Modi government is defensive at home

As Parliament reopened on April 20 for voting on the budget of 2016 and bracing itself for tough legislative battles, the first year record of the all-powerful Modi government throws up a mixed picture of reform initiatives with uncertain outcomes, while its tax and growth policies are still to gain credibility abroad.

For the vast mass of the electorate that solidly backed Narendra Modi, the much-hyped “achhe din”, are not within sight in the foreseeable future. Prime Minister Modi, back from another  tour abroad, is now forced to fight for the “pro-poor” image of his government. The Modi government’s drastic revision of an earlier consensus law on land has triggered unrest among farmers. The Congress is now spearheading a countrywide farmers’ revolt, which has shaped into a major political challenge for the Bharatiya Janata Party. The road ahead for the Modi government may not be a smooth one.

Though the International Monetary Fund (IMF) has projected strong growth for India in the new fiscal year,  there is some scepticism as to how much the present ruling dispensation would be able to deliver on its structural reform agenda, apart from succeeding in enabling ease of doing business. 

Finance Minister Arun Jaitley, who was recently camped in USA, found to his dismay that the perception of an adversarial tax regime was still a matter of concern for foreign investors. His two consecutive budgets and copious assurances about not resorting to retrospective taxation had not gained the desired levels of credibility amongst prospective investors.

Jaitley, however, did not mince words when he referred to some old cases involving tax dues from multinationals being under scrutiny. He declared that as a matter of policy, his government was against any action with retrospective effect and was working on a modern tax system with “ globally competitive rates” for foreign investors who would be seen as “partners and not potential hostages or victims”. Jaitley had coined the expression “tax terrorism” to run down the erstwhile government’s tax law with retrospective provisions. Ironically he has to now respond to an avalanche of criticisms against the highly complicated Income Tax Return policy designed for 2014-15. In his latest visits to France, Germany and Canada, Prime Minister Modi ran down the previous UPA-led government by charging it with having created a “mess” and asserting he would change India’s image from a “scam-scarred” nation into a “skilled” nation.

The Congress, which led the UPA, promptly denounced Modi’s attacks, charging him with taking domestic politics into foreign soils, lacking propriety for a Prime Minister, and said henceforth it would ensure that its spokesman would be present wherever Modi went to respond on the spot to such contentions. On the economic front, the Modi government has little to show, as reflected in the slump in industrial output till February, lack of pick-up in credit growth despite RBI rate cuts, and a sharp drop in exports, resulting in a trade deficit of `137 billion dollars, despite a sizeable reduction in import prices of oil. The sharp fall in oil and commodity prices helped the government to deregulate diesel prices and reduce oil subsidies, along with some drastic cuts in development expenditure and spectrum auctions to hold the fiscal deficit down to the targeted 4.1 percent of GDP.

While the economy is showing signs of a turnaround, according to Arvind Panagariya, NITI Aayog Vice-Chairman, the sentiment that “nothing has changed on the ground is very much there”. Questions had been raised about taxation, at the IMF briefing on Asia and Pacific Outlook on April 17, on the sidelines of Fund-Bank meetings. IMF spokespersons said the projected 7.5 percent growth is based on expected pick-up in investment with a possible quick start of recently approved projects. It further added, overall, there is “room for optimism”. IPA