An Economic Renaissance?

Are economic green shoots finally beginning to sprout as Prime Minister Narendra Modi completes two years in office? The economy may not yet be in full bloom but there are enough positive signs to suggest the next three Modi years could see India finally live up to its potential.

Even Reserve Bank of India (RBI) governor Raghuram Rajan, who has become progressively more enthusiastic about the Indian economy’s prospects as his three-year term approaches its end (and possible renewal) in September, was drawn to say: “The economy is doing great. But its best is still to come.” Let’s crunch the numbers to see if they bear out Rajan’s new-found optimism.

Foreign direct investment (FDI) is booming. In the calendar year 2015, India attracted $63 billion in FDI — a record. It vaulted for the first time to the top of the league: China drew $56.6 billion and the US $59.6 billion in FDI in the same period. In the calendar year 2014, India had received just $23 billion (while China attracted $75 billion). The rise in 2015, therefore, represents a quantum leap.

Most of the foreign investment is in infrastructure and technology. The boost will deliver to industry and services will feed through to the economy on the ground in subsequent years, given long gestation periods for infrastructure projects. A majority of CEOs, however, agree that project clearances — especially environmental — are quicker under the Modi government than they were when Jayanti Natarajan was the environment minister.

The index of industrial production (IIP) rose, meanwhile, by a mere 0.1 per cent in March 2016. On a year-on-year basis, the IIP has remained stuck at just above 2 per cent. If GDP growth is to meet the IMF estimate of 7.5 per cent in 2016-17, industry must perform better.

Corporate investment plunged in the last two years of the UPA-II government as financial scams unravelled and the GDP growth slowed. An analysis of 350 firms indicates a long-awaited uptrend in the January-March 2016 quarter. Net sales rose 5.6 per cent year-on-year, while net profit increased sharply by 16.9 per cent — the fastest pace in six quarters. If the trend continues into the fiscal 2016-17, corporate investment could receive a fillip, leading to a virtuous economic cycle.

The first quarter of 2016-17 could, meanwhile, see India’s first trade surplus in over seven years, driven by sharply lower gold imports and moderate crude prices. The rupee will likely stabilise as a result, further reducing the cost of imports.

The government’s flagship project for financial inclusion, Jan Dhan Yojana, has given virtually every adult Indian access to banking. The total number of bank accounts under the scheme has crossed 215 million, covering over a billion people (at five members per family). Critics say many of these bank accounts are unused or empty. But they serve a larger purpose as pathways for remitting subsidy benefits to farmers and the poor. Middlemen have been cut out and pilferage reduced.
The government’s crop insurance scheme has been a quiet success, giving distressed farmers relief. With a good monsoon predicted, farm income should rise this year, boosting rural consumer spending which has been flat for two years. The knock-on effect of greater disposable farmer income on the economy could help India reach its GDP growth target. Foodgrain production in 2015-16 is estimated at 252.53 MT, slightly higher than 252.02 MT in 2014-15, despite a second successive bad monsoon.

The Modi government’s focus on sanitation presents a mixed picture. Eight million toilets have been built in the past year alone under Swachh Bharat Abhiyan. But many lie unused due to cultural factors; some don’t have running water. Clearly, sanitation is a problem that needs a more holistic approach, combining education and maintenance protocols before it can make a dent in the cruelly high number (48 per cent) of Indians without access to a toilet.

The government has been quietly reviewing 1,200 colonial-era laws in order to eliminate anachronisms in the judicial system. Judicial reform though remains an intractable problem with over three crore cases still pending across all courts. The Modi government’s uneasy relationship with the higher judiciary has placed the National Judicial Appointments Commission (NJAC) on the back burner. It is an issue that needs to be tackled with greater alacrity.

Modi’s foreign policy has been robust but there are warning signs too. The first is Pakistan, where the carrot-and-stick approach has run its course. Inviting the Joint Investigation Team to the Pathankot airbase was a blunder. A strong response by the Border Security Force has silenced the mortars of the Pakistan Rangers on the Line of Control and the International Border. Counter-terror operations have resulted in aborting militant attacks in recent weeks. Overall, however, India’s Pakistan policy remains hostage to events rather than in control of them.

Modi’s nuanced foreign policy got off to a good start with China and Nepal but matters have since slipped. Nepal has been poorly handled and much goodwill of Modi’s first visit lost. China presents a trickier problem. India and China will be the world’s two largest economies by 2050. The Chinese think long-term and are preparing for a tripolar world with India as one of the three pivots along with itself and the US.

India’s foreign policy thinkers, however, remain obsessed with treating China as a zero-sum game. India’s future lies in using its economic and military partnership with the US to balance China and employing its geostrategic relationship with China to balance the US. This will make the future tripolar equation into an Isosceles triangle rather than a geometric pyramid with India as the smallest of the three angles.

A significant problem in the Modi government is talent. While several ministers are doing a good job, an equal number aren’t. A cabinet reshuffle is overdue. Among the big portfolios, the finance ministry needs visionary new stewardship. So does the home ministry in the face of growing security threats. The rapid electrification of villages by the power minister and the construction of highways at an annual rate of 6,500 km by the transport minister show what good stewardship of ministerial portfolios can achieve. The same drive and competence is needed in the finance, agriculture, health and education portfolios.

The other principal weaknesses in the government relate to tax, labour and big-ticket economic reforms. The income-tax department remains in its pre-2014 mould: suspicious, intransigent and unhelpful. It is an area of concern for the prime minister. The retrospective tax, a legacy of the UPA 2 government, should have been repealed in Finance Minister Arun Jaitley’s first interim Union Budget in July 2014. Even P. Chidambaram, not the most credible voice in these matters, was astonished when it wasn’t, despite the BJP’s majority in the Lok Sabha.

In the next one year, during which he will cross the midpoint of his prime ministership, Modi must hunker down to execute schemes already in place: Make in India, Digital India, Smart Cities and many others. Banking and public sector reforms must also be at the top of the agenda for the next three years.

Vision, execution and speed: these are the benchmarks on which the Modi government will be judged.