Needed: Reform 3.0

Assessing Prime Minister Narendra Modi’s performance on the eve of the second anniversary of his government throws up three facts and two conclusions. First the facts.

One, on foreign policy, Modi is doing well with the exception of his Pakistan policy which remains a work-in-progress.

Two, on social policy, the jury’s still out. Education is a key area and needs more attention than it is receiving. So do sanitation and healthcare.

Three, on economic policy, schemes on financial inclusion, digitization and domestic manufacturing are purring along nicely though tax reforms remain a standout failure.

That brings us to the two conclusions.

First, the Modi government is strong on ideas but weak on execution. Nothing demonstrates this more pointedly than tax. Modi has promised an end to intrusive tax inspections. He has pledged his government will not resort to retrospective taxation. And yet, both promises ring hollow.

Businesses continue to complain about harassment from mid-level tax authorities. Under Finance Minister Arun Jaitley’s nose, Cairn and Vodafone have received notices to pay up old disputed retro tax amounts which are currently under litigation or arbitration.

This is not just bad economic governance. It is bad faith.

Why would foreign investors repose faith in India’s growth story when the tax department behaves extortionately barely days after Jaitley, under whose jurisdiction the tax authorities operate, promised that retro tax cases would be allowed to wind themselves down through the judicial process?

In his 2016-17 Budget speech, Jaitley offered companies engaged in litigation over retro tax the option to pay the principal amount. The interest and penalty would be waived.

The offer is bad in principle. On the one hand you say retro tax is not a good tax and will never be applied by the Modi government. On the other, you ask companies like Cairn and Vodafone to pay up the principal even while lawyers are making a tidy pile as the cases “wind themselves down through the judicial process”, in Jaitley’s lawyerly words.

Such doublespeak is not worthy of the government – any government. It does not inspire confidence in India’s economic governance.

The second conclusion that presents itself after nearly two years of the NDA government is that execution often contradicts policy. Examples abound. In healthcare, the decision to ban fixed drug combinations (FDCs) seems antithetical to patients’ interests. Antibiotic resistance is a serious problem but banning hundreds of commonly used drugs is not a sensible policy. It has already led to litigation, again benefiting lawyers but few others.

Take another example: Modi’s Make in India initiative is clearly an excellent idea but here too there is a slip between the cup and the lip. As journalist Swaminathan Aiyar wrote in The Times of India recently: “The government is suffering from schizophrenia. Its Make in India campaign aims to convince global and Indian manufacturers that India is a business paradise. But recent measures (on tax, drug controls and cotton seeds) suggest the government is arbitrary, populist and scornful of the sanctity of contracts.”

Such cavalier misgovernance has consequences. Unsurprisingly, Cairn (which received an income-tax notice to pay Rs 20,495 crore) has counter-sued the government for $600 million (Rs 4,000 crore) for dimunition in its valuation.

Modi needs to crack the whip, starting with his finance minister, and restore his own reputation as a reformer. In a piece in Business Standard, Dabashis Basu rightly observed: “The PM surely knows that all serious businessmen want simple and transparent policies. They have to battle capricious policy changes and daily extortions and needless litigation. Only a few crony capitalists have built up massive bad loans and they are untouched. I have heard dozens of stories of proactive and fair action under Modi, as Gujarat CM. It is time the old Narendra Modi returns to launch a new thrust to create what matters most: millions of much needed jobs.”

Without creating those jobs over the next three years, the prime minister will find the 2019 Lok Sabha election a lot harder to win.