Since Mr Modi and his team expect to win the 2019 elections, the groundwork for improved performance of India’s economy in their second term should be done now.
Is the economy paying the price for the government’s failure to undertake basic reform over the past three years? Almost certainly, yes, just as it is also paying the price for the previous government’s failure to undertake structural reform. The time to take the difficult decisions was when the going was good — and who can deny that the going was good for India these past many years? But the Manmohan Singh government was beguiled by flattering growth rates into doing little on some basic issues, taking the wrong turn on some others, and getting paralysed into inaction in the wake of sundry scandals.
In turn, the Modi government has simply not been interested in spending political capital to undertake difficult reforms. Both governments can claim specific programmes that have done some good, but systemic change was not attempted until quite recently. The price is being paid now, in the form of dipping growth rates.
The government’s spokesmen — and the prime minister himself — like to talk about having brought about transformative reform. The alternative view, put out by The Economist, describes Narendra Modi as a “tinkerer”. Since no transformation is in evidence, the critical view may be more accurate. It therefore becomes necessary to spell out the key reform that has not been attempted. The mantra of making markets work better when it comes to the factors of production (capital, land and labour) is all too familiar to bear repetition; but the continuing pain caused by government-owned banks does serve as a reminder.
Equally important reform measures lie outside the sphere of hard-core economics — like judicial reform. Delays in courts make it difficult to enforce contracts — and this is a factor in the World Bank’s rankings on ease of doing business. Other badly-needed reforms have to do with public health and the quality of school education.
Most of India’s politicians may not be aware that the East Asian success story began with sharp improvements in the quality of human capital — achieved by South Korea, Taiwan, and China itself. India’s continuing failure on this front is all too glaring — and bear in mind that there are no ideological barriers to action here.
The second constraining issue has to do with the old bugbear of project execution — precisely the area where Mr Modi was supposed to make a difference. But the skills programme, started by one government and re-formatted by the next, is still in tatters.
“Make in India” has made no noticeable difference. One doesn’t hear any more about the Delhi-Mumbai Industrial Corridor even as its showpiece — the town of Dholera — seems to have got bogged down in the familiar problem of land acquisition. Both demonetisation and the introduction of the goods and services tax have suffered from botched execution. It is not hard to add to this list.
With the medium-term groundwork not having been done, and programme execution falling short, the government is looking at short-term measures like bumping up spending to make up for slack private investment. This might work if it serves to create demand and boost private sector activity. After all, fiscal policy is supposed to be counter-cyclical; persisting with fiscal contraction during a slowdown is not the smartest stance to adopt.
But an expansionary fiscal stance brings with it the risk of the Reserve Bank of India becoming leery about inflation and therefore adopting less than accommodative on monetary policy; should interest rates go in the wrong direction, they will crowd out private sector activity and the economy will be in no better shape than before.
The fact is that short-term crisis solutions create distortions, and are not a substitute for foundational work. Since Mr Modi and his team expect to win the 2019 elections, the groundwork for improved performance in their second term should be done now. In other words, go beyond whatever short-term measures are in the works, and tackle the underlying issues that hold India back.
By Special Arrangement with Business Standard
Mr Ninan don’t be good with words alone … “””””Most of India’s politicians may not be aware that the East Asian success story began with sharp improvements in the quality of human capital — achieved by South Korea, Taiwan, and China itself. India’s continuing failure on this front is all too glaring — and bear in mind that there are no ideological barriers to action here.”””””………. Unending reservations in education and promotions has actually killed Human Capital. What is left has migrated!!!! RTE and no Detension was the final nail in the very education system meant to create this much needed Human Capital … Where else in the world Sir are these policies in vogue and what are their existing standards???!!!
The second constraining issue has to do with the old bugbear of project execution — precisely the area where Mr Modi was supposed to make a difference. But the skills programme, started by one government and re-formatted by the next, is still in tatters….. Please …… non of the Make in India Projects of NaMo have actually taken off they are works in the making ………. The idea .. dpr .. tender & pnc … contract and execution in the existing CVC environment is like a 5 to 6 year cycle !!!! I think Mr Gadkari has done a fantastic job and we all need to complement him… See the Bharuch and Chambal cable stay bridges two years fantastic world class and many more such in the pipeline. But you seem to make missed these altogether!!!!
“Make in India” has made no noticeable difference. One doesn’t hear any more about the Delhi-Mumbai Industrial Corridor even as its showpiece — the town of Dholera — seems to have got bogged down in the familiar problem of land acquisition…………….. The Government has clearly said there is no need to acquire anything new since there is enough space in the existing SEZs how I did you miss that???? All Make in India initiatives are High Tech Defence Sector Projects that have a long gestation period and will come online by 2020/21!!!!!
As for demonetisation and the introduction of the goods and services tax have suffered from botched execution. … The man could not be faulted for trying and there was no better time earlier … Having settled in this was the best he could and did do …. He will now be laughing last while the Congress Centre & Communist Left eats Crow in 2019!!!! Sanguine. 🙂
Single most important reform required is in the Justice delivery system in the courts.
If banks could recover their loans through the courts in a time bound manner they would not have been in the present position.
If a corrupt officer could have been convicted swiftly the corruption would not have been where it is now.
If the recovery of the business man was possible from the courts the business sentiment would have been pleasantly positive.
Today if some one wants to go to courts to seek remedy for his problems either with the government or a private person, it means he is ending his options for his life time.
It’s a rather intriguing argument that on the hand “…the Manmohan Singh government was beguiled by flattering growth rates into doing little on some basic issues, taking the wrong turn on some others, and getting paralysed into inaction in the wake of sundry scandals…” (so: blame all of UPA’s idiocies and scams on misleading growth data?), while on the other “the Modi government has simply not been interested in spending political capital to undertake difficult reforms…The price is being paid now, in the form of dipping growth rates…” (so: whip the NDA using the same misleading growth data). How true the old saying: that economists use statistics the way a drunkard uses a lamp-post: for support, not illumination.
What u have said is mild terms…..actually the crisis is greater than u can imagine all minute and small businessess have closed down or on the verge of closing down…the whole economic picture is bleek….daily jobs are being lost even the proposed to to eliminate crores of jobs…..a pack of idiots are running the country. ……..
All business that were cash based and had no tax liability and thrieved as such are closing down … And they should close down … Get Tax compliant and prosper …. The salaried class is happy because they always were TDS… Not so with the SMEs who were all under/ over envoicing with untraceable Bills and Ledgers…. No businessman appeared to be paying income tax but had two or more cars … Welcome to the real world my friend … Learn to pay up and feel happy as we the salaried class all do!!!!!!
Agree. Only description of UPA scandals as “sundry” is a gross understatement.