Tuesday, 27 June 2017

Modi's Illusionary of reforms

Modi is a Hindu zealot disguised as an economic reformer, or the other way round? Modi has pandered to religious sentiment by appointing a rabble-rousing Hindu prelate as CM of UP. Modi’s government is the strongest in decades. The opposition is hopeless. The low oil price of late has been boosting growth by perhaps two percentage points a year. India is young. He has not come up with many big new ideas of his own (the GST and the bankruptcy reforms date back long before his time). Over a quarter of the people joining the world’s workforce between now and 2025 will be Indian. And there is enormous scope for catch-up growth: India is the poorest of the world’s 20 biggest economies. Modi, in short, is squandering a golden opportunity. 
  • But he has also pushed through reforms and these are deceiving. 
  • The GST, is unnecessarily complicated and mangled, greatly reducing its efficiency. Keeping petroleum products and liquor outside GST is unnecessary. A simple GST might have added two percentage points to GDP growth. The complicated version will probably yield less than half that and only after a painful transition.
  • The new bankruptcy law is a step in the right direction, but it will take much more to revive the financial system, which is dominated by state-owned banks weighed down by dud loans. The government has known about the problem for years but has done little to resolve it.`
  • When Modi was elected many business leaders winced him as a reformer promising “minimum government, maximum governance”. It was hoped that the state apparatus would be aimed away from trying to do everything and towards providing basic services, such as education, health care, a functioning market for land and labour, a working judiciary, and a stable and predictable regulatory environment in which the private sector could create jobs. Three years on, those hopes are fading. 
  • Corruption seems to have abated, at least at the highest levels of government. But he has demonstrated little appetite for the reforms which would bring sustained growth that could transform the lives of Indian citizens.
  • Analysts estimate that low oil prices alone has boosted GDP by 1-2%. Modi also benefited from the tenure of Raghuram Rajan, whose inflation-targeting regime has helped keep prices in check. (Mr Rajan was, in effect, sacked by Mr Modi in 2016.)
  • Growth of 7% or so is nothing to scoff at. But Modi’s ministers speak of an economy expanding by 8-10% a year is necessary to absorb the 1 million Indians who enter the labour market every month. Achieving this would require deep and broad reforms.
  • The central government’s response to the difficulty of buying land to the reform of rigid labour laws, has been to pass them to the states. 
  • One of the big reforms it has undertaken, demonetization of 86% of currency, in an effort to curb the black economy was counterproductive, hamstringing legitimate businesses without doing much harm to illicit ones. It was certainly brave but did not make it a sound policy. Lack of planning and unclear objectives mean the exercise has damaged the economy; its potential benefits remain hard to judge. It seems to have paid off politically. The BJP thumped opponents in UP elections in Feb 2017. People queued for days on to exchange old banknotes but were apparently consoled by claims that the rich were suffering far more (they were not).
  • He is no good at working systematically to sort out the underlying problems holding the economy back. Lending to industry, which once grew at 30% a year, is contracting, for the first time in 20 years.
  • Infrastructure projects are stalled for lack of cash and corporate India is in the doldrums. 
  • Modi should have recapitalized state-owned banks and sold them off, to get loans flowing again. 
  • Too often, he ducks essential reforms. When courting voters he talked tantalizingly “I believe that government has no business to be in business,” he proclaimed. But the much-discussed privatization of state-owned firms is yet to take place. The problem is that Modi is not that brave as he exhibits. 
  • Modi has proved the exception rather than rule. “We elected a radical, we got a tinkerer,” rues a banking boss.
  • He should be working to simplify the over-exacting labour law, property purchases are a forbidding quagmire; try to improve the quality of registers to reduce the scope for disputes. 
  • His government recently created havoc in the booming beef-export business with annual earnings around $4 billion (nearly a third of the country’s trade deficit) from exporting beef, and last year was the world’s biggest exporter of the product. But nearly all of it comes from buffalo, not cow.
  • Modi has kept the focus on smaller projects at the expense of broad reforms. The government has proved adept at dealing with the consequences of bad policy rather than recasting policy itself. One scheme put forward by Modi bailed out state-owned electricity-distribution firms at vast expense, because their weak financial position was hampering efforts to electrify rural India.
  • The “Make in India” campaign, designed to lure foreign manufacturers, has loudly proclaimed the country open for business, organizing conferences and photo-opportunities for Modi and foreign bosses. But little has been done to tackle the shortcomings that discourage foreigners from building factories in India.
  • Most economic activity takes place in the shadows. A round nine in ten workers toil in informal jobs. One of the aims of demonetization was to bring more of India into the open. If it has achieved that, it is only by clobbering the informal sector rather than helping the formal one.
  • Companies deemed to earn excessive profits are hounded: makers of stents, pharmaceuticals and seeds have been forced to cut prices recently.
  • A plan to improve the skills of 500 mn Indians by 2022 has been hastily dropped. A Rs. 400 bn public-private fund unveiled in Dec 2015 to finance infrastructure is reportedly yet to find a single investor or project. This government moves from decision to decision, without checking performance or compliance.
  • Senior ministers relegated to the edges of a policy making machine run by a tight group around him, few people know what Modi has in mind. But most conclude that his core beliefs are already in evidence. And with the economy ticking along nicely thanks to the oil dividend, overhauling it has not required, or received, much attention.
  • GDP growth faltered in the latest quarter. The sag seems to have begun before demonetization but has been aggravated by it. Creation of ever fewer jobs in the formal sector have added to a recent sense of economic malaise. Political attacks on the government’s job-creation record are common.
  • Rules issued in May to protect cows have put in jeopardy buffalo-meat export industry as well as dairy and leather producers. State governments are caving in to demands for farmers’ loans to be forgiven, that will bring short-term relief but make it harder for farmers to borrow in future. It could also add two percentage points to the fiscal deficit, nullifying the hard-won consolidation of recent years.
  • If the economy falters, Modi may will try to maintain his popularity by stirring up communal tensions. That is how his BJP first propelled itself to government in the 1990's. 
  • Modi himself was chief minister of Gujarat in 2002, when rioting for over 2 months, killed at least 1,000 people, most of them Muslims. To this day, he has never categorically condemned the massacre or apologized for failing to prevent it.
  • Hindu nationalist thugs intimidate those who chide the government for straying from India’s secular tradition, or who advocate a less repressive approach to protests in Kashmir, India’s only state with a Muslim majority. 
As prime minister, Modi has been just as careful to court militant Hindus as jet-setting businessmen. Modi himself has become the object of a sycophantic personality cult. The prime minister may intend all this as a way to keep winning elections. But it is not hard to imagine it going disastrously wrong. Modi’s admirers paint him as the man who at last unleashed India’s potential. In fact, he may go down in history for fluffing India’s best shot at rapid, sustained development. And the worries about a still darker outcome are growing. Modi’s backers fear more erratic decision-making would be an expensive way to conceal an absence of reform. If he continues in this vein, Modi will leave India a little better off but otherwise not much different from how he found it.

My View:
Any reform will create initial disturbance and after stabilizing the fruits will be seen with passage of time. Aggressive reforms are necessary only when economy is in distress. Otherwise step by step reforms eliminating ills of the existing system is most preferred. Last year our economy was doing reasonable good with GDP growth of 7-8% better than China. Modi's senseless demonetization was utterly unwarranted which almost destroyed informal sector and agriculture. Even before it has shown any signs of recovery, adventuring GST (in mangled format) now, without adequate transition time will only complicate matters and its devastating effects are beyond imagination or prediction. His hurried nature of financial reforms indicate that his objective is to please FII's and World Bank for ratings upgrade rather than any sincerity towards poor people of the country and his deep desire to go down in history as 'the greatest reformer of India'. It is design of God that deep desires will never get fulfilled. History is testimony that never results would be as predicted. Commonsense tells me that when goings are good, it makes sense to adopt slow and seamless changes and poor and vulnerable are never subjected to any discomfort. Alas, if Modi has that much of serenity of mind, he wouldn't have become PM at all.

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