Modi’s new year of opportunity

More than most world leaders, Indian Prime Minister Narendra Modi must’ve cheered the end of 2015. The year was an annus horribilis for him, marred by policy paralysis, embarrassing electoral defeats and mounting doubts about how transformative his term will turn out to be. He has a chance to regain momentum in 2016, but only if he’s smarter and bolder about pushing his reform agenda.

Last year, voters hammered Modi in elections in Delhi and Bihar, states he’d swept in the 2014 general election. He spent much time and political capital personally leading campaigns in both states — and worse, backed off tough reforms for fear of antagonising this or that group of voters. The approach failed miserably, leaving him well short of a majority in the Upper House of parliament. There, the opposition led by the Congress party stymied his two major legislative initiatives — to relax rules on land acquisition and to create a Goods-and-Services tax (GST) to replace the current maze of central and state taxes.

Meanwhile, India’s economy remains on shaky ground. Gross Domestic Product (GDP) growth, aided by a sharp fall in oil prices, was officially estimated around 7 per cent in 2015, among the fastest globally. But many analysts say a change in statistical methodology last year has rendered growth data suspect. Nominal GDP growth in the latest quarter, measured by the old methodology, grew only 5.2 per cent — a marked slowing. Corporate results were dismal in the last two quarters. The stock market, which initially boomed, ended the year in the red as foreign portfolio investors pulled billions out. Exports declined almost continuously through the year, though cheaper imports kept the trade gap in check.

Two things will likely shift in Modi’s favour this year. India suffered droughts in the last two years, so the law of averages suggests a good harvest in 2016. More important, he’ll likely gain around 18 seats in the Upper House after more favourable state elections in April. While that won’t give him a majority, the Congress and its allies would no longer control enough seats to block the two-thirds majority needed for the constitutional amendment authorising GST. If Modi can win over key regional parties — and most are already in favour — he could clinch the GST law this summer. That would be a major boost, ushering in, for the first time, an all-India market with uniform tax rates.

At the same time, incremental steps to improve the business climate in India are adding up. In the World Bank’s Doing Business report for 2015, India’s rank has improved from 142 to 130. India’s 2015 ranking in the World Economic Forum’s Global Competitiveness report is up from 71 to 55, and in Transparency International’s Corruption Perception Index from 85 to 75. While the country remains in the bottom half of most rankings, this should help boost investment and productivity.

Modi’s efforts to expand infrastructure spending should start to show results in the second half of the year. Already road construction is up 50 per cent. Capital spending in railways is rising, although it’s taking time for orders to translate into production. Coal shortages have fallen sharply, while reforms in the bust electricity sector should further increase the availability of power. Modi’s skilful salesmanship has spurred foreign direct investment: Electronics giant Foxconn plans to invest several billion dollars in new mobile phone factories in India.

Modi can’t afford to waste this opportunity. Faced with continued legislative gridlock in New Delhi, he needs to do much more to persuade willing state governments to pass reformist laws. Already three states have enacted labour reforms that allow flexibility in hiring and firing; Modi must ensure that at least the states ruled by his Bharatiya Janata Party follow suit, offering fiscal rewards as incentive if need be. A similar approach is needed for changes to land laws, which should address acquisition, titling and ways to stimulate long-term leasing for industry as well as corporate farming.

Modi also needs to focus more on administrative reforms that don’t require legislation. He should allow lateral entry into the civil service to bring sorely-needed experts from the private sector into government. Privatisation of dud state-owned companies has long been discussed, but needs to become a reality now. Government departments running ports and railways should be converted into corporations, with shares sold to the public to ensure lively monitoring by and accountability to investors. Given the trade slowdown, the government needs to work at reducing the time and cost of transporting and documenting exports.

Modi must think defensively as well. The main risks to the Indian economy this year will come from the deteriorating global climate, especially for emerging markets. Modi’s Finance Minister Arun Jaitley wants the Reserve Bank of India (RBI) to cut interest rates faster to stimulate investment, while the RBI governor, Raghuram Rajan, is moving cautiously, giving top priority to fighting inflation. Regardless of these differences, Modi needs to have the well-respected Rajan on board to steer India through financial tempests that may lie ahead. Rajan’s term comes to an end this year. Modi must leave no stone unturned to persuade him to stay on. Otherwise, 2016 could well end on an even gloomier note than its predecessor.

— Bloomberg

Swaminathan S. Anklesaria Aiyar is a research fellow at the Cato Institute with a special focus on India and Asia.