According to the current trends, the India would be a $28 trillion economy by 2050, a ten-fold rise from the current $2.8 trillion. That would translate to a $17,000 per capita income. The boost would have profound implications, not only for business operating in India but for social indicators in financial markets as India becomes an exporter of capital and, geopolitically, as its foreign exchange reserves approach the top of the global league tables.
When the Narendra Modi-led National Democratic Alliance (NDA) government took charge of the country’s destiny, the Indian economy was recovering from the mini-crisis of 2013 - when the rupee had crashed after India’s twin deficits (current account deficit and fiscal deficit) ballooned out of control. Since then, the government has succeeded in consolidating the steps taken during the fag end of the previous government’s term to control the twin deficits of current account and fiscal, and to bring down inflation.
The government’s decision to keep farm support prices in check has helped lower inflation, and inflationary expectations. The fall in global commodity prices also helped the cause, as it helped tame inflation even as it allowed the government to raise fuel taxes to finance its expenditure. But, the government’s key achievement of taming inflation seems to be under threat, because of both global and domestic factors. And farm distress has led to a sharp rise in agrarian riots, prompting the government to announce an expansion and hike in farm support prices, which could stoke the fires of inflation once again.
Although there is some evidence to suggest that rural fortunes may be reviving now, it is not clear whether the revival will sustain, and if it will persuade the government to give up on its ambitions of an expansive farm support regime.
Remarkable rise in FDI inflow
The other notable achievement of the Indian economy over the past few years has been the remarkable rise in foreign flows, and in particular, in foreign direct investment (FDI). From being considered to be among the Fragile Five among emerging markets five years ago, the Indian economy has emerged as a top investment destination, with a ratings upgrade from Moody’s Investor Services last year.
While in office, one of the first acts that Modi initiated was to dismantle the long-standing relic of economic planning, the Planning Commission, and also eliminate the distinction between planned and non-planned expenditure in the country’s annual budgets. These changes signalled the completion of India’s ideological shift in economic thinking, away from the state-led planning of the Nehruvian era towards a market-oriented approach of development.
The government also accepted a proposal of the Finance Commission to give state governments 42% of central tax receipts, up from 32%. India has leaped to the 50th place on the World Bank’s Ease of Doing Business rankings by the end of Modi’s five-year term.
Deregulate diesel and petroleum prices
In a similar spirit of allowing market forces to define outcomes, the government also managed to deregulate diesel and petroleum prices, which formed a substantial part of the subsidy bill. As a result, India joined the club of select countries like USA and Australia where fuel prices are revised on a daily basis. Deregulation was also partially achieved in case of natural gas..
Foreign investment cap in defence sector lifted
Advancing further on the reform process, the private sector was given further leeway in sectors where the state was proving incompetent. A cap on foreign investment in the defence sector was lifted from 26% to 49%. Similarly, furthering Vajpayee’s initiative to allow private entry into the insurance sector, the cap for foreign investment in it was raised to 49% as well.
The World Bank noted in its 2018 Doing Business report that India had adopted 37 reforms since 2003 and nearly half of them had been introduced in the last four years.
Game-changers
A few of the key reforms that the World Bank alludes to have been game-changing in their expected long-term impact on the economy. The first arose from a strenuous legacy of rising non-performing assets (NPA) with public sector banks that the BJP government had inherited. The Insolvency and Bankruptcy Code, 2016, was passed in parliament to address the issue. The code allows either the creditor or the borrower to approach the National Company Law Tribunal (NCLT) to initiate insolvency proceedings. It further lays down provisions for debt resolution within a span of three to five months.
The second major reform by the BJP government on the economic front came in the form of the biggest tax reform in Indian history with the implementation of the goods and services tax (GST), after well over a decade in the making. The tax, which aims at simplifying the tax structure of the country by replacing the erstwhile multilayered complicated tax system, was introduced in 2017
The new tax system eliminated the maze of check posts at state borders, where lorries transporting goods typically used to languish for hours. It is expected to transform into higher ease of doing business in the economy and translate into facilitation of a high-growth trajectory.
The missteps
A more controversial step by the government against black money has been the move to demonetise 86% of India’s currency overnight, with the expectation that the illicit part of it will not be returned to banks for fear of being penalised. As it turned out, almost all of the demonetised currency returned to the central bank.
Jobless growth has always been an uncomfortable reality for the country’s masses and the situation has worsened of late. Despite such setbacks, the economic record of the BJP government has been fairly satisfactory. Latest Labour Bureau estimates show that there was an absolute decline in employment between 2013–14 and 2015–16, probably for the first time since Independence.
