India: A “Modi-fied” government Asia Pacific Economic Outlook, July 2014 The single-party majority has set the foundation for a stable central government, raising the hopes of both domestic and international investors, who are frustrated by policy inaction, slow growth, and inflation. Written by Dr. Rumki Majumdar – Published June 20, 2014 ________________________________________________________________ The general election that concluded on May 16, 2014, turned out to be phenomenal. This election recorded the highest-ever voter turnout (551.3 million) and the highest-ever voter participation (66.4 percent), marking it as the largest democratic election in the world’s history.1 It was also the most expensive in the history of independent India. The election outcome was surprising to many investors and civilians, who had expected a coalition government, which has become the norm in India for the last three decades. The Bharatiya Janata Party (BJP) emerged as the single largest party to get a majority in the Lok Sabha (lower house), and the first to get such a mandate since 1984. Narendra Modi, who led the party during the election and is considered to be the biggest reason for the historic won, has been sworn in as India’s prime minister. The single-party majority has set the foundation for a stable central government for the next five years. Political stability has significantly reduced downside risks to the economy. This has also raised hopes for both domestic and international investors, who are frustrated by policy inaction, slow growth, and inflation. Voters’ demand While winning the election with the largest mandate was an uphill task for the BJP this election, challenges that lie ahead for the new government will be equally big and will require adept leadership and economic management. For two consecutive years, the nation has endured growth of less than 5 percent and a loss of consumer and investor confidence. Those who voted for the BJP hoping for improved governance will now demand results. Industrialists from different sectors have voiced their demands, especially around substantial reforms and clarity around policy making. Transparent and business-friendly tax policies and regulations, interest rate rationalization, infrastructure development, transparency and accountability in governance, and, last but not least, effective policy implementation are the core demands from the business fraternity. These parameters will decide the ease of doing business in India, which, according to the World Economic Forum, has a poor ranking relative to other countries.2 On the other hand, consumers are fed up with persistently rising prices, especially of food articles. Unfortunately, inflation taxes the poor more than the rich and has contributed to a greater socioeconomic divide in the last few years. In addition, poor job growth and skill mismatch have resulted in high unemployment and low wage growth. Poor job opportunities in rural India and low agriculture income are resulting in rising migration to urban areas, which is ecologically and economically unsustainable. India suffers from poor infrastructure, which impacts most people’s daily lives. Safety is one of the greatest concerns, and health care remains a pressing issue. During the general elections, the BJP promised a change to Indian voters, who now want to see it. The Modi-led government now has to walk the talk. Policy priorities and their impact But this isn’t going to be easy in the face of current political roadblocks and economic challenges. Ensuring that political stability gets reflected in economic performance will be a difficult process and will require the government to focus on a few key areas of improvement. Modi’s 10-point agenda is a good start on the path of economic reforms. The agenda prioritizes better governance, a strong manufacturing sector, improved investment, and low inflation, among others. Processes and procedures will likely get simplified so that there is “maximum governance with minimum government.” The government has unveiled new policies for sushaasan (good governance), aimed at reviving the decision-making process with a clear vision and empowering its departments to take quick, efficient, and transparent decisions. Good governance will likely bring certainty in policy direction, which will remove impediments to higher growth. Processes and procedures will likely get simplified so that there is “maximum governance with minimum government.” The government aims to revive the manufacturing sector, which has slipped into a recession thanks to poor policies and structural bottlenecks. Most likely, the government will first clear pending projects by putting them on a fast-track mode and reviving investor sentiments. The central government may work closely with state governments to tackle issues such as land acquisition and tariffs in the power structure, which are the biggest impediments to projects. Structural reforms, such as rolling out goods and services tax, and infrastructure improvement for industries may be other steps to boost the investment cycle in the economy. A turnaround in the manufacturing sector will likely help generate economic growth and employment. The reversal of investment in the economy and effective implementation of policies will likely help contain the price rise, which has been persistently high primarily due to supply shortages and structural factors. Price stability will, in turn, boost growth. The previous government had significantly deviated from the fiscal target mandated by the Fiscal Responsibility and Budget Management Act. Populist policies and high subsidies caused the gross fiscal deficit to spiral up from 1.27 trillion Indian rupees (2.5 percent of GDP) in FY 2007–08 to around 5.25 trillion rupees (4.6 percent of GDP) in FY 2013–14.3 The rising deficit has been a cause of worry for investors, which implies that fiscal consolidation will not be an option going forward. The government has proposed divesting public sector undertakings and will likely suggest other prudent measures to check the fiscal balance without compromising on kick-starting investments in infrastructure. Economic scorecard The economy expanded 4.6 percent year over year in Q4 of FY 2013–14, at an annual growth of 4.7 percent in FY 2013–14. This is the second consecutive year during which the economy grew at a pace below 5 percent in the last decade. GDP annual growth in FY 2012–13 was a decade low of 4.5 percent. Growth in the agricultural sector spurred India’s economy this year. However, both manufacturing and mining industries contracted in FY 2013–14, while the construction sector performed poorly due to lackluster infrastructure. Inflation is consistently trending down; wholesale price inflation was 5.2 percent in April 2014, and consumer price inflation (industrial worker) has been hovering at around 7 percent year over year in the last three months. However, consumer prices are still above the target range of the Reserve Bank of India. As a result, despite the fall, the bank decided to keep the policy rates unchanged in the second bimonthly monetary policy meeting since there is room for inflation rates to come down on a sustainable basis.4 However, the statutory liquidity ratio of scheduled commercial banks was cut by 50 basis points, which will likely improve bank lending to investments. In other words, the governor has signaled that growth will likely not suffer on account of lack of liquidity, though he will keep a close watch on inflation. Endnotes 1. “Lok Sabha polls 2014: Country records highest voter turnout since independence,” Economic Times, May, 13, 2014.Back to article 2. Klaus Schwab, The global competitiveness report, 2013–2014 (full data edition), World Economic Forum, 2013.Back to article 3. Ministry of Finance, Department of Economic Affairs, Indian public finance statistics 2012–2013, July 2013, finmin.nic.in/reports/IPFStat201213.pdf; Ministry of Finance, Public debt management: Quarterly report, January–March 2014, finmin.nic.in/reports/PDM4thQ201314.pdf.Back to article 4. Raghuram G. Rajan, Second bimonthly monetary policy statement, 2014–15, Reserve Bank of India, June 3, 2014.Back to article
Posted on: Tue, 24 Jun 2014 19:21:26 +0000
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