Three years of Modi govt: Reform momentum is back, but it’ll be a cardinal mistake to say all is well

On 16 May 2014, when Narendra Modi guided the BJP to a landslide victory, the change in sentiment was palpable in every part of the country.

Stock markets had run quite a bit, even before Modi took over on 26 May, expecting radical positive changes in Indian economy from the pro-business government. People who voted out the Congress-led government was fed up with series of corruption charges involving UPA ministers, a prolonged period of policy paralysis at the Centre and lack of reforms drive.

Hopes were running high on the former Gujarat chief minister, who came with a proven track record of administrative skills and reform-appetite. People hoped for prosperity, more jobs and a safer environment to live.

Prime Minister Narendra Modi. PTI

Prime Minister Narendra Modi. PTI

Three years have passed since then. Modi hit the ground running with a host of changes both at the policy level, the way government departments function, approach the investor community with programmes like ‘Make in India’ and subsidy rationalisation programmes with thrust on ‘Direct Benefit Transfer'. The launch of ambitious ‘Jan Dhan Yojna’ programme and use of technology to reach out to the unbanked people in the financial sector, have aided to a positive shift, despite the problems in implementation.

On the reforms front, Modi has clearly managed to get the juggernaut moving by kicking off the reforms process with respect to Goods and Services Tax (GST), bankruptcy code, focus on large corporate loan defaulters and major drive to rationalize subsidies. Clearly, this government has fared far better than the UPA regime in terms of proactive approach to reforms and change in the way government offices function.

In the three years of Modi government rule, there has been no major corruption cases involving central ministers and the government has largely kept its promise on keeping to the reform process.

Economic tasks remain

The reform process have begun, which will ready the platform for future growth. But the Modi government cannot claim a major economic revival in this period. In fact, a realistic look at the macro-economic numbers would show that private investments are yet to pick up in a significant manner. There are few indicators that tell us where the economy stands now:

One, bad loan situation has only turned worse with more hidden Non-performing assets (NPAs) coming out of the books of public sector, banks. At the end of December, GNPAs of banks stood at Rs 6.5 lakh crore but the total stressed assets (bad loans and restructured loans) are much higher than this. As a result of poor demand and banks’ hesitance to take further risk, credit growth has hit decades low.

While top rated corporates have shifted to the money market to raise funds, small and medium enterprises are facing a fund drought. The government has empowered the RBI to directly involve in cases of NPA resolution, but experts are still skeptical to what extent this will help. Even if the bad loan clean-up is over, there is a huge capital void in the state-run banks which the government has to fill up. Tackling the existing stock of bad loans continue to be a major challenge for the Modi government. With a sick banking sector, no economy can claim health.

Two, investment scenario does not look promising as yet. Data on gross fixed capital formation, a measure of total investment activity on the ground, shows that GFCF has been coming down since financial year 2015 as a percentage of GDP. In fact, in the first two quarters of FY17 and last quarter of FY16, the GFCF showed negative growth. According to CMIE data, fresh capital formation has fallen from the peak in Q3, fiscal year 2015 steadily before showing a pick-up in Q4 FY17. With no major investment recovery, job creation and poverty alleviation are pipe dreams. Ensuring inward investments remains a challenge for Modi.

Three, the big worry is the current scenario on employment. Early this year, rating agency Crisil said that over 1.5 million people are entering the job market every month and the rapid adoption of automation which reduces the dependency on labour is only aggravating the situation.

The unemployment rate in the country was 4.9 percent in 2013, 4.7 percent in 2012 and 3.8 percent in 2011. As for the scheduled castes, the unemployment rate was 3.1 percent in 2011, which has now risen to 5 percent. That means, while there has been a steady increase in the number of jobless people since 2011, there has been a worrying, almost double, jump in the figures pertaining to the unemployment figures among the scheduled castes.

"The last three years have seen a slow but steady uptick in economic growth, but it is likely that this hasn't been accompanied by commensurate job increase in employment and that those sectors which grew faster have low labour intensity and share in overall output," the agency said in a note. NITI Aayog, the government’s think-tank has estimated the unemployment rate between 5 percent and 8 percent currently. That is despite his ambitious ‘Make in India’ programme generating interest from foreign investors.

Modi’s demonetisation in November last year further impacted the jobs in the informal sector. With more number of people being pushed out of factory jobs, number of unemployed people in the market is on the rise. The challenge for the Modi government on the employment front is even bigger now with the IT sector, one of the largest employers in the country, is on a layoff spree to cut costs and also due to work permit restrictions for Indians in foreign countries.

But, not all is bad

While the challenges remain, it is wrong to paint a doomsday scenario, however. There are positives too. Inflation has come down, exports have started picking up since mid-last year after showing a contraction for almost 14 months. Business confidence has improved with the government’s continuous efforts to fight corruption and increase the pace of reforms. Once the GST is passses the initial hiccups, it can significantly lift the economy to higher growth orbit, the scrapping of several old redundant laws and changes in the budget presentation and timing (more symbolic though) gives an impression that the government is not averse to changes, subsidy reforms have worked well so far and will help reduce the government’s subsidy burden. If RBI succeeds in the NPA battle, that will reboot the economy.

The bottomline is this: The Modi government’s three years have been spent well to lay out a future roadmap for growth and address some of the long-pending issues. This government has so far succeeded in offering a corruption free, proactive administration that has begun work across different verticals of the economy. But, it will be a major mistake to go for chest thumping over the incremental success achieved so far and forget the bigger tasks ahead—mainly on job creation and investment generation.

There is very little lime left for the Modi government to finish the core tasks before the 2019 election fever takes over. A very big distraction for Modi is in his own camp from the Hinduvta brigade and gaurakshaks. Unless Modi takes control of the polarising elements in his own cadre, the remaining period of his term will be spent to address distractions, instead of aiding reform-led growth.

It is even more critical now to push for aggressive privatisation of PSUs, mainly in the banking sector, and bring in private capital. Also, the government needs to put maximum focus on job creation to accommodate the millions of people entering the workforce every year. What it can claim so far is the success in bringing the reform momentum back, but it’ll be a cardinal mistake to imagine all is well in economy.

Updated Date: May 16, 2017 16:55 PM

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