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. 

---

[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.

 

PM Modi’s Foreign Policy

President’s Address To Parliament

      PM Modi’s government has used the vehicle of the President’s address to spell out its foreign policy priorities: These are, (1) SAARC countries, who are also  India’s close neighbors in South Asia, (2) China, a neighbor and a Great power, which does and will continue  to impinge directly on Indian interests, (3) Japan, a long standing economic power house, which can help transform Indian Infrastructure and economy, (4) Russia a long time Strategic and defense technology partner and (5) USA, still the sole super power, which has multifarious possibilities for partnership, but whose promise has still to be fully realized. (6) The European powers (i.e. UK, France, Germany), which still have areas of technological and strategic strength from which India can benefit.  Though SAARC, a pluri-lateral organization is mentioned, the focus is clearly on bilateral relations with this set of countries, which together will have a high priority in the nation’s foreign policy. .

   Perhaps, underlying these is a more hard headed evaluation that real gains to India can come only from give and take between these countries and India rather than from drawn out discussion at (or with) multilateral and regional fora.

Foreign Policy Approach

     The selective list of countries mentioned in the speech, are those that can have the greatest impact on India’s economic development, the welfare of its people and its national security.  India’s  “values” and “soft power” will be balanced with “pragmatism” to achieve “mutually beneficial relations.” These words and inaugural actions, suggest that neither self-imposed ideological shackles nor fearful assumptions about the impact of bilateral relations on third countries, will be a constraint in pursuing India’s interests. However, PM Modi’s previously articulated interest in foreign economic relations (trade & investment) to promote India’s economic and technological development suggests a much greater emphasis on opportunities for mutual economic gain.

    The Modi led government is likely to shun grandiose concepts of global architecture and global governance and focus pragmatically on its economic and National security goals.  It is likely to have a business-like approach: Identifying opportunities and threats and pragmatically going about using the former and minimizing the latter, in co-operation with whichever country is most helpful in each case.   This does not imply an absence of strategic objectives, strategic doctrine or plan, but a shift in emphasis away from philosophical principles and moralism to more specific achievable economic and technological objectives.

SAARC

    A peaceful, economically integrated neighborhood tops the nation’s foreign policy agenda outlined in the President’s address. Historically, this included Myanmar, but the latter is now a member of ASEAN not SAARC. Though Myanmar is also a member of BIMSTEC this includes another ASEAN member Thialnd.
     Similarly, Tibet a part of India’s historical neighbor hood has for obvious regions to be dealt with as part of China policy.  The early invitation to SAARC leaders is suggestive of the fact, that the new government will give much closer attention to the SAARC countries than the previous one. Pakistan as the second largest country in SAARC, will undoubtedly get its due share (no more, no less) of attention within this grouping, both from the perspective of peace and security within the region and with respect to mutually beneficial economic integration and regional growth. 

China: Threat or Opportunity

       China, a great power neighbor obviously requires the sustained and serious foreign policy attention from India.  With the possible exception of China, all other countries in the Modi Govt’s list of foreign policy priorities can be seen as providing opportunities for economic and technological development. So is China, the second country on the list, a threat or an opportunity? China’s actions on its land (Indian) and maritime borders (S China sea and E China sea) have alerted the World to the “potential” threat of a rising and aggressive China.  But the unravelling of China's Export-Investment led growth model after the Global financial meltdown, suggests that the ultra-nationalist actions may be an attempt by the Chinese Communist Party leaders to divert public attention away from slowing economic growth to foreign concerns.  China’s economic weakness and counter-action by its maritime neighbors also provide a cautionary warning to its leadership and may strengthen those elements in China that are “pragmatic” and genuinely believe in “mutually beneficial relations” with India.  If this is true, then China can be converted from a potential threat into a potential opportunity for India.

   There are three basic issues that need to be addressed for India-China relations to become a win-win opportunity for both: (1) A border settlement: Premier Chou en Lai provided a template and a map which is reportedly still available in the Indian archive, but from which the Chinese have resiled.  This long buried proposal along with the India-China border agreement of 2005, can be the basis for a border settlement in which China accepts India’s claims in the East and India broadly accepts China’s 1960s claims in the West. Alternatively, if this is politically too difficult for the two sides to do, the ill defined LAC should be converted into a defined and agreed LOC. (2) The great asymmetry in trade relations arising from the ability of the Party (CCP) to control imports from India without any formal procedure. The massive trade imbalance can only be corrected if the party issues clear instructions to this effect.  India can provide greater access to China’s construction exports and FDI in infrastructure, in return for a shift of China’s Labor intensive export industries to India (some of its parts & components would also be imported from China). (3) China’s nuclear and missile proliferation to India’s neighbors:  By formally agreeing to support India’s entry into UNSC, NSG, MTCR, Wassanar group etc. China can partially assuage the deep distrust that such proliferation has aroused.

Japan

     To the surprise of some, Japan an economic power, is listed ahead of the USA on the list of countries that have priority in PM Modi’s administration. The primary reason for this is the perception that the Japanese government has the financial wherewithal, the ability and (under PM Abe) the will to help India solve its infrastructure problems, meet its energy deficits and efficient use of natural resources and thus accelerate economic growth significantly.  It also has a wide range of technological capabilities that it can use to help upgrade India’s strategic R&D and technological abilities. Given historical cultural links, shared democratic perspective and geographical location, it has the potential of becoming a true and equal “Strategic partner” for India in a decade or so, if it can resolve the political divisions between traditional, older pacifists and younger, modern, nationalists. Among the pending issues are an Indo-Japanese "Civil Nuclear Agreement" on the lines of those with France,UK, Russia etc and Japanese decisions on opening up Defence system sales and technology export.

Russia

   Russia is a valued partner because of its co-operation in developing strategic technology for mutual benefit. Despite the fact that its Defense industry was disrupted by the collapse of the USSR and has never quite recovered enough to meet its cost and time commitments, it remains a major partner. Its large energy and natural resources also have potential, which has not been fully exploited for mutual benefit. 

USA

      After a great start to the India-US strategic relationship under the Bush administration and some successes during the Obama administration(a la Ashton Carter, former Deputy defence secretary), the India-USA relationship has become increasingly transactional after the global financial crisis. We must however, be careful to distinguish between the Security related and Economic aspects of the relationship.  The former has the potential to become a solid and mutually satisfying strategic partnership while the latter is inherently more transactional, given the divergence in economic interests. As the Modi led government has few if any ideological constraints & self-imposed restrictions, there is an opportunity to transform the Indo-US security partnership (strategic technology, defense production, national defense, terrorism and internal security). 

   With the Govt’s desire to harness private investment & entrepreneurship private business relations are bound to flourish, given US firms are (in general) still the most technologically advanced and competitive in the World.. Thus it is advisable to use government to government interactions on economic policies to minimize the politically inspired conflicts between the two countries through honest give and take and transactional deals to satisfy political pressure groups and vested interests.

Conclusion

    Sometimes, a simple slogan can catch the essence of a new approach to National security and international relations. For PM Modi’s government there are in my view two such that people will eventually use to describe the new approach adopted by the Indian Government. These are, 
(1)    Speak Softly but Carry a Bigger Stick, ('speaking softly' may not come easy to some in BJP vis-a-vis Pakistan or China, but must be done e.g. "We want peace with Pakistan but it cannot be achieved through nuclear blackmail, terrorism and mutilation of our soldiers;" Similarly a 'bigger stick' is best signaled through informal channels rather than derogatory/rude language. Finally, those who accused PM Nehru of making empty threats in 1961-62 musn't make the same mistake).
         and 
(2)    Deterrence without Delusions (of converting ideologically driven opponents into peace-nicks through "Pappi-Jhappi" style of International Relations: National Power & the will to use it is the only way to deter or dissuade aggression and in this context, "Actions speak louder than words").