Modi needs to get a grip on reality
Heading into its second year, the Modi government perhaps hopes to see some immediate signs of economic revival. The initial signs are good, with the timely onset of monsoon, though its future course remains unpredictable. While inflation appears to have stabilised, thanks to continuing low oil prices, food inflation continues to be a cause for concern, with the latter’s strong linkages to monsoon and supply-side management.
However, the road to economic progress this year will not be smooth for the Modi Government, which has got itself enmeshed into a range of controversies, both social and political. These issues have brought into question pertinent issues of transparency in governance. These controversies could reverberate throughout the Monsoon Session of Parliament in July-August.
The Congress party has taken the lead in charging some leaders from the ruling Bharatiya Janata Party of indulging in corrupt under the table dealings with the former Indian Premier League chairman Lalit Modi, who currently remains a fugitive in London. The opposition party not only called for the resignation of Union External Affairs Minister Sushma Swaraj but more pointedly of Rajasthan Chief Minister Vasundhara Raje, after Lalit Modi’s revelations to the Indian media.
While some BJP ministers at the Centre have tried to defend both, dismissing any charge of corruption, Prime Minister Modi has maintained a stoic silence for weeks, presumably hoping for the noise to die down. This may be a shrewd way to keep him above the din, whatever the damage these controversies will create to the image of credibility his government has tried to uphold.
After all, Modi is more focused on further electoral triumphs in Bihar (October) as well as other states going to polls over the next two years that would enable him to leave a lasting legacy. With such ambitious long-term goals, Modi may prefer to be more discreet. However, such an approach cannot last forever.
Through this cavalier show of indifference, Prime Minister Modi will run the danger of being regarded as the one who reneged on his promise of corruption-free governance. His party (BJP) would soon be treated at par with the previous Congress regime, which Modi vilified in his year-long poll campaign before the 2014 general elections. The Prime Minister must not forget the aspirations of many young Indians, who voted for him with the expectations of a corruption-free and transparent government. It is, however, safe to say that some disenchantment has already set in.
Much of the difficulty that the Modi government has run into was avoidable, but for the streaks of arrogance on display and majoritarian assertions of several BJP leaders at the helm. Prime Minister Modi himself is no exception judging from his postures on many occasions.
The Prime Minister seems to have <g data-gr-id="79">hardy</g> made any effort in getting leaders of different parties together to build consensus over some of the more controversial legislative proposals - whether on land, labour or goods and services tax. In fact, his ministers have rattled about conducting a joint session of Parliament to overcome all opposition to its reform plans. He would rather prefer to work silently than build consensus in his bid to cut the Congress to size in the Rajya Sabha.
With such an attitude, the major problem of land acquisition was allowed to take a nationwide dimension. Modi belatedly recognised he was being viewed as anti-farmer and pro-rich. It is now recognised abroad that there are limitations even for the Modi government, which had come to power on the back of a largely favourable electorate and their hope for political certainty in India.
It is against this background that Finance Minister Arun Jaitley had gone on a ten-day visit to The United States to present the government’s commitment to reforms and improvements in India’s business environment. And he found that investors expectations far exceeded what his government had attempted or intended to do.
At home, Jaitley wrestled with tax issues that continue to trouble foreign investors. His repeated reaffirmations of the government’s commitment to a simple and stable and non-adversarial tax regime had only received a lukewarm response. He returned home, not so much with a greater promise of investment flows as with the conviction that there was still much work to be done at home. Hopefully, he told investors that agricultural prospects would be better in 2015/16, thereby helping improve the overall growth outlook. The manufacturing sector has also turned the corner.
Recent trends no doubt project improving macroeconomic stability. Government finances are under greater control to achieve its fiscal deficit target, whatever the negative impact on social sector spending cuts. The current account deficit effectively controlled since 2013/14 has narrowed and is now manageable with the cushion of added reserves. Reserves stood at $355 billion by June 19.
The loss of export momentum in 2014/15 with a toll on output and jobs continued into early months of current fiscal, but a larger decline in our imports, pointing to slack in domestic demand, keeps current account deficit low, which can be easily managed with capital flows. The outlook for exports is still bleak despite the rupee depreciating in recent months as global demand remains in the doldrums.
The global economy is ending the first half of 2015 with a mixed bag, first quarter contraction in the US followed by some subsequent pickup in consumer spending. The European Union has started looking better, fuelled by quantitative easing and Japan is experimenting with new reforms. Concerns on China’s growth and financial stabilisation are again up front.
On June 28, China cut interest rates for the fourth time in seven months and also the reserve ratio in the hope that such “forceful easing” could stabilise the market and shore up growth. The lending rate has been cut to 4.85 percent. On the fiscal side, with fall in revenues in the first five months China would have difficulty in meeting 2015 budget targets.
India aims to grow by around 8 percent in the current year, but most global and other projections point to a recovery at or little below 7.5 percent. India’s ability to rise above it below-par economic performance is linked with the government’s ability to clear projects and legislate land and labour reforms.
With severe stress in the banking system and corporate finances, a strong revival of investments in the economy would remain elusive. How far the government is able to step in with larger public investment to trigger all-around activity is still a moot question, Jaitley’s budget promise notwithstanding. Growth impeding factors, as RBI points out, include falling profit margins and decreasing debt repayment capabilities of the corporate sector. Whatever the Federal Reserve Bank’s monetary policy stance later this year, India is better prepared to deal with any volatility, and the stronger macroeconomic fundamentals provide “a reasonable degree of resilience to Indian financial system in the event of spillover effects” from global factors. IPA