Modi Government’s Economic Reform: The Cup Is More Than Half Full

As the Narendra Modi government completes two years in the saddle, has it been doing anything other than harassing students and booking them for sedition, saffronising educational and other independent institutions by appointing its fellow travellers in them, trying to obliterate the name of the Nehru-Gandhi dynasty, dismissing legitimately elected state governments, turning a blind eye to atrocities on Dalits and religious minorities, watching silently as its ideological brethren run amok forcing people to chant its favourite patriotic slogans and telling them what to eat and BJP state governments hounding sundry activists?

If you have been following only the mainstream narrative, the answer is no. A big, categorical, unequivocal NO.

According to this narrative, the government has been unmoved by rural distress, the ravages of two successive years of drought, the 13-month slump in exports, the sluggish manufacturing sector which refuses to perk up, the increase in stalled projects. All that it has been focussed on is systematically going about the task of imposing a Hindu majoritarian regime and furthering crony capitalism.

On the other hand, the government has been tom-tomming its economic performance tirelessly—the fact that India is the only country that is showing strong growth, that the International Monetary Fund has called the Indian economy an island of stability, that foreign direct investment (FDI) inflows haven’t dried up but have, in fact, increased, that agricultural growth is in the positive territory despite two successive years of drought. That inventory is as endless as a roll call of its failures.

So what is the truth? As always, it lies somewhere between these two extreme positions.

There is no doubt that the government did mismanage some controversies, dismaying many of its ardent supporters. In the case of both Rohith Vemula’s suicide in Hyderabad and the anti-India sloganeering in Jawaharlal Nehru University, it came across as pandering to the Akhil Bharatiya Vidyarthi Parishad (ABVP), the student wing of the BJP, the thuggish behaviour of which is fast resembling that of the Youth Congress during the Emergency and the early 1980s. Both controversies could have been defused quietly, taking the winds out of the sails of the secular liberal outrage brigade (SLOB). The dismissal of elected state governments on specious grounds has been hard to defend. The government has not been able to do anything about—or decisively distance itself from—the right wing fringe, whose antics have been the SLOB’s delight, giving Modi-baiters innumerable opportunities to show that this is all that his government is about.

Worse, it has disappointed the right-liberals who expected it to undertake big bang reforms—rolling back the state, privatising public sector undertakings, pushing through labour law reforms. Minister of State for Finance Jayant Sinha may often talk about how this government is moving away from entitlement to empowerment, but far from dismantling the rights-based entitlement regimes set up by the United Progressive Alliance (UPA) government, Modi seems focussed on making them work better. So it has not been able to shake off the Congress-plus-cow and a more-efficient-and-less-corrupt-UPA jibes.

And yet there is no denying that in its first two years of existence, this government’s economic policymaking has been quietly transformational. Beyond the glitzy initiatives like Make in India, Digital India, Start Up India, Stand Up India, Mudra, Jan Dhan Yojana (whose reality does not always match up to the hype), a lot of boring stuff has been happening that does not make for great headlines—in fact may not make headlines at all—but has far-reaching implications.

Many of the ease-of-doing-business initiatives are individually insignificant—cutting down a number of forms here, putting processes online there, setting deadlines for approvals, allowing self or third party certification—but together they are making life much easier for businesses, especially small and medium scale entrepreneurs. How many of even Narendra Modi’s biggest fans have heard of amendments to the Arbitration Act? The Arbitration and Conciliation (Amendment) Act, which came into effect earlier this year, sets right many of the problems with the Arbitration and Conciliation Act, 1996, including long-drawn-out proceedings, almost similar to court cases. The new law facilitates speedy disposal of disputes. For infrastructure companies dogged by arbitration cases, this has meant the lifting of a huge burden.

Indeed, the infrastructure story is being rewritten by the trinity of Nitin Gadkari, Suresh Prabhu and Piyush Goyal.

Gadkari is shaking the roads and highways sector out of the stupor it had gone into. The pace of roads construction has picked up from between 10 and 12 km a day to 17 km a day, thanks to a lot of petty, procedural snags being removed. Contracts worth Rs 1.55 lakh crore for 18,000 km have been awarded. There’s been no dearth of initiatives in this sector—concessionaires of build-operate-transfer (BOT) projects stuck for no fault of theirs will get some compensation, an exit policy for highway project developers has been announced to unlock equity for a funds-starved sector, a hybrid annuity model for awarding roads projects has been devised to revive public-private-partnerships, where necessary the traditional EPC (engineering, procurement and construction) model will be used. These are some of the things already done and not mere announcements of intent; and Gadkari has a lot more up his sleeve.

Coastal shipping and waterways are getting a leg up. While the Sagarmala project, which will push port-led development, will take five years to complete, a beginning has already been made with cars being transported from Chennai to Gujarat over sea, a special purpose vehicle—Indian Port Rail Corporation Ltd—being set up last year to push rail connectivity to ports; more than 20 projects have already been taken up. Inland waterways—making rivers work as transport channels—are next on Gadkari’s agenda.

There’s a lot happening in power too, with Goyal often breathlessly reeling off statistics on power generation, rural electrification, distribution of LED bulbs. And then there is UDAY (Ujjwal Discom Assurance Yojana), which attempts to put ailing state electricity boards and distribution companies back on track. It is possible that UDAY may not yield the results it is expected to and be nothing more than a huge loan write-off for discoms, with possibly disastrous consequences for state finances and bonds markets. Indeed, that seems to be the entire focus of the debate on UDAY and there is not much discussion on how this will spur discoms to improve their efficiencies. These concerns notwithstanding, it cannot be denied that UDAY is a bold initiative.

Suresh Prabhu is not just wowing passengers with a focus on clean stations, better food and improved passenger amenities, but is also eschewing populism to put Indian Railways back on financial track as well as looking for innovative financing measures for a host of big-ticket projects.

The process of environmental clearances—a huge hurdle for infrastructure projects and other large investments—has been eased a great deal. The days when environmental clearance would be held up for years together are hopefully a thing of the past. That’s the hope for corruption too, with most clearances now going online. Environmentalists insist that essential safeguards are being given the go-by and instead of dismissing this as anti-development rhetoric, it would be best for the government to ensure that their concerns are addressed. Meanwhile, the Finance Ministry has chipped in with a viability gap funding scheme for PPP projects and set up the National Investment and Infrastructure Fund to pull in big-ticket investments into the infrastructure sector.

The incrementalism complaint that market-oriented critics of the Modi government’s economic policy throw at it doesn’t stand scrutiny in the petroleum sector, which has seen two major reform initiatives. Last September, the government freed up the pricing of natural gas by exploration and production companies, junking an earlier corruption and dispute-prone system. And in March this year, a more transparent and market-friendly oil exploration policy was announced. Together, these two policies will not only encourage more investments in this sector but also strike a blow against the cronyism that it was dogged by. Quite early in its tenure, the government also deregulated diesel prices, something that had been pending for years, though no doubt the government was helped in this by falling global oil prices.

It is also difficult to fault the government on how it is going about financial inclusion in close cooperation with the Reserve Bank of India (RBI), with the zero balance accounts under the Jan Dhan Yojana, pushing the Aadhaar platform which takes care of the problem of identity proof for the migrant population, and the small finance banks and payment banks. The latest is the Unified Payments Interface system, which will allow transfer of money through mobile phones, which could eliminate the problem of lack of banking infrastructure in rural areas and the less-than-successful banking correspondent model, which was being attempted earlier.

When the government took over, there was understandable concern over its equation with the RBI, given statements made by some party leaders and supporters as well as initial friction over RBI governor Raghuram Rajan’s inflation-targeting stance that kept him from lowering interest rates. But over the past two years, the government and the central bank have been cooperating closely and the best example of this is the decline in inflation (partly due to lower oil prices, but equally because of several actions of the government) and the interest rate cuts that have followed. The collaboration is also evident in steps to tackle the stress in the banking sector—the RBI is getting a free hand to go after large defaulters and the initiation of banking sector reforms, which are still in its early days.

The government has come late into the agricultural policy space; its first year was focused almost entirely on industry and manufacturing, and this is definitely a failing on its part. But it has tried to make up for lost time by stepping up investments in irrigation, launching a new, improved crop insurance scheme as well as the National

Agriculture Market, an e-trading platform that should give farmers choice in selling their produce. Eight states have come on board.

Agriculture reforms are a bit difficult because this is a subject that is under the jurisdiction of the states, but the central government is trying to do what it can. The compulsory neem-coating of urea does not seem a big initiative, but it will cut down on diversion of urea for industrial purposes and be more effective for farmers who use it. The government has been making a lot of noise about bringing down the subsidy bill, but whatever success it has had till now, appears to be the result of the fall in global oil prices and confined to the petroleum and fertiliser subsidies; a rise in prices could see spending on subsidies rising again. It is attempting to put a lid on subsidies through better targeting and reducing leakage through a gradual shift to cash transfers. Right now, this has been successful only in the case of the cooking gas subsidy; the jury is still out on food and fertiliser subsidies. The direction, however, is clear and this is a good sign.

Not many of these initiatives have had an impact at the ground level yet. Businessmen complain about inspectors and red tape in spite of all that has been done to ease the business environment. Many initiatives will take time to deliver results. Many will depend on how states pick up the ball and run with it. UDAY, for example, will not mean very much if state governments do not let discoms operate on commercial principles. The National Agriculture Market will not help if states do not reform their agricultural marketing laws. Cash transfers or even biometrics-based point of sale machines for distribution of rations will not work if states do not crack down on corruption in the public distribution system.

Yes, the systematic and wholesale demolition of the welfare state has not happened and may not; at best, it may only become more efficient. Yes, minimum government has only meant cutting red tape and taking processes online. The bureaucracy, especially the tax bureaucracy, has still not been reined in. It is quite possible that the huge action on the infrastructure front may peter out for a variety of reasons—this has been known to happen. But there is no denying that this government has packed in a lot more economic action in its first two years than any others in recent memory.

Even if one accepts the argument that this government is intent on pursuing a sinister Hindutva agenda and all the economic reform measures are an eyewash, well, even the devil needs to be given his due.