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Modi has “robbed India of its economic prowess,” writes Rahul Gandhi, leader of the opposition Indian National Congress, in the Financial Times. Prime Minister Narendra Modi does not much care for such comments. He does not much have to: his party maintains firm control of India’s lower house of parliament, the Lok Sabha, as well as a commanding majority in state legislatures. Mr. Modi and his Bharatiya Janata Party (BJP) stormed to power on a promise to galvanise India’s economy with a series of wide-ranging reforms. The two most controversial actions were demonetisation and the institution of a nationwide Goods and Services Tax (GST). This article will analyse the controversy surrounding those reforms, and will also examine a few other key reforms.
Demonetisation, Mr. Modi’s dead-of-night decision to take high denomination notes out of circulation, has unexpectedly become a central political pillar of his economic policy. The government’s objective was to expose illegally—and often, corruptly—acquired “black money”. Such money is kept away from the taxman and is frequently the proceeds of corrupt activity. Black money circumvents the banking system and any institutional oversight, allowing wealthy individuals to avoid their duty to society and enabling criminal activity to flourish.
Although noble in intention, the move was economically unwise. It was heavily criticised, both by domestic political opponents and international commentators. There is flimsy evidence to support the notion that demonetisation obtained its desired outcomes of quashing corruption or of meaningfully increasing the government’s tax intake. Economists widely saw the move as an essentially meaningless distraction.
The policy appears even less defensible in view of the disruption it caused. Millions had to leave work to wait in queues hours or even days long. The small businesses in India’s large “informal economy” rely on cash transactions, and found their businesses facing serious cash flow difficulties. Mr. Modi’s political opponents have mercilessly exploited the policy’s relative failure, rolling out hyperboles like that demonetisation has “ruined the lives of millions”.
Mr. Modi’s other rather controversial reform was the implementation of a nationwide Goods and Services Tax (GST). This time, however, he is on firmer economic footing. Previously, each state in India its own tax regime, making interstate commerce numbingly inefficient. State-specific tax filing was required every time a good crossed state borders, in effect making the country resemble not one, but twenty-nine different markets. In theory, the GST is a boon for the economy.
However, opposition figures claim, not without merit, that implementation has been botched. For one, instead of a single late levied on all products, different items are subject to different tax levels. This complicates filing and adds an unnecessary level of political and bureaucratic wrangling. In addition, small businesses that typically flew under the radar for taxation now have a significant added cost in handling more comprehensive GST taxation—although many would argue that the benefit of bringing this businesses into the formal sector is well worth the cost.
“Make in India,” the prime minister’s slick campaign for to turn India into a high-tech manufacturing powerhouse, has understandably not been the subject of political derision. As an overarching idea, the scheme has been praised on both sides of the aisle. The thrust of Make in India is greater foreign investment into the economy. There is a greater willingness to allow foreign companies to acquire Indian ones and invest more heavily in them, enabling a transfer of technology and an increase in manufacturing capacity. This is a seismic shift from the days in which foreign involvement in the economy used to be seen as undermining local development. The policy framework also includes a commitment to loosening labor laws and making it easier to acquire land for infrastructure development.
The policy manifestations of the campaign have, however, been placed under scrutiny. Some have called “Make in India” a hollow slogan without a coherent set of underlying policies. It is indeed true that Mr. Modi appears more an orator than a policy wonk, and the evidence so far suggests that “Make in India” has not yet been a resounding success. Loosening labor laws and land-use restrictions are inevitably politically fraught tasks, and the BJP’s lack of a majority in the upper house also complicates issues. To be fair, Mr. Modi has laid the groundwork for a more promising business environment, and India has shot up on the World Bank’s “Ease of Doing Business” ranking: from an ignominious 130th place to 100th place.
Another important, yet less media-tailored reform has been a push to reduce bank lending to “priority” sectors like education and agriculture. Public sector banks account for 70% of total assets in the Indian banking industry, an extraordinarily high figure. That the public sector is so prominent in lending is itself undesirable, but there appears to be little political appetite for a wholesale privatisation of the sector. Pivoting away from priority lending is a commendable first step.
Priority sector lending has meant that loans have been allocated inefficiently, with underperforming firms frequently extended credit even as they floundered. This has allowed unproductive, unviable businesses to lumber on, adding little economic value. Worse, the fastest-growing industries have been starved for capital as banks have been saddled with non-performing loans—borrowers who are either behind on their payments or in default—and strained balance sheets. Banks and industry are both critically weakened. Without priority lending, market forces will determine who gets loans, and capital will be better utilised.
One of Mr. Modi’s signature campaign lines was an exhortation to the Indian people to “give me just five years” to transform the country. Over three years have passed. As with every leader, a large number of Mr. Modi’s promises have not come to fruition. And, as with every leader, this is not entirely his fault: a strong partisan divide in parliament and near-continuous campaigns for rolling state legislature elections have weighed on Mr. Modi’s ability to enact radical change. It is undeniable that there has been a concerted effort to reform. Will the prime minister leave a lasting, positive mark on the economy? We will have to wait and see: the Indian people did promise Modi at least two more years.
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