Millennium Post

Can Modi administer economic bitter pill?

The ‘Modi speak’ on tough decisions in the next couple of years to nurse ailing economy has sparked off speculations about what measures he might take.

Modi is right now on his honeymoon period with the public, which has voted him with great expectations. The budget is the first signal which way the government will go in restoring the economic health of the country and send out cues how the Modi government proposes to deliver its poll promises.

The new prime minister knows that time has come to take these hard decisions as they are always taken at the start of the term and not at the fag end.  ‘I am well aware my steps may dent the immense love the country has given me. But when my countrymen realise these steps will result in getting financial health back, I will regain that love,’ Modi said to his party workers in Goa over the weekend.

The harsh realities on the economy must have come as a shock to Modi after sitting in the PM’s chair. ‘I have taken over the reins of the country in circumstances when there is nothing left behind by the previous government. They left everything empty. The country’s financial health has hit the bottom,’ Modi said observing about the state of economy he has inherited from his predecessor Manmohan Singh. This is not new because most prime ministers had made similar charges about their predecessors.

Can Modi really administer the bitter pill? The economy is slipping because of various factors. The first big challenge is the rising prices and inflation. Inflation has hit a five-month high due to rising prices of rice and vegetables. Onions have become scarce. While the contingency plans are well in place the Finance Minister Arun Jaitley has attributed this to withholding of stocks on apprehensions of a weak monsoon. He has asked the state governments to come on board and discourage speculative hoarding. He is also targeting exporters. Release of food supply is also attempted. The public sector undertakings may also step in to intensify purchase of essential commodities to ease the situation.

The second is the rising fuel costs in view of the on going Iraq crisis.  While this is a global concern, the price of crude oil per barrel has gone up to $114 recently which will be a huge increase on our oil import bill. Iraq is India’s second-largest oil supplier after Saudi Arabia. High crude prices would mean higher inflation as India imports 75 per cent of its crude oil requirements. It would also upset the government’s plans to cut subsidy and narrow the fiscal subsidy. This is beyond anybody’s control or expectations.

The third is the prediction that there could be a weak monsoon and also deficiency in rainfall. The El Nino effect is another worrying factor. One positive thing is that the Modi government has inherited a large food stock.   These could be used to stabilise the food prices front. Contingency plans for food imports like pulses and edible oil are some prudent actions.Modi is willing to bite the bullet and therefore he should concentrate on policy action to lessen the pain. With a sluggish economy with a 4.7 per cent GDP growth, - 0.7 negative growth in the manufacturing sector, 4.7 per cent in agricultural output, 5.8 per cent in service sector, things are not looking rosy by any standards. Therefore, the bitter pill will have to be administered taking everyone on board including the states. The government recognises that for two consecutive years industry and manufacturing sector have registered negative growth. You cannot expect a seven per cent GDP if these two sectors are not revived.  Therefore incentives should be given to revive these sectors as well as others.  This would include some short term as well as long-term measures.  Industry has lost confidence as most policy decisions have been put on the back burner.  Modi’s task is not just to convince the foreign investors but also to enthuse the domestic investors. While the foreign investors may be looking at the FDI route, the domestic investors would be enthused by incentives in construction and real estate sectors first .The industry expects quick results going by Modi’s election rhetoric. Fuel price reforms would go a long way in restoring the confidence.   Secondly, there is also need to tackle the food subsidy and the PDS.  The Food Security bill is going to cost Rs 1.75 lakh crores. The government should have a relook at this expense. Labour law reform is yet another crucial step as these have been eluding for the past two decades. Land acquisition is gong to be expensive. Modi might also think of railway fare hike. Increase in taxes, fertiliser subsidy reduction, austerity measures and fiscal consolidation.

The GST is yet another problem. Earlier the BJP governments were opposing it and now the Congress ruled states might oppose on political grounds. Modi has this unenviable task of brining all the states on board on the GST. But some of these measures need the approval of the
Parliament. While the NDA has a majority in the Lok Sabha, it is in a minority in Rajya Sabha. Perhaps this was the reason he sought the cooperation of the opposition in his maiden speech in Parliament.

Modi has a window of opportunity now to set right the economy if he takes bold decisions and administer the bitter pill which may hit popularity.  He has the chance to do things now as he has the mandate and good will. How far he will go is to be seen.
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