Modi faces a challenging fifth year

The NDA government led by Prime Minister Narendra Modi is celebrating its fourth anniversary. There are many achievements worthy of celebration, many of which are prominently highlighted in the government’s own advertisements. Chiefly these are in the area of macroeconomic management, legislative initiatives and financial inclusion. On the former, the macro numbers steadily improved since the near crisis days of 2013, the year of rupee panic, high inflation and when India was counted in the global club of “fragile five”. With the current account deficit crossing four percent of the GDP and a rapidly falling exchange rate combined with high inflation, memories of the 1991 crisis were vivid. In the subsequent four years, we have seen the stabilising of the rupee, moderation of inflation, narrowing of the current account deficit, healthy build-up of the foreign exchange reserves and lower interest rates as compared to 2013.

On the legislative front the main achievements were in the passage of the Goods and Services Act across India, new monetary policy framework which now focuses on inflation targeting, the insolvency code which speeds up bad loan recovery and liquidation of sick companies. On financial inclusion the high point has been widening the scope of direct benefit transfers.

The PM after his unprecedented electoral victory in May 2014, was soon blessed with an unexpected bounty, in the form of a steep fall in oil prices. This led to considerable saving in the current account, in the oil subsidy and in bringing down inflation. The fiscal benefit to the government during the next two and a half years is expected to have been close to eight percent of GDP. This bounty was wisely divided into benefits to consumers, the treasury and to infrastructure projects. This was wise macroeconomic management, resisting temptation to fritter away all the fiscal gains.

On the legislative front the main achievements were in the passage of the Goods and Services Act across India, new monetary policy framework which now focuses on inflation targeting, the insolvency code which speeds up bad loan recovery and liquidation of sick companies. On financial inclusion the high point has been widening the scope of direct benefit transfers. The DBT is now used in more than three hundred government schemes, and has itself been made possible due to the record breaking opening of 315 million new bank accounts in less than two years. Beyond these notable achievements, are several milestones, which surely the government will highlight in the coming weeks. As always, and even once mentioned by the PM himself in a speech in a college in Delhi, all performance appraisals of the government are like a glass half full and half empty. Depending on your vantage point you may choose the full or the empty part, but both are valid. However citizens are entitled to focus on what remains to be done, rather than praise what was done. The reward for past performance is in the hands of the voters of the next election.

Some significant areas of dissatisfactory performance are in banking, capital formation, agriculture and job creation. Of course job creation is largely a consequence of policy. It is certainly not the case that jobs should simply be created by increasing the recruitment in government itself, or in the armed forces and railways. But filling up vacancies of sanctioned posts could go a long way. The banking bad loan problem keeps mounting, although this is also a direct consequence of explicitly recognising non-performing assets, and not succumbing to the “extend and pretend” culture of postponing the day of reckoning. As such between the bankruptcy process in full steam and an upswing in the business cycle the NPA problem might diminish. But deeper structural reforms remain - such as restructuring incentives, giving greater autonomy, lesser interference and possibly lowered government ownership.

Finally what matters at this stage is how to tackle the serious macroeconomic challenges that are coming up in the fifth year of the government. Oil prices have shot up causing inflation, interest rates and the current account deficit to all go up. The fiscal situation is also under stress due to additional obligations such as farm loan waivers and the need to cut excise duties on petrol and diesel.

Agriculture continues to display distress as evident from farmer agitations in different parts of the country. This is a much deeper structural issue but the last four years don’t seem to have made a serious dent. In fact the tight monetary policy and demonetisation may have led to the downward pressure on farm prices, which have contributed to the farmers’ woes. On capital formation too we see a continuously downward trend in the investment to GDP ratio. This is indeed worrying and more so that it persists despite very healthy foreign direct investment and record breaking capital markets.

Finally what matters at this stage is how to tackle the serious macroeconomic challenges that are coming up in the fifth year of the government. Oil prices have shot up causing inflation, interest rates and the current account deficit to all go up. The fiscal situation is also under stress due to additional obligations such as farm loan waivers and the need to cut excise duties on petrol and diesel. Export momentum is better than the previous four years, but issues like delayed GST refunds plague the sector. India’s industrial growth and success of Make in India requires exports to be exuberant. At a time when the world economy is in good shape and our destination markets have good GDP growth, it is inexcusable that exports are not growing at 20 plus percent in dollar terms. In our core areas like textiles, leather and agricultural products we are losing market share globally.

On top of this there is a great surge of imports into the country, which takes away the domestic market share of Indian industry, and harvests the consumption demand in the country. Some of this is because of an overvalued exchange rate, but much of it is because of lack competitiveness arising out of high energy and logistics costs, and the continuing burden of the inspector raj. The farm issue also needs urgent attention, not just in terms of higher MSP, or loan waivers, but in serious structural reforms, unshackling of the farmer, FDI in retail, connecting the supply chain, and generally higher prices and returns for farm products. Clearly the work for the final year is cut out for the government.

(The writer is an economist and Senior Fellow, Takshashila Institution)