Modi’s First Year

William J. BurnsOne year ago, the Carnegie Endowment for International Peace published Getting India Back on Track: An Action Agenda for Reform. This collection of memoranda, written by India’s most accomplished analysts and edited by Bibek Debroy and Carnegie’s Ashley J. Tellis and Reece Trevor, laid out for the incoming Indian government a clear blueprint for India’s high-growth future. On the one-year anniversary of Prime Minister Narendra Modi’s election, we asked several of the volume’s contributors to assess India’s reform achievements and near-term challenges.

As U.S. deputy secretary of state, I had the honor of being the first senior Obama administration official to meet with Prime Minister Modi after he assumed office. In our meeting, Prime Minister Modi made it very clear that his eyes were fixed firmly on the future of his country. His determination to realize India’s promise, and to make tangible the slogan of strategic partnership with the United States, was palpable.

In my meeting with Prime Minister Modi earlier this month, I was struck by his sustained determination and optimism, despite the inevitable headwinds to reform. For Prime Minister Modi, progress at home is the most essential prerequisite for shouldering the responsibility of global partnership and leadership—and the most essential prerequisite for strengthening the ties that bind Americans and Indians.

President William J. Burns meeting with Prime Minister Narendra Modi

After reciprocal head-of-state visits and high-level strategic dialogues, it is clearer than ever that American and Indian interests increasingly converge in the Pacific Century unfolding before us. Translating those common interests into practical achievements and a shared future is the task facing both leaders and both societies. I cannot think of a more important long-term strategic investment.

William J. Burns is president of the Carnegie Endowment for International Peace. He previously served as U.S. deputy secretary of state.

A Historic Mandate Waiting to Be Seized

Milan Vaishnav

It has been an eventful Year One, with clear gains on stabilizing the macroeconomy, injecting new energy into India’s foreign presence, and clearing the cobwebs of outdated (or downright counterproductive) policies. But several themes emerge from the one-year assessments compiled here that demonstrate much work is left to be done.

First, the Modi government has been active—perhaps even hyperactive—when it comes to announcing new policy initiatives. From Make in India to Act East, the government has embarked on policy forays across a diverse array of both domestic and international domains. However, sloganeering should not take the place of getting implementation and execution right, and in several instances, the rhetoric emerging from the government has far outpaced the rate of change on the ground.

Second, the government has tended toward incremental adjustments rather than decisive reform, a surprise given its once-in-a-generation political opportunity backed by the first single-party majority in the lower house of parliament (the Lok Sabha) and an electorate anxious for economic transformation. Cautious moves on the economy and the lack of political risk taking suggest that the Modi government is worried about taking on too much too soon. But the unique political window for getting the big things done is rapidly closing with a raft of state elections beginning in October 2015 and continuing through 2017.

Third, a major challenge going forward will be India’s weak state capacity. The government has taken steps to improve the quality of governance, with Modi referring to himself not as prime minister but as India’s “prime servant.” Yet wide-ranging, systematic administrative reform has so far not been a hallmark of this government. Modi’s vision of deploying India’s power beyond its borders, bolstering the country’s economic fortunes, and ensuring that the fruits of economic growth are broadly shared will be unattainable unless he can reform India’s patchy governance.

Milan Vaishnav is an associate in the South Asia Program at the Carnegie Endowment for International Peace.

Agriculture: Much Left to Do

Ashok Gulati

When Prime Minister Narendra Modi entered office in May 2014, the most pressing item on his government’s food and agriculture agenda was to attack food inflation. The government, to its credit, wasted no time announcing new measures to tackle the high price of food, holding fast to its commitment to actively find ways to defuse the simmering economic (and political) issue.

The government was aided by a fair dose of luck in the form of declining global commodity prices, including the cost of food. In relatively short order, food inflation came down substantially. Compared to the near double-digit growth toward the end of the previous administration, this was a signal achievement.

Unfortunately for the Modi government, the very steps that were responsible for taming food prices have had adverse impacts on the lives of India’s farmers, whose fortunes were further impacted by a drought followed by unseasonable rains this spring. With global food prices depressed, agricultural exports were badly hit. Taken together, this has been a perfect storm for farmers over the past year. In the coming fiscal year, it is possible that agriculture’s contribution to overall GDP will remain flat.

How has the Modi government dealt with the increasing signs of rural distress? It has been slow off the mark. Its decisions to raise the compensation for affected farmers by 50 percent while simultaneously lowering the trigger point for compensating farmers who have suffered damage were positive, yet insufficient.

The Modi government should use this experience to invest in a new crop insurance system backed by cutting-edge technology and fully integrated with the prime minister’s financial inclusion and biometric authentication initiatives.

In the year ahead, with signs of rural distress on the rise, the Modi government has a full agricultural agenda.

Another missed opportunity for the Modi government is taking on sizeable and costly food and fertilizer subsidies. The government had set up a high-level committee to develop proposals for reforming the body that oversees food policy (the Food Corporation of India) and increasing the efficiency and effectiveness of the food management system. The panel submitted its report, but the government has yet to take its recommendations on board.

In the year ahead, with signs of rural distress on the rise, the Modi government has a full agricultural agenda, which must include tackling fertilizer subsidies as well as upgrading a broken water management system. A failure to do so will have lasting implications for the sector as well as for this government.

Ashok Gulati is Infosys Chair Professor for Agriculture at the Indian Council for Research on International Economic Relations.

Manufacturing: Work in Progress

Rajiv Kumar

Drawing on his experience as chief minister of Gujarat, Prime Minister Narendra Modi is focused on expanding the manufacturing sector’s share of the economy in order to boost employment for India’s young population. To this end, the government launched its flagship Make in India program on September 25, 2014, and it has identified 25 “thrust sectors” to be given special attention. But it has yet to outline concrete measures for promoting investment in these areas.

Nonetheless, the government’s sharp policy focus on expanding manufacturing capacities is a positive signal. The Department of Industrial Policy and Promotion, the lead agency for the Make in India program’s implementation, has been empowered to coordinate across ministries and between the central government and the states. Yet given India’s legacy of weak, fragmented governance, such coordination is easier said than done.

Overall, the government has taken a number of incremental steps toward realizing Modi’s objective to raise India in the World Bank’s Ease of Doing Business rankings by as many as 50 places by the end of his first term. The department has launched the eBiz online portal, which collects ten regulatory permissions in one place and allows for online clearance. This obviates the need to submit separate forms to different offices. The government has allowed self-certification of certain regulatory provisions; relaxed foreign direct investment caps, with 100 percent now allowed in the great majority of sectors and with lower caps for defense, insurance, and multibrand retail; and given the nod for two states, Rajasthan and Madhya Pradesh, to reform their labor laws in a pro-business manner.

Investor confidence, however, remains low, as the growth of credit offtake from commercial banks has dipped below 4 percent. In part, this is due to continued slack in both domestic and international demand. The biggest culprit for investment weakness is the unpredictable and overtly anti–private sector stance of the Income Tax Department, whose questionable behavior the finance minister has inexplicably allowed to continue.

In sum, while on-the-ground realities may have remained virtually unchanged, there is plenty of work in progress. Investors are willing to wait for some time before making up their minds. For the manufacturing sector, the first year of the Modi government represents a task that is well begun but not yet half done.

Rajiv Kumar, a senior fellow at the Center for Policy Research in New Delhi, is an economist and author of several books on India’s economy and national security.

Generating Employment: Time for the Rubber to Meet the Road

Omkar Goswami

If a week is a long time in politics, then a year is but a flicker when it comes to creating jobs. There is little doubt that the government of India under Prime Minister Narendra Modi has achieved quite a bit in its first year. India has done spectacularly better in foreign relations. The government introduced a reformist budget in February 2015 that, unfortunately, has been somewhat blemished by counterproductive acts aimed at maximizing tax revenues. And the prime minister has announced a slew of measures, from campaigns like Clean India and Make in India to setting up 100 “smart” cities.

If a week is a long time in politics, then a year is but a flicker when it comes to creating jobs.

All this notwithstanding, creating jobs for 10–12 million people each of the next four years is a different kettle of fish. Although economic growth has rebounded in 2014–2015, it is nowhere near enough to absorb the millions of people searching for a secure livelihood.

Meanwhile, in the manufacturing sector, technology is steadily reducing the number of workers needed to produce a unit of output. Thus, though the share of manufacturing certainly needs to grow in India, it is not the sector that can provide all the additional jobs.

To bring about significantly higher levels of employment, India needs to see much more infrastructure and construction activity plus a serious kick-start to the services sector. Unfortunately, despite the government’s encouraging fiscal allocations, investments in infrastructure and construction have not yet taken off, nor have transportation, telecommunications, banking, insurance, hotels and restaurants, real estate, education, health, community, and social services. For these sectors to start firing on all cylinders, India needs continuous public and private investments, a far better investment climate, a rekindling of animal spirits across all entrepreneurial groups, and a clear path to 8 percent or more growth.

These are not easy changes to make, and, as any economist will vouch, they are virtually impossible to achieve in a year. But that does not give license to the Modi government to take its eyes off the ball. The speak great, feel good glide path is coming to an end; soon the rubber must meet the road.

Omkar Goswami is the founder and current chairman for CERG Advisory, an economic research and corporate advisory firm. He was formerly an academic and the editor of Business India.

Education: Limited Progress

Laveesh Bhandari

In the past year, India’s education sector has regularly made headlines, especially since the human resource development minister, Smriti Irani, is a charismatic and important leader in the ruling Bharatiya Janata Party. Yet on the sector’s three overarching reform priorities—pedagogy, resourcing, and decisionmaking—the government, thus far, has largely performed poorly on each measure.

Pedagogical changes are typically slow-moving, so expectations for a government’s first year should be modest. Indeed, the government has only taken some minor steps thus far, such as tinkering with the choice of education specialists in certain institutions. Nevertheless, even these small changes were poorly handled.

The government has been whittling away at the largely leftist clique that controls education in India. Yet it is a fruitless battle in the government’s early days, as the problem lies not in getting rid of entrenched actors but in identifying qualified experts who can replace them. In many cases, the chosen replacements have been controversial. Looking ahead, the government’s performance and political maneuvering must improve.

Thus far, stagnant budgetary allocations have prevented resources from flowing into the education sector. Moreover, no major reallocations or reprioritization has occurred. The government has announced that a number of new higher education institutions will be directly overseen by the central government, yet there have been few ideas about how to better fund older institutions, which still need significant support to improve quality. There are some reports of changing the role of the University Grants Commission, but it remains unclear how and when this will occur.

The most important priority is reforming decisionmaking by increasing information, accelerating delegation and decentralization, and improving monitoring. Yet media reports suggest that the government has been delegating less, and there have been regular public battles between the ministry and higher education technocrats. Furthermore, there has been no progress on decentralizing Sarva Shiksha Abhiyan and Midday Meal, two flagship primary education schemes.

On a positive note, the government is developing a comprehensive rating mechanism for education and skill-development programs. Moreover, the elimination of the Planning Commission and the decentralization of Finance Commission transfers will empower states to a much greater degree than in the past. These two changes are bound to positively impact the education sector.

Laveesh Bhandari is the head and founder of Indicus Analytics, India’s premier economics research firm. He has done extensive work on inequality and socioeconomic performance in India.

Universal Health Coverage: Awaiting a Strategy

A. K. Shiva Kumar

The National Democratic Alliance government began its term in 2014 with a flurry of progressive announcements to improve healthcare, coining the phrase “health assurance for all.” It signaled a move away from reliance on traditional medical insurance and suggested that assuring good health outcomes depends on the provision of universal healthcare, and also on two critical and complementary factors: addressing the social determinants of health and putting in place mechanisms to guarantee quality and redress grievances to ensure accountability.

Over the past year, the Ministry of Health and Family Welfare has announced several new initiatives, including measures to reduce neonatal mortality and achieve universal immunization coverage. It also released India’s first national mental health policy and issued a draft national health policy for comments in December 2014.

This burst of enthusiasm seems to have died down in recent months. In November 2014, the minister of health was suddenly replaced. There is no indication of increasing public spending on healthcare, which remains grossly underfunded. On the contrary, the Union Budget of India for 2015–2016 has cut allocations to the social sectors that are unlikely to be offset by the marginal increase in the central transfer of funds to state governments. Increasing dependence on the private sector and private commercial medical insurance seems inevitable, even though no country has been able to establish universal health coverage by taking such a route and without a strong public sector. There has been little discussion about introducing a much-needed regulatory framework to improve quality, efficiency, and accountability of healthcare delivery. Nothing more is known about “health assurance for all.” Much less is known about the fate of the national health policy.

Does this government have a strategy and the political determination to back universal health coverage?

After one year, expectations remain high. For the first time, the government of India’s Economic Survey 2014–15 questions incentives and rewards that are provided to local bodies for their performance and that are euphemistically described as “promotional and motivational” measures to encourage family planning, particularly sterilization. The government is expected to announce free diagnostic tests for those visiting public health facilities. After being elected president of the World Health Assembly in May 2015, India’s minister of health fully endorsed universal health coverage.

Looking ahead, the key question to ask is: Does this government have a strategy and the political determination to back universal health coverage?

A. K. Shiva Kumar is a policy adviser and teaches economics and public policy.

Land Rights: The Modi Government’s Missed Opportunity

Barun S. Mitra

Conflicts over land are prevalent in India, with both landowners and potential investors facing difficulties. This is primarily because India lacks a functioning land market. Poor land records, high transaction costs, and rigid land use and zoning regulations mean that the demand for land is much greater than the supply. As a result, land and real estate transactions have become synonymous with corruption.

After taking office in 2014, Prime Minister Narendra Modi put forward amendments to the land acquisition law claiming to make the bill more business-friendly. The proposed amendments would free the government from meeting onerous consent requirements and conducting a social impact assessment when it acquired land for infrastructure and industrial projects. But Modi has struggled to get the amendments passed by both houses of parliament.

The government argues that it is necessary to acquire land to promote investment, employment, and economic growth. But a functioning land market could put to good use the significant capital assets that are outside the market by reducing conflict associated with land acquisition, thus encouraging investment. This would also lay the foundation for a high-growth economy by increasing employment and reducing the need to acquire land for productive enterprises.

The government has a dismal employment-generation record and has struggled to adequately rehabilitate and resettle those displaced when it has acquired land for big projects. This has made the public skeptical of any attempts to expand the scope of land acquisition.

A key bone of contention has been the high level of consent that land buyers must secure from sellers, who are often farmers. But surveys suggest 40 percent of farmers would like to stop farming, while approximately 60 percent of them do not want their children to take up agriculture as a vocation. This implies that consent is a surmountable hurdle and that large amounts of land currently under agriculture could be available for public infrastructure and other nonagricultural purposes. But the lack of a land market has meant that there has been little progress in this area.

Land problems affect rich and poor, industrialists and agriculturists alike. Yet, this issue is low-hanging fruit that the Modi government has refused to pluck. The new leadership has expressed its support for a decentralized and devolved governance structure; land is an area in which that rhetoric can become action. Transferring jurisdiction over land to the local councils would not only strengthen these institutions but also greatly reduce conflict over land acquisition. 

Barun S. Mitra is a commentator on current affairs on a range of issues. His articles have appeared in Indian and international publications. He is the director of Liberty Institute, an independent think tank based in Delhi.

Energy Reforms: An Uneven Road

Sunjoy Joshi

Tumbling oil prices have proved to be a boon for Prime Minister Narendra Modi’s administration. The government, given new space to reform pricing, moved immediately to rationalize subsidies, pragmatically continuing with the Aadhaar card–based biometric ID scheme for the direct transfer of cooking-gas subsidies, which will eliminate ghost beneficiaries and curtail leakage. Similarly, it adeptly used falling prices to deregulate petrol and diesel, allowing oil-marketing companies to fix prices for the first time in twelve years and, therefore, reverse the systemic underrecovery of costs.

However, private actors, singed by the policy fluctuations of 2003–2004, have remained wary of entering the market, unsure of the government’s future policies should crude prices rise again.

Simultaneously, a halfhearted move on gas pricing did little to comfort investors. The government continued with restrictions on the sale of domestic gas. It then tied a sizeable chunk of the pricing formula to Russian-ruble-denominated local prices at a time when the ruble was in free fall and investors’ faith in the sanctity of Russian markets was at an all-time low.

Even though the pronouncements of the Supreme Court could have forced a rethink and provided the impetus for market-based liberalization, the government continued with end-use reservations for coal blocks, even as it made the process of auctions more open and transparent.

The Modi government’s biggest challenge is battling a legacy of distrust.

By not opening the coal sector to merchant mining, the government may have missed an opportunity. There is still no coal market in India, and major mining enterprises have little interest in acting as subcontractors and service providers, saddling the sector with poor technology and inefficiency. Meanwhile, even as the government goes about maximizing auction revenues, tariffs remain nonnegotiable. Should the projects turn unviable, the government as well as lending institutions may find themselves in a cleft stick again.

The Modi government’s biggest challenge is battling a legacy of distrust. The dominant political discourse in India remains deeply suspicious of market liberalization. Indeed, it was this throwback to the old patronage system that flourished during the “License Raj” era that led to arbitrary systems for allocation of coal blocks and the telecommunications spectrum. In terms of energy policy, there had been a hope that the new government’s focus on economic growth would shift the political discourse to an acknowledgment of the strength of market-based reforms. However, if the government continues to pursue a reform path of least resistance, the process may yet again be mixed, uneven, and viewed with deep skepticism.

Sunjoy Joshi is the director of the Observer Research Foundation, New Delhi.

Rule of Law Reform: A Mixed Record

Devesh Kapur and Milan Vaishnav

Improving the rule of law is a tall order for any Indian government, especially during its first year in office. Perhaps the most one could expect are tangible signs that the new regime is making a down payment for long-term reform.

After its first year in power, Prime Minister Narendra Modi’s government has a decidedly mixed record. It has plucked some low-hanging fruit, but shied away from more systemic changes. With one exception—the appointment of judges—it has shown little appetite for risk taking.

One year ago, we highlighted four areas in dire need of reform: India’s outdated legal undergirding; the nexus between crime and politics; a demoralized police force lacking independence; and a judiciary plagued by “clogged, dilapidated plumbing.”

With regard to repealing outdated laws, the government has moved gradually. While Modi told his Madison Square Garden audience “if I end one law a day, I will be the happiest,” parliament has thus far passed two bills repealing 126 redundant laws. Another bill that would repeal over 700 appropriation acts awaits parliamentary approval.

Despite Modi’s repeated campaign pledges, very little has been done to crack down on criminally linked politicians. Given that 35 percent of members of parliament from the ruling Bharatiya Janata Party face ongoing criminal cases (including 22 percent facing serious cases), this is perhaps not surprising.

Meanwhile, the central government has cut its expenditures on police modernization. States now have the freedom to allocate devolved funds to their specific needs, though whether they will do so remains to be seen.

The budget’s meager allocation for strengthening the country’s overburdened judicial infrastructure demonstrates that the issue is a low priority. But there has been some positive movement. Parliament passed the National Judicial Appointments Commission (NJAC) Bill, which created a new entity to screen and select judges for the Supreme Court of India and the various high courts. Yet the judiciary fears that the executive is encroaching on judicial independence. With the Supreme Court set to review the NJAC’s constitutionality, the two branches are in a stalemate.

Strengthening India’s rule of law is an unglamorous, yet essential, component of getting India’s economy back on track. Without more systemic changes, the transformative potential of Modi’s reform program is at risk.

Devesh Kapur is the director of the Center for the Advanced Study of India at the University of Pennsylvania. Milan Vaishnav is an associate in the South Asia Program at the Carnegie Endowment for International Peace.

Advanced Defense Technology R&D Capabilities: Still Missing

Ravinder Pal Singh

Acquiring the capacity to develop critical advanced defense technologies, including research and development (R&D) capabilities, requires realizing a long-term convergence between internationally competitive technology infrastructure, world-class R&D skills, and entrepreneurial finance. In its first year in power, the National Democratic Alliance government has yet to take steps in these directions.

A decades-old belief in India assumes that simply by licensing the assembly of advanced technology products, capacities would emerge in India that would somehow create advanced technology R&D resources as well. Thus far, the new government has not challenged this belief.

Over the past year, India has signed contracts to acquire a number of advanced defense technology products. However, there is no evidence that the steps required to acquire R&D capacities in India have been taken. For example, the government has yet to define an advanced technology development strategy or a long-term R&D action plan to build processes for the selection, prioritization, and validation of key advanced technologies or for the convergence of multisector R&D markets to achieve economies of scale.

Indian policymakers have not yet come to terms with the fact that competitive, advanced defense technology R&D capabilities can be pursued only if the government has a coherent long-term strategy that includes the following initiatives:

• Building advanced R&D infrastructure that adheres to international standards in selected critical technologies, a process that should enable access to wider commercial and military markets
   
• Developing world-class R&D skills and a user-developer interface for technology innovation to overcome the steep technology learning curve
   
• Establishing access to entrepreneurial finance and incubation capacities for high-cost, high-risk R&D ventures that can meet the challenges posed by the rapid rates of technology obsolescence in competitive global markets
   
• Developing processes for independent verification of the country’s advanced technology standards—a move that the Indian establishment in nearly every sector, from agriculture to space to defense, has fiercely resisted

Unless and until the government addresses these fundamental challenges, a transformation in acquiring defense technology R&D capabilities is unlikely. Despite the availability of public knowledge on ways to overcome these barriers, India has not taken the policy steps necessary to address these limitations.

Ravinder Pal Singh was a senior fellow at the Institute for Defense Studies and Analyses in New Delhi and later led a twelve-country project on Arms Procurement Decision Making at the Stockholm International Peace Research Institute.

Foreign Policy: Modi Makes a Difference

C. Raja Mohan

During his first year in office, Prime Minister Narendra Modi has produced the greatest momentum for India in the least expected domain—foreign policy. Modi has shown a surprising personal enthusiasm for diplomacy and demonstrated the political will to break from the conventional wisdom.

One year ago, I suggested a number of steps Indian policymakers could take to rejuvenate the country’s foreign policy—including the revitalization of the stalled partnership with the United States, better management of ties with China, more purposeful engagement with India’s neighbors, and an effort to build on India’s inherent soft power advantage. There has been interesting movement on all of these fronts in Modi’s first year.

In successive summits with U.S. President Barack Obama, Modi acted quickly to address differences with the United States on food subsidies and nuclear liability, inject new energy into defense cooperation, and indicate flexibility on climate change. Meanwhile, he sought deeper economic ties with Beijing while signaling a tougher posture on the border dispute with China. In contrast to the previous United Progressive Alliance government’s emphasis on nonalignment, Modi has laid out a framework of greater security cooperation with the United States and a strong economic partnership with China.   

To realize his foreign policy vision, Modi will have to move swiftly to make things right on the home front.

Though Modi has gotten trapped on the familiar roller coaster with Pakistan, he has moved decisively to improve relations with smaller neighbors such as Bangladesh, Nepal, and Sri Lanka. The prime minister has rebranded India’s Look East policy as Act East, with a special emphasis on strengthening economic and security ties throughout East Asia. Intensive outreach to the diaspora and the promotion of India’s religious and cultural links with its neighbors have been special features of Modi’s diplomacy.

Modi’s most significant contribution has been the decision to discard the baggage of “strategic autonomy” and initiate the idea of India as a “leading power.” While this new framework needs to be fleshed out, the proposition could help India imagine a different future for itself on the global stage.

Looking ahead, the greatest constraints on Modi’s foreign policy come from the slow pace of economic reform, limited institutional capacity to deliver on foreign agreements, and emerging threats to domestic social harmony. To realize his foreign policy vision, Modi will have to move swiftly to make things right on the home front.

C. Raja Mohan is a nonresident senior associate in the South Asia Program at the Carnegie Endowment for International Peace. He heads the Strategic Studies Program at the Observer Research Foundation in New Delhi and is a foreign affairs columnist for the Indian Express.