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A way to go yet for Modi

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Indian Prime Minister Narendra Modi greets the audience during the launch of a special television channel for farmers in New Delhi, India , 26 May 2015. Modi's government is marking their first year in office. (Photo: AAP)

In Brief

There is no doubt that Modi works hard and drives his government at a similar hectic pace. Midnight oil is burnt regularly in the Prime Minister’s Office, which now resembles an omnipotent and omnipresent command station.


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Under Modi, the economy has improved. Inflation is down and the growth rate is up, though marginally. Foreign reserves are higher, and current account and fiscal deficits have been reined in. A number of investment projects have also been cleared and new ones announced, especially in the public sector.

Some reforms have been undertaken. Modi has overseen transparent auctions of coal mines and telecom spectrum as well as the successful launch of financial inclusion schemes in banking and insurance sectors. He has ended the freeze on defence orders and contracts, and raised the cap for FDI in defence, insurance and railways. There has also been a spate of executive measures for improving the ease of doing business.

Despite these reform measures, there are still dissatisfied and disgruntled voices. Both large business houses and small-medium domestic investors are not investing in new capacities. This is reflected in the fact that the growth rate of commercial bank credit to non-food sectors has plummeted to 3.6 per cent.

FDI has also not increased in any significant manner. Portfolio investors have voted with their feet against the government bringing avoidable volatility and chaos to the equity markets. The real estate sector is reportedly in doldrums. Urban middle classes are not rushing to buy new homes or assorted consumer durables and rural demand seems to have tanked.

Surprisingly, at the end of his first year, Modi finds himself facing disquietude and impatience from the middle, neo-middle and business classes, who a year ago were his star supporters. Negative mutterings even appear within the diaspora, who would rather shower Modi with accolades.

To Modi’s credit, undeterred by current circumstances, he is consciously working towards a plan, which will serve two objectives, First, to ensure electoral success in the upcoming Bihar and Uttar Pradesh elections and second, to get the Indian economy on to a higher, sustainable — and hopefully employment-generating — growth track.

Modi has focused his major reform initiatives, energies and communication skills on schemes designed to benefit the marginalised or those at the bottom of the pyramid. He has rightly surmised that a united opposition, not an easy construct, is counting upon this segment of voters to defeat him by projecting Modi’s government as ‘suit-boot ki sarkar’ — that is, a government for the elite. To pre-empt these charges, Modi has launched a financial inclusion scheme.

Modi’s middle-class support base has taken a rather severe mauling since the Aam Aadmi Party’s surprising victory in Delhi. The investor and business community is also increasingly sceptical, especially in light of the hostile stance taken by the tax authorities and virtually zero change in ground realities so far. Modi should not wait too long to start to reverse the negative perceptions in these segments. The best way to achieve this change is by being seen to be focused on a domestic reform agenda rather than being more concerned with, as he appeared to be in 2014, raising India’s image and stature abroad.

Modi has set his own reform timetable in an effort to avoid being a one-term prime minister. But he will have to move quickly to reignite the private investment cycle. To achieve this, Modi must bring a heavy hand down on the truant direct tax department. He will have to connect with investors individually and collectively, and not simply through chambers of commerce as he did in Gujarat. He must also help kick-start private investment by taking the lead and accelerating public sector investment in as many sectors as possible.

Finally, Modi should marshal a much larger resource base of expertise and skills from outside the pool of covenanted government servants. The Japanese practice of creating tripartite advisory committees for important ministries could be successfully replicated in India to good effect. This kind of a collaborative effort, which will truly represent ‘Team India’, is necessary if Indian firms are to successfully compete in global markets.

Rajiv Kumar is a Senior Fellow at the Centre for Policy Research and the Founding Director, Pahle India Foundation.

This article first appeared here in The Financial Express.

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