One Year of the Modi Government: Slow, Yet Steady
With the biggest parliamentary mandate in three decades, India’s Prime Minister Narendra Modi began his term in office amid great expectations. In the past year, the National Democratic Alliance (NDA) government prioritized economic growth and infrastructure development – a departure from its predecessor’s focus on health, education, and welfare.
Although there have been no major reforms thus far, Prime Minister Modi has initiated several smaller reforms that he hopes will eventually lead to transformative changes. Among the Modi government’s accomplishments are the reduction in foreign investment caps in the insurance and defense sectors; fair and transparent coal and spectrum auctions; the deregulation of diesel; the direct benefit transfer system for cooking gas linked to the existing Aadhar (unique identification) system; and the new nation-wide financial inclusion scheme that is aimed at effective implementation of welfare reforms.
Modi government’s approach to governing:
The policy making process in the Modi administration is concentrated in the Prime Minister’s Office.
However, although there is greater centralization of power at the national level under Prime Minister Modi, he claims to be working in partnership with the states on India’s development agenda. Several measures have been taken to instill a spirit of “co-operative federalism” among states. While the former Planning Commission forced states to adopt the national government’s spending mandates without any room for discretion, the new Niti Aayog (National Institution for Transforming India), which replaced the old commission, allows states to exercise more discretion over spending. The Centre also devolved tax funds to the states based on the 14th Finance Commission's recommendations. Moving forward, states will also be able to keep all funds raised by auctioning natural resources.
Under Prime Minister Modi, state governments will now be assessed and ranked on the ease of doing business. As a result, several states have already started relaxing labor laws and liberalizing economic policies.
Modi-nomics: The Growth Agenda
When Prime Minister Modi took office, India was in the midst of a macro-economic crisis. The economy was burdened by a huge current account deficit, double-digit inflation, poor growth, and a plunging rupee.
Today, India’s economy is on much more solid footing. Aided by a fall in global oil prices, India was able to regain momentum to become Asia’s best performing market in 2014. In 2014, foreign direct investment rose by more than 25 percent and investor sentiment reached an all-time high, despite some legacy tax issues. Today, foreign exchange reserves are once again growing, the fiscal deficit is lower, and inflation is more under control. According to the most recent figures, India is now the fastest growing economy in the world at 7.5 percent, surpassing China.
This economic upturn has led international institutions such as the OECD, the World Bank, the IMF, and several rating agencies to express greater confidence in India’s growth trajectory. The IMF’s Christine Lagarde described India as a “growth bright spot” ahead of other emerging and developing markets. Industry associations have also given the Modi government a thumbs up. Results of a survey of the top 55 CEOs in India show that the government’s efforts to tackle corruption and ease the process of doing business have started showing concrete results. The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has given the Modi government a 7/10 for fostering an improved macro-economic situation.
Minimum Government, Maximum Governance
Parliamentary productivity is at an all-time high. The budget session has proved to be the most productive of the last decade, with 24 bills passed. In order ensure he was not plagued by the same policymaking paralysis that haunted the UPA regime, Prime Minister Modi employed ordinances to fast track several reforms and bypass obstructions in the Upper House, where the NDA does not have a majority. However, some legislations remain stalled, including the contentious land acquisition bill and legislation for the implementation of the Goods and Services Tax (GST) regime.
In addition, flagship programs such as Clean India, Smart Cities, Make in India, and Digital India demonstrate that the Modi government believes fostering public-private partnerships are important for India’s future. There has been a significant departure from the past: while the government stands ready to create a facilitating environment for private investment and implementation, it also expects active participation from private stakeholders themselves. This attitude has already begun to reap dividends. For example, the DIPP has assigned special committees to expedite inbound foreign investment, and companies have begun to announce investments in some of the programs, like Swachh Bharat.
India’s Foreign Policy: Winning Friends and Influencing Neighbors
Prime Minister Modi’s foreign policy is characterized by two clear objectives – to project India as the leading power in the region and to further India’s economic agenda. As a result, the Prime Minister has visited 18 countries, spending a total of 52 days abroad in the last 12 months. Already he has participated in several multilateral summits and hosted numerous world leaders in India. An important element of his foreign policy has also been to tap into the vast Indian diaspora.
PM Modi’s “Act East” policy has helped to advance India’s strategic position in South Asia and position India to engage with China on more equal footing. From the beginning, the Modi government has focused on strengthening relations within the region. In an unprecedented move, the Prime Minister invited heads of state from all South Asian Association for Regional Cooperation (SAARC) nations to his swearing in ceremony. Moreover, his visits to Nepal and Sri Lanka, and upcoming visit to Bangladesh, have been viewed as positive steps towards resetting relations with these countries. India has also been proactive in reaching out to support other countries in the region during crises. Prime Minister Modi also recognizes that investment from China is indispensable to India’s growth, but his direct references to the South China Sea in Japan and South Korea are clear signals to his Chinese counterpart. Most recently, Modi also announced $1 billion in aid to Mongolia in a move to keep tabs on China.
Prime Minister Modi's visits to France, Japan, China, Australia, and the United States have also conveyed his willingness to engage more broadly, and in many cases, move beyond past disagreements or obstacles to further trade and investment. Prime Minister Modi will likely focus on India’s relations with African countries and some Central Asian countries, as well as Iran, in the coming year. It remains to be seen how the Modi government will engage bilaterally with Pakistan.
While business leaders remain optimistic, Prime Minister Modi is starting to receive criticism from some quarters. Disputes over tax issues have caused frustration among investors, leading to recent falls in the stock market. Corporate earnings have dropped. And some of the government’s big flagship schemes still lack clear guidelines for implementation.
According to the Economist, Prime Minister Modi runs the risk of becoming a “one-man band.” Arun Shourie, an economist and former BJP minister, said the government lacked a single unifying vision on economic policy and was “directionless, a great disappointment.” The American media has also come down strongly on the prime minister calling his flagship Make in India drive “so far mostly hype” and deeming job growth sluggish amid “outsized expectations.”
The Modi government has put in place some measures to address concerns around taxation and ease of doing business. It has established a committee to look into “legacy cases”; formed working groups to identify specific ‘quick-win’ schemes that can be delivered swiftly and effectively with minimal political intervention; and created an e-biz online platform that will bring together all central government services for businesses.
As far as legislative reform is concerned, in the short-term, the Land Acquisition Bill and GST Bill remain high on the agenda. However, passing these will only be a start; lowering interest rates and simplifying archaic labor laws will be crucial next steps. The government will also have to invest in adequate infrastructure – from roads to energy distribution – if it wants to further strengthen the manufacturing sector. Lastly, the government will need to take a more proactive approach to disinvestment in order to start spending early and boost growth.
At the one-year mark, Prime Minister Modi has made some steady progress but has plenty of low-hanging fruit left to pluck. For the incremental reforms to add up, implementation will be key.