Promises yet to keep

Other than the bankruptcy law and GST, NDA government’s record on economic reforms needs improvement and fine-tuning.

Written by Devashish Mitra | Updated: July 25, 2017 4:30 am
pm modi, nda govt, modi economic reform, indian express Prime Minister Narendra Modi. (Reuters photo)

When Narendra Modi became the country’s prime minister, it was widely believed that he would bring about big-bang economic reforms. With his government well past the halfway mark, what reforms has the PM really been able to bring about? What does the government’s overall reform record look like? The two real economic reforms have been the bankruptcy law reform and, to a lesser extent, the adoption of the GST. The bankruptcy law reform is expected to get rid of non-performing assets of banks and stimulate risk taking, entrepreneurship and, in turn, economic growth. This reform is potentially a game changer, if implemented well.

The GST is a distant second. Despite the PM calling it a “good and simple tax,” it has taken a very complex form, with seven different rates. In principle, the GST, which, unlike demonetisation, has been carefully vetted over many years, is a great idea. However, it has succumbed, in its implementation, to the Indian bureaucracy’s penchant for complexity.

Looking at the different rates applied, there seems very little method to the madness. There is, for instance, a much lower tax rate on gold (3 per cent) than on notebooks (12 per cent). Similarly, the tax rate on shaving cream (28 per cent) is much higher than on ghee (12 per cent), as if the consumption of the latter is more essential than the use of the former for one’s well-being. It is not clear whether the objective of the GST schedule is raising revenues or addressing inequality or both.

Following in the footsteps of demonetisation, the GST is also trying to achieve multiple objectives simultaneously, violating the famous basic economic principle of at least as many policy instruments as policy goals. Besides, the multiplicity of rates encourages lobbying, as was pointed out, in the case of import duties, in research by Arvind Panagariya with Harvard’s Dani Rodrik in the 1990s. The GST’s complexity also adds to the bureaucracy’s power, especially over small businesses. Nevertheless, the government deserves considerable credit for pushing through this reform, which can be improved and fine-tuned over time.

However, these reforms have been more than offset by certain ill-conceived policies, such as demonetisation and, subsequently, the so-called “election finance reforms” or “tax reforms,” sneaked into a money bill. The new election finance laws, while digitising campaign contributions, do nothing about increasing transparency. In fact, for corporations the political contributions cap was done away with, anonymity was fully permitted, thereby making capture of the regulatory process by corporate interests easier. In addition, tax inspectors have been empowered to conduct raids and searches, without providing any reason. Such changes are making way for the comeback of the “license-permit-inspector raj”.

What about international trade, which has been recognised as an important engine of growth in the NITI Aayog’s Action Agenda (AA)? In fact, right after taking office, the Modi administration joined Bolivia, Cuba and Venezuela in efforts to derail the Trade Facilitation Agreement at the World Trade Organisation, thereby signaling its lack of commitment to trade reforms.

The AA emphasises the importance of export growth in job creation and recommends special coastal economic zones with flexible labour regulations. However, the progress on labour reforms has been slow. Recognising the political obstacles at the national level, the government’s approach so far has been to encourage states to make labour law amendments, labour being in the Constitution’s concurrent list. These amendments have to be approved by the president, based on the advice and recommendation of the Union cabinet.

Indeed, we have recently seen initiation of labour reforms through this process in Rajasthan and Madhya Pradesh. Note, however, that this provision has always existed in the books. State governments over the last several decades have used it to bring about both pro-employer and pro-employee changes in labour regulations. Now a more aggressive departure from the past in bringing about labour reforms is needed. Otherwise, effective labour costs in India will continue to remain above those in other Asian countries, preventing the expansion of labour-intensive industries to create new jobs. The cautious approach to these reforms, recently advocated by the finance minister, will not be good enough for the success of Make in India.

That India has a long way to go before it becomes an attractive place for businesses to produce for export is evident from the fact that it is ranked 130 out of 190 countries in the “ease of doing business”. One of the prime reasons, it turns out, is India’s inefficient judicial system, that leads to poor contract enforcement. The government needs to realise that its push for digitisation is most needed for the judicial system, primarily in the form of electronic case registration and management. Besides, the overworked judiciary needs to be expanded. We have seen no progress on these reforms.

The Modi government’s performance on economic reforms has, at best, been mixed. There have, of course, been other initiatives that are repackaged and relabeled versions of UPA-initiated schemes, for example, Swachh Bharat Abhiyan (Nirmal Bharat Abhiyan under the UPA). And, of course, the government has been smart enough to give the UPA’s Aadhaar initiative a big push (even though the BJP had earlier opposed it).

If the government is serious about exports and jobs, a bolder approach needs to be taken on labour reforms. But, as explained above, equally important are judicial reforms. The PM should try to sell his reforms directly to the people, to break the constraint imposed by the absence of a majority in the Upper House. But such advice might fall on deaf ears, since, as seen with demonetisation, bad economics often makes for very good politics.

The writer is professor of economics and Cramer Professor of Global Affairs at the Maxwell School of Citizenship and Public Affairs, Syracuse University, New York.

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  1. A
    Anand
    Jul 26, 2017 at 5:13 am
    Article writer do not have job to do- khali dimak shaitan ka- are koi is Mitra ko kaam vaam to do.
    Reply
    1. A
      Anand
      Jul 26, 2017 at 5:12 am
      ABE KAMINE - TUM BHI KAR LO KUCHH!
      Reply
      1. K
        Kash40
        Jul 26, 2017 at 5:03 am
        Are they not reforms Sir? You have a way set of opposition outfits who do not want reforms stall the work for all irrelevant, imaginary issues. What is your take on efforts on "black money" trail. Open up do not tow the corrupt dynasty outfit,non from the dynasty brought any economic reforms it was PVN who was the PM who boldly reformed economy. PVN's body was not allowed to be cremated in Delhi by the dynasty its slaves..
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          MIGHTY BOMBER
          Jul 25, 2017 at 10:20 pm
          “Effective labour costs in India will continue to remain above those in other Asian countries”. What is the meaning of this statement ? Does the author want to replace labour with machine causing more un-employment, or does the author want “hire and fire” for this section so that they are treated like un-wanted necessity, or does the author wants more inhuman working conditions for this section, or the author wants more workers for less wages or anything else ? Please do not make such ridiculous statements. Next is “ease of doing business”. The only thing required in ease of doing business is less and less tax and least possible bureaucracy intervention.
          Reply
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            Krishna Bhagawan
            Jul 25, 2017 at 11:14 pm
            So what happens if your employee does not work ? does not upgrade skills ? Or are a ried employee yourself.
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              MIGHTY BOMBER
              Jul 26, 2017 at 6:38 am
              Bhagwan ji, what are labour costs ? It is only wages paid vs. work done. Nothing else. Majority of labour are daily wagers, they are not considered employees. For upgradation of skill any person has to have enough monetary resource, time to learn and practice new skill. This section of society is deprived of both these things.
          2. M
            MIGHTY BOMBER
            Jul 25, 2017 at 10:20 pm
            Next is “Swachh Bharat Abhiyan”. Government at present is collecting cess for Swachh Bharat. Ask an average Indian “is there any improvement in cleanliness ?”. The answer will be no, nothing has improved on this front. No parliamentarian is interested in knowing about how much cess is collected and where it has disappeared. Similarly, no parliamentarian talks about “krishi kalyan cess”. Next is GST. Too many slabs make it difficult for everyone to implement GST. When it will be fine-tuned, no one knows. The present government at best could be described as “बचत पर ब्याज घटाओ सरकार ” for its concerted effort to reduce interest rate on small savings scheme,bank fixed deposits.
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              Kumar
              Jul 25, 2017 at 10:14 pm
              Out of about 130 plus crores of Indian, about 100 crores are economists of some sort and about 90 of them lean towards CPI(M). They tend to forget that one of the reasons, why investment was shy was the environment of strikes and indiscipline that had been created. Who can forget the system of Attimari in Kerala and party managing the supply of construction material in West Bengal.
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                MIGHTY BOMBER
                Jul 26, 2017 at 6:35 am
                Why people lean towards a particular party you mentioned ?just think about it. Indian economy is based on consumption in India, there is a little emphasis on exports. Millions of dollar have been invested in India since economic liberalisation, has India’s parti tion in international trade increased ?
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                ashok kumar
                Jul 25, 2017 at 9:27 pm
                President Harry truman used to say that in order to live like Republican , you have to vote democrat and speaker sam rayburn used to say that any jackass can knock a barn door,you need carpenter to build one. These self critic does not realize how hard it is to get anything done in India . The system is so corrupt from top to bottom that you do not know how to do anything. Now they say nirmal bharat was a congress idea, did you see mms or italian lady cleaning herself a police station which modiji did it himself. The govt employee ry has skyrocketed so much , private sector is finding it difficult to compete. Why would someone work a manufacturing job at 10000 rupees when a peon ry in govt is 40000. Maruti one of the most successful corporation had to face a labor problem .
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                  Kamal Pasha
                  Jul 25, 2017 at 7:26 pm
                  MY DEAR INDIANS, I PROMISE YOU ALL THAT I WILL NEVER FULFILL ANY PROMISE I MADE TO YOU. YOURS PM . Narender Dhamodar Modi
                  Reply
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