Professor Jagdish Bhagwati has lauded Prime Minister Narendra Modi’s economic vision: When he was CM of Gujarat, he built prosperity with “efficiency-enhancing policies” that included openness to trade and to foreign direct investment (FDI) inflows. Naturally, he is expected to “scale up these policies to the national level,” he added. Such an assessment is very much in line with the thinking of investment banks like Deutsche Bank that have discerned a East Asian outward–oriented model underlying much of what the PM has been articulating in his ‘Make In India’ campaign.
The big question is whether the PM’s vision is radically different from the economic reforms implemented since the early 1990s that similarly emphasised outward orientation and encouraged FDI. Tariffs of manufacturers were brought down from three–digit levels to 10 per cent over two decades. Such reforms were instrumental in eliminating the external constraint that bedevilled India’s growth during the first four decades of planned development. During those fateful decades, foreign exchange and a precarious balance of payments (BoP) were serious constraints to growth. Not anymore.
Thanks to a strong external profile, BoP crisis management now is less of a preoccupation of India’s policymakers. Trade liberalisation surely helps in fostering faster export growth. The NDA government is hoping to achieve exports of $340 billion in 2014-15. Foreign portfolio investments are surging into the economy. FDI inflows are currently in the range of $30 billion and the need is for attracting $500 billion or $50 billion a year to finance telecom, power, roads and ports over the next 10 years. Such capital inflows will add to our already comfortable foreign exchange reserve stockpile.
PM Modi, however, desires greater trade openness and foreign investments when the global economic environment is not so favourable. Major economies in the world are experiencing recessions or sluggish growth. The world economy is expected to grow by three per cent this year, not very different from 2.6 per cent in 2014, according to the World Bank. This is an extremely uncertain environment to launch an export drive. India’s growth prospects are predicated on implementation on reforms and deregulation that will bring in FDI. Such measures will quicken the overall pace of expansion this year.
Besides adverse global cues, matters are also not helped by the fierce political opposition to trade openness and FDI within the country. The so-called “populist anti-reformers” include those from within the ruling political formation as well. The ruling BJP, whose support base comprises largely of traders, has elements discontented with trade liberalisation and FDI, especially in multi-brand retail. There are also elements in the ruling formation that are averse to rolling out a red carpet for FDI and prefer a much greater swadeshi orientation to economic policy that emphasises self-sufficiency.
The ruling party is thus far from monolithic on “efficiency-enhancing policies” or an East Asian model. Bhagwati rightly insists that the opposition to these policies will have to be overcome politically and intellectually. Unfortunately, time is fast running out for the PM. The window of opportunity is open until the next union budget for 2015-16 to persuade foreign investors to take long-term bets on India. Not a single reform that has been cleared by the BJP government has been passed with legislative support. The bill that raised FDI limits to 49 per cent in insurance is a case in point.
The BJP government passed an ordinance, as it was frustrated by the political opposition to insurance and other reform bills in the Rajya Sabha. The ordinance route to garner FDI, however, does not inspire confidence among prospective investors, who expressed their concerns during the recent Vibrant Gujarat Global Summit 2015.
“Investors will remain nervous unless ordinances are implemented legislatively’’, stated Ajay Banga, CEO of Mastercard, in his summit address. The upshot is an apprehension that reforms will be not
sustainable with the passage of such emergency measures.
PM Modi sought to assure global investors that India would be the “easiest” place to do business. Such an assurance flies in the face of the reality that India is currently at the bottom of the heap, ranking 142nd among 185 countries for doing business. At the Gujarat Summit, the foreign investors’ wish list was that India’s policy makers tackle the crumbling infrastructure, stifling red tape and outline a clear road map for reforms if the economy is to be an attractive destination for big-ticket FDI inflows.
The tax regime is also worrisome. Union finance minister Arun Jaitley rightly noted that retrospective taxation was the “defining moment” against investments in India. Investors, no doubt, feel assured when the finance minister forcefully states that the NDA Government has no intention of levying retrospective taxes. But this threat still remains in law. All eyes will therefore be on the forthcoming budget as to whether it will make suitable amendments in the Finance Bill, to eliminate the threat of retrospective taxation and bring in changes that will make for a non-adversarial tax regime.
At the Gujarat Summit, PM Modi made a serious pitch for greater foreign investments into the economy, stating that the country is a 3-D destination, based on democracy, demographics and demand. There will, no doubt, be efforts in the coming months to improve the business environment by streamlining clearances. But implementing his policy vision is crucial to revive India’s flagging growth story. There is a need to finesse the internal opposition to greater trade openness and FDI. The stakes are indeed high. If it implements reform, India can catch up with China in 2016-17 and become the fastest growing emerging economy in the world. Without reform, it will languish at 5.5 per cent or less, which is not enough to create jobs for the millions who leave the farms for factory employment in towns and cities. The ‘Make in India’ pitch to kick-start manufacturing will remain only a paper tiger, rather than an East Asia model at work.
(N Chandra Mohan is an economics and business commentator based in New Delhi)
N Chandra Mohan
