ini­ti­ate in­sol­vency and bank­ruptcy pro­ceed­ings against them. Amend­ments to the Bank­ing Res­o­lu­tion Act will be in­tro­duced in the next ses­sion of Par­lia­ment.


The one big fail­ing over three years of the Modi gov­ern­ment is its in­abil­ity to cre­ate new jobs. This stands out even more starkly con­sid­er­ing the BJP vo­cif­er­ously vil­i­fied the UPA’s ten years as a pe­riod of job­less growth. Also, PM Modi did prom­ise vot­ers 10 mil­lion new jobs ev­ery year.

In 2015-16, only 135,000 jobs were cre­ated across eight key sec­tors—man­u­fac­tur­ing, con­struc­tion, trade, trans­port, ho­tels and restau­rants, IT and BPO, ed­u­ca­tion and health. Ev­i­dently ini­tia­tives like Make in In­dia, Skill In­dia and Start-Up In­dia have failed at any sig­nif­i­cant gen­er­a­tion of em­ploy­ment.

Ra­jiv Ku­mar of the Cen­tre for Pol­icy Re­search sug­gests ‘self em­ploy­ment’ as the way for­ward. “In the con­text of in­ter­net tech­nol­ogy, ar­ti­fi­cial in­tel­li­gence etc, the in­di­vid­ual may well be the cen­tre of change rather than big cor­po­rates,” he says.

And de­spite their ef­fer­ves­cent praise of the gov­ern­ment, big cor­po­rates have shied away from in­vest­ments. Peak­ing at roughly 16 per cent of GDP in 2007-08, cor­po­rate in­vest­ment has since fallen to un­der 10 per cent. A Novem­ber 2016 anal­y­sis by the Na­tional In­sti­tute of Pub­lic Fi­nance & Pol­icy states that for a sus­tained 8 per cent growth, pri­vate in­vest­ment needs to rise well above 25 per cent of GDP.

An­other big crit­i­cism has been the fail­ure to de­velop a more mar­ket-ori­ented ap­proach. The gov­ern­ment has con­sis­tently slipped on its dis­in­vest­ment tar­gets, and now, with the stock mar­ket touch­ing new highs, it would have been a good time to fi­nally de­liver on its min­i­mum gov­ern­ment agenda. The gov­ern­ment’s pol­icy ad­vi­sory body, Niti Aayog, has sug­gested strate­gic dis­in­vest­ment in 12 pub­lic sec­tor units. Lastly, In­dia is poised to take a big leap with many pos­i­tives work­ing in its favour, but it could all be frit­tered away if the gov­ern­ment loses fo­cus from job pol­i­tics to cow pol­i­tics.

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