As the NDA government’s first anniversary in office draws closer, there is the usual self-congratulation and hype on its achievements. Two examples stand out. Union finance minister Arun Jaitley claimed “Never in the Indian history, we have had the Government which in the first one year has undertaken such a large number of reforms”! At a time when investor confidence has not yet revived, there is an even more incredible pitch that the flagship Make in India programme launched last September is experiencing a surge in foreign direct investments (FDI), especially in the manufacturing sector.
The government has, no doubt, sought to push economic reforms since it came to power last May. But the pace has been disappointingly slow to investors who expected this government with a commanding majority to push through policy change faster than, say, a minority or coalition. The truth is that reforms in India during the last two decades have been somewhat slow regardless of regime, except in moments of crisis when there is momentary autonomy from political constraints as in the early 1990s. The track-record on reform in the first year of the NDA government is indeed a modest one.
Virtually all its reforms, ranging from raising FDI limits in insurance to the Goods and Services Tax, have faced opposition in the Rajya Sabha. Getting bills passed in Lok Sabha has been easy but piloting them through the upper house — where it does not have the numbers – is taking time. A similar fate clouds the land acquisition bill. As if all of this weren’t bad enough, Sangh Parivar affiliates like the Swadeshi Jagran Manch are not on the same page as the Narendra Modi-led government on reform. The reality is of fierce pressures from within and outside government to go slow on change.
For such reasons, there is no roadmap for more important structural reforms like labour that are so essential for the Make in India programme to kick-start manufacturing in the country. This activity will certainly get a boost if enterprises can flexibly utilise labour in line with the ups and downs of the business cycle. Such flexibility must go hand in hand with taking care of the interests of workers. If labour reform does progress, it will be largely due to investor-friendly governments like Rajasthan and Madhya Pradesh and to a lesser extent Maharashtra that are ahead of other states, if not the Centre, in this regard.
The political gridlock over reform has naturally buried any expectation of so-called big bang policy changes over the near term. Even the chief economic advisor to the NDA candidly stated in the latest Economic Survey that such shock and awe changes are not on in the Indian context. The country only needs to follow what he termed as “a persistent, encompassing and creative incrementalism”! This indeed has been the charge of critics of the NDA who have found its policy initiatives to represent only baby steps forward rather than bold and radical departures from the past.
Thanks to slower reform, foreign and domestic investors remain in a pause mode. India’s economic fundamentals like industrial production remain weak. Its stock market is experiencing turbulence with FIIs pulling out some of their money. The rupee is testing new lows. The frothy markets are clearly getting less and less bullish about the Modi-effect that dazzled them a year ago. GDP growth thus will continue to languish. Except the IMF and the World Bank, nobody seriously believes that the pace of economic expansion was as high as 7.5 per cent in the three-month period ending December 2014.
The grim reality is that the economy is only muddling through at a much lower rate of GDP growth. But the finance minister sees all of this with rosy-tinted glasses to state that a 9 per cent growth will soon be the new normal! Getting back to such a trajectory is not easy although the government has sought to open more sectors for investments and ease conditions for doing business. But investments, both foreign and domestic, have not been forthcoming as businessmen have not seen much improvement on the ground. That includes corruption. Big ticket projects in infrastructure like power, roads and highways are still languishing for want of clearances and supply linkages.
While the NDA government believes that its Make in India programme is making waves, the reality is that foreign investors like the South Korean steel giant POSCO are frustrated after waiting many years to acquire land and secure clearances. There are still no takers for Nokia’s world-class facility to assemble mobile telephones in Tamil Nadu. Meanwhile, there is a steady drum beat of criticism – from tire to electronic manufacturers – that it is much cheaper to import finished goods than raw materials from abroad. In this milieu, domestic manufacturing is at a serious disadvantage.
All of this is not deny that foreign investments have flowed into telecom, automobiles, computer and software industries in the five months (October-February 2015) since the Make in India programme kicked off. But there much less investment in priority sectors like power and metallurgical industries like steel. The really interesting question is whether domestic investments have revived and gone into the manufacturing sector over this period. If so, this would be the best possible advertisement for this major initiative of the one year-old NDA government.
All of this does take the shine from what the NDA considers its crowning achievements of a year in office. The consolation perhaps is that India’s woes pale before those of its competitors in the world economy. The economy may not be growing at a tigerish clip but the external front is healthy. Foreign investors are concerned about sluggish reform and tax problems but the other BRIC economies are doing much worse. Brazil’s economy is experiencing its deepest recession in 25 years. Russia is suffering from a crash in oil prices and sanctions. China is slowing down rapidly. Compared to these troubled emerging economies, India remains a haven of relative stability.
(N Chandra Mohan is an economics and business commentator based in New Delhi)
