Prime Minister Narendra Modi has sailed into his second term with an overwhelming mandate by the Indian people, and the political capital to pass sorely needed economic reforms. Yet, the departure of many liberal economists, including former IMF alumnus and chief economic advisor (CEA) Arvind Subramanian, does not bode well for India’s economic prospects in Modi’s second term. If Modi wants India to reclaim the position of the world’s fifth-largest economy and rebound from this year’s declining economic growth, he must fulfill his promise to the Indian people and enact genuine business-friendly economic reforms, rather than continue the failed policies of patronage development.
In 2015, Modi sought to reform land ownership laws that limit economic development, but he was forced to backdown due to political pressure and public appeals by the Congress party. The political unpopularity of policies considered “low-hanging fruit in opening up the Indian economy,” such as “easing labor and land-acquisition laws, privatizing state-owned companies and hacking back government’s restrictions on agriculture,” have historically hampered meaningful economic reform.
Modi’s first term has been no different, according to Carleton University professor of economics Vivek Dehejia, with the last five years being marked not by reform, but rather increasing government efficiency. Professor Dehejia goes on to say that the “BJP has shown it isn’t willing to risk votes for a theoretical boost in economic expansion.” More bluntly put by Sonali Ranade and Sheilja Sharma of ThePrint, “the BJP, which projected itself as the true champion of economic reforms at election time,” has continued to pursue the same “statist welfarism” that the Congress Party was “pilloried for.” The BJP’s national spokesperson for economic issues, Gopal Krishna Agarwal, has indicated that this aversion to reform will continue, saying that the government is focused on “the better implementation of existing laws,” and that “[a]t present India doesn’t require…structural big-ticket reforms.”
Yet, on August 12, in an exclusive with the Economic Times, Mr. Modi outlined economic reforms he hoped to implement that would attract more foreign and domestic investment, including “liberalising our FDI policy, simplification of labour laws, further enhancing ease of doing business, power sector reforms, asset monetisation and asset recycling in public sector, and reforms in banking, insurance and pension sectors.”
Prominent Indian economists and groups have also called on the government to enact these kinds of structural reforms. Rathin Roy, director at the National Institute of Public Finance and Policy and a member of Prime Minister Modi’s Economic Advisory Council, believes India is headed toward a “structural crisis,” with the economy growing based on what “the top 100 million of the Indian population wants to consume.” Averting this crisis will require changing the engine of demand, accomplishable only through changes to India’s economic strategy. NITI Aayog, the Indian Government’s policy think tank, has set up a task force to prepare a blueprint for structural reforms in the agriculture sector.
According to Ravi Aron, a professor at the Johns Hopkins Carey Business School, the key areas of reform the Modi government should target include “labor reforms; divestment and privatization of state-owned enterprises; and unwinding protectionist policies that restrict foreign direct investment.” Reform to the Industrial Disputes Act, which has stifled labor flexibility and “choked the growth of manufacturing labor in India for more than 40 years,” could actually increase employment. Increasing labor flexibility would resolve employer reluctancy to hire employees who are practically unfireable under the current law.
That said, Aron is not optimistic that Modi will enact truly structural reforms, instead opting for “slightly cosmetic changes” that will not upset entrenched special interests, like labor unions. In terms of divestment and privatization, Modi already has cabinet approval to privatize “some two dozen public sector undertakings (PSUs).” Yet, Modi’s first term was marked by a reluctance to take meaningful steps toward privatization, “except at the margins,” and largely in the form of divestment from minority stakes in companies to manage budget deficits. Opposition by some vocal Hindu nationalists in the RSS to divestment from state-owned enterprises only further decreases the likelihood that the BJP will pursue full scale privatization of state companies. In all five years of Modi’s first term, there has not been a single large privatization of any major public company.
Especially in the financial sector, it is unlikely that Modi will push for privatization. Public sector banks, which are already highly exposed to bad loans, have been regularly used to finance other public sector enterprises and development projects. It is unlikely that Modi would privatize companies that are “core to his welfarist strategies, including banks.” Modi’s first term was marked more by development schemes like toilet construction, cooking gas provisions and other populist measures, than by business-friendly policies.
But, despite entrenched opposition and few political incentives to implement broad structural reforms, Modi is nonetheless well positioned to take the bold action required to liberalize the Indian economy. With the BJP winning an outright majority in 2019, Modi should use his second term political capital to make the difficult decisions necessary to propel the Indian economy toward the $5 trillion GDP target. With the depth of the Prime Minister’s mandate, it’s no longer a question of the political feasibility of enacting reform, but a question of Mr. Modi’s political will to do so.
Photo Credit: India Today