National Reform Agenda: Post Modi 1 year Update

Introduction

My January 2014 paper titled “National Reform Agenda for Growth and Welfare” proposed a reform agenda for the five years of the Government that would be formed after the General Election in May 2014.[i]  At that time, a number of pre-election Pols predicted that the BJP-NDA could be the largest party-coalition in the Lok Sabha, there was far from consensus on how far they would be from a majority. Thus the paper can be taken as an objective assessment, given the data and information available till that time, on what needed to be done. 

    A recent paper, titled “National Reform Agenda: Year One of Modi Government,” by the author, Evaluates the actions taken on the issues reaised and suggestions made in the January 2014 paper.[ii] There were three main sections in the Agenda(January 2014)[iii]: The Broad Objectives and aims, Reviving Growth by correcting the mistakes made in the previous four years, with particular reference to Governance, and Economic & Institutional reforms for putting growth on a sustained fast growth path. The paper, uses the same format and headings as in the earlier note, and considers each of the 15-16 sets of issues and suggestions. In each case the action taken by the Modi government is listed and commented on, followed by further suggestions. The first broad suggestion and the conclusions are reproduced here to give a flavor of the paper:

Objective: Closing Welfare Gap

Issue: Welfare Gap It is the gap between our per capita GDP (at PPP) and the World average, which (along with corrupt governance systems) results in our having higher poverty ratios and worse social welfare indicators than those of better off countries. The fundamental objective of any Indian government must be to close the welfare gap of the Indian people with the rest of the World.  This will require a restoration of per capita growth to 6.5% (~ 8% GDP growth) and policies to sustain this growth rate.  If we can sustain such growth for two and a half decades, Indian welfare levels will equal the rest of the world by 2040.

Action Taken: This government seems to understand the critical link between economic growth, employment generation and public welfare. This is reflected in the change in focus from “poverty alleviation” to “poverty elimination” and economic & technological development and employment creation as the principle instrument for achieving it. Another indicator is that it has adopted, as its principle foreign policy objective, the need to close the economic and technological gap with the rest of the World.

        The other issues and suggestions range from reform of laws passed in the last few years, to Governance and corruption issues and Policy and Institutional reforms to put economic growth on a sustained low inflation fast growth path. (for details see policy paper).

Conclusion

 The January 2014 paper suggested that, “It is not necessary to accomplish all the listed reforms within three years, though it may be opportune to take the politically sensitive steps within the first few years.  It is however essential to outline the broad direction of reforms and to take credible steps to implement them.”

  The government has taken action in virtually all the areas suggested by the paper. Thus we can say that it has taken credible steps to implement the suggested reforms. There are undoubtedly a few areas in which action has not been initiated, but this is to be expected from any government. Good progress has been made in a majority of areas, with one exception. The performance on income tax reform issues has been dis-appointing.  Government has, however shown responsiveness by responding quickly to widespread protests on what were seen to be backward steps.

   Inflation has declined sharply from 11% in Oct-Dec, 2013 to 5.3% in Jan-Mar 2015 (CPI2012). Both food (weight 0.39) and Core (weight 0.54) have contributed to this decline, with food inflation down from 14.7% to 6.4% and core inflation from 8.7% to 4.5%. CPI Fuel (weight 0.68) inflation has actually risen from 1.6% to 2.3% because of lags in pass through.

  Economic Growth has accelerated by 0.4% to 0.6% in 2014-5 relative to 2013-14: 0.4% in the case of GDP which approximates what was earlier called GDPMP and by 0.6% in terms of Gross Value Added(GVA) which approximates what was earlier called GDPFC. This is a little lower than what the author had projected, based on the old GDP series.[iv] However, the decline in Inflation is much greater than any analyst (including the author) had forecast. Thus inflation as measured by the Private consumption deflator has declined from 8.5% in 2013-4 to 4.6% in 2014-15 and inflation as per the CPI2012 base has declined from 9.5% to 6.3%. The global factors that have aided the fall in inflation are the same ones that have slowed the recovery of World GDP and World demand for tradable goods and services and thus contributed to the slower recovery of the Globalized part of the Indian Corporate sector.  Thus to the extent that success in inflation control can be attributed to global developments, the same developments also resulted in slower recovery of GDP growth. 

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[i] Virmani, Arvind, “National Reform Agenda for Growth and Welfare,” Policy Paper No WsPP 1/2014. https://sites.google.com/site/drarvindvirmani/policy-papers   

[ii] Arvind Virmani, “National Reform Agenda: Year One of Modi Government,” Policy Paper No. WsPP 5/2015: https://sites.google.com/site/drarvindvirmani/policy-papers

[iii] Virmani(2014) op cit FN 1.

[iv] We had projected an increase of growth rate of GDPFC of 1% +/- 0.25 ie between 0.75% & 1.25%. Thus the actual increase in GVA is a little below this range.

Political Economy of Expectations & Performance Evaluation

      How do observers analyze the performance of the Modi Government, after completing one year in office? That depends on their expectations. An added complication this time is that expectations have changed sharply during the last two years. The evaluation of the Modi Government depends on whether the observer measures performance against his expectations one year ago or his expectations two years ago.  This note however discerns a pattern, that may help readers evaluate the evaluators and thus indirectly do a better job of evaluating the actual performance of the Modi Government.

     If we go back in time to the middle of 2013 (May-June), most observers of the economy and economic policy fell into two categories: Very negative and moderately positive. The first category(I) were extremely apprehensive about the future of the Indian polity and economy.  In political terms this group consisted primarily of anti-BJP, ant-Modi persuasion. The second category(II) were mildly positive, in the hope that any change from the previous dispensation would be in a positive direction, even though the change may be incremental and slow.  This group largely consisted of all those who were positive towards candidate Modi’s economic agenda or economic management style or both.

    By the middle of 2014, each of these groups had subdivided into two (A & B), depending on their political inclinations and attitudes to the NDA government. What is most interesting is that sub-groups IB and IIBs expectation converged after the formation of the NDA government in 2014, so that there were really three views/ sets of expectations in mid-2014. One part of the original negative group’s attitude changed little- they (IA) remained negative about the Modi Government’s performance, perhaps even a little more negative than before, expecting no improvement and giving no quarter.  The second sub-group in this category (IIB) went from negative expectations to Very high expectations of what the Modi Government should accomplish. This change took time to brew below the surface, but then changed suddenly on record.

      The original positive group (II) also separated into two sub-groups in mid -2014. One sub-group (IIA) remained positive but with a greater confidence and faith that the direction of the economy and economic policy would indeed be changed in positive direction.  It therefore began to sketch out a range policy & institutional reform possibilities that had a realistic chance of being adopted and implemented.  The second sub-group(IIB) was euphoric about the Lok Sabha majority attained by the NDA and its expectations, about what the Modi government could or would do, sky rocketed. Members of both this sub-group (IIB) and the other sub-group (IB) developed a must do agenda/reform lists based on long standing views, which each member of the group felt he had a right to expect from this government. Some of these ,verged on the miraculous when viewed in the light of harsh political reality and dynamics of the political economy of vested interests. 

      Not surprisingly both these sub-groups (IB & IIB) have, in mid-2015,  expressed severe disappointment in the performance of the Modi government. Both groups have written off the Modi Government (perhaps in different ways). The difference between the two is, that the dis-appointment of sub-group IB is tinged with  quiet satisfaction that its original expectations in 2013, that “no good can come from the rise of Modi”, may yet come true. In contrast sub-group IIB is genuinely dis-appointed with what they thought were easily achievable goals for a Govt. with a LS majority, unaware of forgetting that, a Rajya Sabha majority is needed to pass all legislation (except the budget and the finance bills). 

    Sub-group IIA which had mildly positive expectations in both 2013 and 2014,  continues to have such expectations of the Modi government. The Government’s performance balance sheet from its perspective has some good positive achievements, a smaller but still significant number of negatives (boo boos or slow progress) but is mildly positive on a net basis.  Members of this “realist” sub groups may differ on specifics of the positive & negative items and of the net benefits and impact, but they remain hopeful of steady progress on economic policy, institutional (governance) reforms and economic growth and welfare improvement.

 

Will Political Uncertainty Gut Economic Reforms?

The withdrawal of the DMK from the UPA coalition government has raised questions in the public mind about the longevity of the government and the effect on the chances of passage of Economic reform legislation.   My tentative answer is possibly, but it could paradoxically also help in expediting some (real) reforms if managed skillfully.

Early Election?

The first question on everyone’s mind is whether the DMK withdrawal heralds an early election.  It does not appear to be in the interest of the DMK and the BSP to have an early election, because their opponents, the AIDMK and the Samajwadi Party (SP) respectively recently swept the State elections and are likely to win the corresponding Lok Sabha seats.  Thus an early National election increases likelihood of the DMK and BSP loosing many of the Lok Sabha seats they currently hold.  Given that the serious corruption charges against former Telecom minister A Raja(of DMK) and others in the DMK are still fresh, it is in their interest to give time for them to fade from public memory. 

The puzzle is, however, why the SP has not tried to pull down the UPA Govt. and why the TMC has become hesitant?  A few possible explanations come to mind.  One, that they need more time to recoup their State election costs and generate enough funds to fight the National election. Two, that this period of uncertainty could be used to extract concessions on legal cases and prosecutions. Three, that they need fiscal indulgence from the center and fear the next government may be less forthcoming.  The first two perhaps apply more to the SP and the last to the TMC.  On balance therefore, the DMK withdrawal, does not per se affect either the calculus of these parties or the probability of an early election.

End of Policy Reforms?

What about the effect on economic reform legislation?  The conventional wisdom on economic reforms is that political uncertainty slows down reforms, as opposition parties oppose any action that they can project to potential voters as “ant-people”. This argument, perhaps applies to expenditure (subsidy) policy reform but less to issues where old ideas or ideology play a role. If parties are looking to parley a positive vote on a bill, for favors for their leader, party or State, the government may also have greater opportunities for bargaining to pass reform bills. The current political uncertainty could be used to accelerate genuine economic reform (i.e. reform that restores growth and improves the efficiency of welfare delivery).  The likelihood of Narendra Modi becoming the BJP/NDAs candidate for PM has created uncertainty for its current and potential allies.  For instance Nitesh Kumar’s, JD(U)s public feelers to the Congress regarding ‘Special category status for Bihar,’ and Mulayam Singh’s hints that he could do business with an L. K. Advani led BJP (NDA PM) are indicators of this flux.  If handled skillfully, this could provide the Congress a counter opportunity to accelerate the reforms.

         The Congress led UPA government has repeatedly stated that it has a majority and will remain in power till the due date of the 2014 election.  Despite the optimistic GDP projections in the Economic Survey and in the 2013-14 budget, growth is likely to be around 6% (+/- 0.5%) in terms of GDPFC and between 5% and 6% in terms of GDPMP.  Thus it is critically important for the Congress to end its current term with an uptrend in growth that is visible and credible, and this is only possible if there is another spurt of reforms over the next six months.  The FMs recent statement about formulating and accelerating next generation reforms is an indication.  However, most of the financial sector reform legislation as well as the GST and perhaps even the DTC depends critically on BJP concurrence if not support.

Finding Convergence

        Why should the BJP support this legislation?    First, it gives the BJP an opportunity to redeem itself in the eyes of former and potential Urban BJP voters who were thoroughly disillusioned by the BJP’s unthinking opposition to economic reforms that support investment and growth.  A BJP spokesperson has stated that the country is now in an election mode.  Earlier BJP leaders have asserted that Congress would be thrown out of office during the next election. If the BJP truly believes in these two statements, then it is in its interest to expedite reform legislation in Parliament and vote to pass it.  There are two reasons for this.  Firstly, these reforms are critical to India growing at 8% during the tenure of the next government (whether it is Congress led or BJP led or a third front) and second that Congress is likely to oppose the same reforms if the BJP in power, just as the BJP in opposition has opposed reforms that it introduced when it was in power. 

Bold 

     As both parties need some time to consolidate their support base and organize their aprties (under the leadership of Narendra Modi and Rahul Gandhi respectively), they have enough time to co-operatively pass such legislation before getting into a full-fledged election fighting mode. The Parliamentary affairs minister therefore has two important tasks before him: Get the budget and the finance bill approved and work out with the BJP leadership the changes in reform legislation needed to get their immediate approval.

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A version of this article appeared as Op Ed in the Times of India on March 26, 2013.