Back in 2014 when Narendra Modi took over as prime minister, he promised to usher in "a new era" in India that was rooted on “Sabka Vikas,” or economic growth for all. While Modi’s government initiated with some bold reforms such as a new bankruptcy law, to help tackle an increase in debts that was putting considerable pressure on the Indian banking sector, his first term’s economic record has been scrutinized for leaving out crucial reforms that are duly needed to further develop the Indian economy.
During his first term, PM Modi had some significant achievements on the economic front. His government significantly cut red tape, which resulted in India’s jump to 77th from 134th, when he first took office in 2014, in the World Bank’s 2019 “Doing Business” ranking. Moreover, India also became the world’s fastest growing economy during PM Modi’s first five years in office - a title it has now lost, as the latest figures show India has achieved its slowest growth rate in 17 quarters.
However, PM Modi’s first term was full of strategic miscalculations that resulted in dreadful economic outcomes. For instance, Modi’s decision to ban more than three quarters of the rupee notes in circulation in order to aid in the battle against corruption, misfired and served as a significant hit to economic growth. While such move was initially seen in a positive light, the government’s lack of planning resulted in the replacement rupee notes not being ready in time to substitute the ones that had been removed from circulation. Thus, India’s enormous informal economy was momentarily crippled, which led to countless job losses and a decrease of at least 2 percentage points from the country’s GDP growth rate.
Furthermore, PM Modi’s first term economic achievements were also undermined by the rollout of a new national sales tax (the Goods and Services tax). Such tax is expected to boost economic growth in the long run by streamlining numerous complicated smaller taxes into a single tax, yet the short term complications around its implementation had a severe impact on businesses of all sizes throughout the Indian Mainland.
After securing a powerful electoral mandate during the 2019 Indian general elections, PM Modi has a unique opportunity to really bring about positive changes to lives of millions of Indians with a carefully orchestrated set of economic reforms. The results of the latest election convey the notion that India’s voters are willing to sidebar economic performance of the Modi administration’s first term and give him a second shot. Nevertheless, expectations could not be higher for PM Modi’s second term in office, and the current Indian economic scenario could not be more challenging: unemployment is at a 45-year high (6.1% in 2017-2018 according to a government report leaked by the Business Standard Newspaper); acute agrarian distress has caused famers to commit suicide, the banking system is severely undercapitalized with poor credit disbursements, and the economy continues to deal with the scars of the 2016 demonetization of high-value currencies and the establishment of the Good and Services tax in 2017.
Now that PM Modi has secured his place in Indian history with a second term in office, many scholars expect and hope he may devote more attention to economic affairs. While it is very early to predict what the new Modi government will do to improve India’s economy, this article will shine a light on specific areas where the new government could prioritize economic reforms in order to boost growth.
The first area where reforms could be implemented is India’s state-owned enterprises (SOEs). Very few of India’s “public-sector undertakings” (PSUs), as the government calls them, are paragons of productivity. If PM Modi is serious about improving the situation of India’s economy, he should proceed with divestment and privatization of more than 24 PSUs that have been previously approved by the cabinet. By privatizing such PSUs, PM Modi would have more capital to invest in key areas such as education, national security, and health care. India’s low-efficiency economy is in part a result of the PSUs chronic inefficiency. By conducting a thorough cost-benefit analysis and privatizing underperforming PSUs, the new government could help improve the overall performance of PSUs.
Moreover, labor laws is another area where PM Modi could focus his reforms efforts in order to bolster India’s economic growth. India has very inflexible labor laws, which have served to choke the growth of labor in the manufacturing sector for almost half a century. A greater labor force participation rate would serve to decrease unemployment and increase India’s productivity.
The third and final economic reform PM Modi should prioritize is unwinding protectionist policies that restrict greater flows of foreign direct investment (FDI). India could attract more private capital from the U.S. and other countries as a way to speed up economic growth rates. While PM Modi has done a good job in scaling back India’s excessive regulatory process, a lot more must be done in order to transform India into a “business-friendly” nation. If PM Modi wants to keep his promise of “Sabka Vikas,” he must loosen up protectionist measures that hinder foreign investments. PM Modi must build on his 2014 “Make in India” campaign and further liberalize the investment environment, in which case it becomes possible for foreign companies that have production lines in China and elsewhere to come to India.
Without a doubt, it will not be an easy task to implement the reforms conveyed throughout this article. While the new government will need to deal with a lack of public resources, which will prevent the possibility of providing a fiscal stimulus in order to stimulate the Indian economy, the greatest challenge PM Modi will face is the decline of private investment as a result of Indian companies carrying high debt burdens. Such high debt loads have prevented banks, especially public banks, from lending more capital as they have to deal with colossal nonperforming assets. Overall, Mr. Modi has already shown interest in taking up tough reforms, yet the many strategic miscalculations throughout his first term have made and will continue to make it increasingly difficult to improve India’s economic situation.
Photo Credit: Punit Paranjpe/AFP