Is it end of Modi's honeymoon?

Tags: Opinion

The feeble pace of reforms is testing the patience of local industry and foreign investors

The conclusions reac­hed by authors of the Economic Survey gi­ve ample indication that prime minister Narendra Modi’s honeymoon period, which promised liberal dos­es of economic reforms, could be over.

Two economic surveys after he swept to office in May 2014, the feeble pace of reforms has started to test the patience of BJP’s two biggest allies — foreign investors and local Indian businesses who find themselves hamstrung by the government’s failure to push reforms, which have become a victim of partisan politics. This includes a parliamentary stalemate on the all-important goods and services tax (GST).

The survey 2015-16 suggests as much. “There have also been some disappointments, especially the goods and services tax, which need to be retrieved going forward.’’ GST will subsume excise, service tax, VAT and other state levies and would bring in a single-rate indirect tax in the country, estimated to affect 2-2.5 million excise and service tax payers.

The introduction to the survey this year leaves no one in doubt that the road ahead is far from optimistic. Last year, the survey spoke about a “sweet spot” for the Indian economy arising from a combination of a strong political mandate and a favourable external environment. At the same time, it cautioned “against unrealistic expectations of ‘Big Bang’ reforms because of the dispersed nature of power in India and the absence of that impelling driver — crisis”, suggesting that things may not be as much on track as the government or even global rating agencies and multilateral lending institutions have suggested.

In the same chapter, it is precisely this crisis – or impending crisis – that has been alluded to. “Approval for the game-changing GST bills has proved elusive so far; the disinvestments programme fell short of targets, including that of achieving strategic sales and the next stage of subsidy rationalisation is a work-in-progress… perhaps the underlying anxiety is that the Indian economy is not realising its full potential…”

Even the opposition parties could not have put it better. The survey’s call for more reforms, subsidy cuts and sticking to fiscal consolidation timetable as being essential ingredients of growth, hinges on that one crucial element of democratic politics — consensus. That, at the moment, appears elusive.

If the first couple of days of the current Budget session of the Parliament are any indication, the political lines are more sharply divided than before, with very little chance of a reconciliation visible on pushing through reforms in the immediate foreseeable future.

“No real issue is being discussed. The only thing on the agenda is politics of nationalism and so on. There is very little, if at all, any discussion on the economic reforms agenda and the problems of the people. I see this schism sharpening in the days ahead,” chairman of the Centre for Media Studies N Bhaskara Rao told Financial Chronicle.

When Modi came to power, India, long worn-down by old clichés and weather-beaten socialist mismanagement, had hop­ed for a China-style dismantling of the old economic order, which had fuelled the dragon’s spectacular rise as a global power. Instead, as the last two Union budgets have sho­wn, it has turned out to be a disappointing narrative with the climate of under-investment and a slew of continuing unpopular levi­es, leaving its deep imprint on the Indian economy.

Far from an economic push, politics has, as usual, trumped economics, with emotive issues taking centre-stage. The moment was brought out well by BJD Lok Sabha MP Tathaghat Satpathy this week when he intervened in a high-pitch melodramatic debate on the merits of nationalism by pitching in with: “but what about the top 10 public sector banks writing off Rs 40,000 crore alone in 2015?” Predictably, there were no answers.

CPI(M) general secretary Prakash Karat, a bitter critic of the BJP government, said on Friday that the list of the government’s failures was long, “but the most serious failure is on the economic front, including severe agrarian crisis, contracting industrial production, fall in exports, growing unemployment,” which are reflected in the Economic Survey.

A critical test now awaits Modi on Monday when the government unveils its budget for 2017-18, giving the prime minister an opportunity to turn things around. By the looks of it, Modi also has the global downturn to contend with. Reuters news agency quoted Sergio Trigo Paz, head of emerging debt at BlackRock as saying that India and Mexico were no longer the darlings of foreign investors. “These reform stories (Mexico and India) have run their course, and if anything, they are looking pricey,” he declared.

“A lot of overly positive expectations have been built. They need to reprice sometime, and that's what we will see,” Paz said. It would appear that not just India, but even the world is watching, the first signs of which has come in the survey.


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