The National Democratic Alliance (NDA) government inherited an economy slowly recovering from crisis. It has since placed India’s economy on firmer footing while simultaneously implementing several reforms: transforming the Planning Commission, raising foreign direct investment (FDI) limits, conducting natural resource auctions, among others. However, one year in, poor credit and core sector growth, declining exports, a brewing crisis in agriculture, persistence of stalled projects, and tax troubles are cause for concern. India’s gross domestic product growth estimates are encouraging but, like the recovery, fragile.
The opposition as well as some notable Bharatiya Janata Party (BJP) sympathizers have harshly criticized the government. Former Union minister Arun Shourie has called Narendra Modi’s economic policy “directionless”. Some previously bullish foreign investors have changed their tune. Even The Wall Street Journal editorial page has accused the government of acting “like a rapacious banana republic”. The debate is about how Narendra Modi, armed with the biggest mandate in a generation, plans to build the foundations of India’s next phase of economic development. The BJP’s 2014 campaign had one overarching theme: Modi knows what needs to be done to revive the economy. But in power, his government’s “above trend” actions have been fewer than expected. The government urges that its top priority is to achieve a sustained high growth path—but its plans remain murky. The clarity of May 2014 is giving way to the doubts of May 2015.
The government still has time to live up to the moment and its unique mandate, but this requires resolving five central tensions.
The first tension is striking the appropriate balance between concentrating power and devolving it. This is relevant for the dynamic between the Prime Minister’s Office (PMO) and ministries, as well as the relationship between the centre and the states. From the outset, Modi moved quickly to centralize authority. On his second day in office, he opened up a direct line with departmental secretaries. This came at the expense of, rather than in addition to, building networks of trust with ministers. On bureaucratic appointments, the appointments committee of the cabinet now comprises only the prime minister and the home minister. Insiders note this is truly a committee of one. This method of operating is hampering coordination and clarity of purpose, and inadvertently turning the PMO into a bottleneck.
On centre-state relations, the government has been quite progressive. It took away the financial powers of the Planning Commission, transforming it into a think tank, NITI Aayog. It also accepted the 14th Finance Commission’s recommendations, increasing devolution of the divisible pool of central tax receipts from 32% to 42%, enhancing states’ fiscal autonomy.
In addition, the government is allowing states, under Article 254(2) of the Constitution, to institute legal changes on labour even when they contravene central laws. But it is one thing to approve proposed alterations and another to actively encourage them. For all the talk of “competitive federalism”, Modi has been meek about pushing reforms in BJP-ruled states.
The second looming tension is between announcing bold initiatives and ensuring their smooth implementation.
The pursuit of the 14th Finance Commission’s recommendation for greater devolution to states necessitated budget cuts in central schemes. These cuts, though inevitable, were poorly chosen and executed. Several schemes with key roles for the central government were arbitrarily cut or completely delinked. Budgets to important programmes were slashed without a proper transition. This disrupted states’ budgetary cycles, with potentially severe consequences.
On foreign policy, the prime minister’s numerous engagements have been high on media glitz, but summit statements reveal that actual dealmaking has been modest. Japan has pledged serious new investments, but Japanese officials are privately complaining that India has not kept up its end of the bargain, such as establishing a one-stop shop in the PMO for Japanese investment.
Despite the government’s positive messaging in initiatives such as Make in India and Swachh Bharat, the novel policy ideas that could solve the problems that have suffocated manufacturing or perpetuated a lack of cleanliness are difficult to spot.
A third tension is between a domineering political strategy and the requirements of thoughtful coalition management. Faced with a vanquished opposition and redundant coalition allies, the government’s strategy was tinged with superciliousness. This approach made partners suspicious and opponents resolute, running counter to the political manoeuvring needed for reforms.
Gradually, the opposition has come into its own, with the Delhi elections piercing the invincibility of the Modi-Amit Shah duopoly. Even the electorally bereft Congress has put the government on the defensive. Substantive critiques aside, Rahul Gandhi’s Indira-inspired class warfare is of doubtful long-term efficacy in these aspirational times, but it can win some short-run political battles.
Modi’s pre-election alliance building surprised many, but since then such pragmatism has often been missing. The persistence of reforms during coalition governments, and the relatively poor reform records of stronger governments, gives pause. From privatization of public sector enterprises to reforming civil servant pensions, weak coalition governments implemented many difficult reforms even without an immediate crisis. Contrast that with Rajiv Gandhi’s thwarted reform programme in the late 1980s, and one sees that legislative strength is neither necessary nor sufficient. Savvy political management is what matters most.
The government’s recent moves (such as outreach to Mamata Banerjee) come at a good time, considering the future of two of its legislative priorities—goods and services tax (GST) and the land bill—are at stake.
How and when the government should spend its political capital is another source of friction.
A running dispute within the BJP is whether 2014 was a victory for Hindutva or economic reforms. Survey evidence indicates it was an economic mandate, but the Sangh Parivar begs to differ. The BJP, at the centre and in the states, has not shied away from an activist social agenda, instating a ban on beef, curbs on non-governmental organizations and even suspect cuss words in films. Such posturing has rattled many economically conservative but socially liberal supporters, depleting some post-election goodwill.
On the economy, the government is spending much political capital on the land bill, a debatable allocation given mixed evidence on the scale of the problem, the appropriate level of government to push reform (centre vs state), the record on rehabilitation, and the centrality of property rights.
On timing, Modi rejects the assumption that the biggest changes must be tackled in the early years when political capital is at its apex, instead insisting on a two-term vision. But with a fight brewing in Bihar and rising rural distress, nothing can be taken for granted.
The final tension this government must resolve concerns the scale and scope of reforms. Thus far, the government has been mired in a debate about whether it should pursue big-bang reforms or “creative incrementalism”. This debate confuses more than clarifies. Rather, one can disaggregate reforms along three dimensions: political costs, administrative challenges and economic pay-offs. Ideally, the balance between these three should determine the choice and prioritization of reforms.
On low hanging fruit (low to moderate political and administrative challenges), the government has made halting progress: spectrum and coal block auctions have been followed by questions about the transparency of the latter and the economy-wide impact of auction-based allocations; FDI caps in railways, defence, and infrastructure have been raised, but hurdles remain (e.g. 49% cap in defence is meaningless for technology transfer). In the Finance Bill, the government introduced two financial reforms (establishment of a public debt management agency and transfer of government securities regulation from the Reserve Bank of India to the Securities and Exchange Board of India), but withdrew them on the day of voting, even though there was no political opposition (reportedly under RBI pressure—a self-imposed veto by the government).
Technically, most administrative reforms are within the government’s powers, and, as money Bills only require the Lok Sabha’s assent, so are revenue and expenditure reforms. Other reforms require winning over both Houses of Parliament. However, this legalistic perspective can be deceptive. Interest groups—from the bureaucracy and public sector unions to corporate lobbies—can make reforms politically expensive.
Therefore, reforms require tailored strategies. India’s experience suggests that political manoeuvring, inside and outside Parliament, is essential to bolster supportive interest groups, incentivize/outmanoeuvre opponents, communicate the urgency of the reform, and counter discrediting narratives. Manmohan Singh and Sonia Gandhi did not properly engage in such politics for M. Veerappa Moily’s administrative reform vision, P. Chidambaram’s tax and financial sector reform ideas or Nandan Nilekani’s subsidy reform blueprint.
Recent experience notwithstanding, the opposition typically finds it politically expensive to continually stall popular legislation. Barring a few high-profile battles, the government should be able to build Bill-specific coalitions. Non-NDA parties have supported the government on some Bills (e.g. Congress on the insurance Bill). Political risk and administrative challenges are not intractable for a government with sufficient political skill and administrative acumen (as the diesel price hike and eventual decontrol attests). Furthermore, some controversial reforms can be pursued with greater alacrity in the states, of which the BJP now rules eight.
Moving from announcement to implementation though requires an institutional vision. Sloganeering may help, but the government’s focus should be on its core instruments: taxation, expenditure and regulation. For lasting reform, the government must initiate comprehensive reviews and redrafting of laws, regulations and rules. Reforming the bureaucracy, based on a deep understanding of agency-specific structures, incentives and constraints, is essential. But this can only happen if ministers are empowered and held suitably accountable.
If revolutionaries veer from their core principles or mimic the system they seek to replace, the public will question the revolution. The BJP victory was a revolution via the ballot box. The scale of Modi’s mandate signalled that many voters sought transformative change. Judged against this benchmark, the past year has been disappointing. The government deserves credit for its actions, but they do not yet constitute a decisive structural break.
The victimization, internal sabotage, opposition-blaming and “better than United Progressive Alliance-2” narratives peddled by some supporters, and the insistence that Modi is implementing a secret plan to weave a web of incremental, irreversible reforms, are unnecessary excuses for a government that has so much going for it. If the government fails to live up to its mandate, it will only have itself to blame.