The year 2015 has been a disappointing one as far as economic reforms are concerned. While another failed parliamentary session is likely to lead to more acrimony and finger-pointing among politicians, common people will look back at 2015 as a wasted opportunity. Even the prime minister acknowledges the long road ahead when he says, “reforms are not a sprint but a marathon”.
For the ruling party, there were setbacks on the political front as well. The year started with a humiliating defeat in Delhi and ended with a rout in Bihar. With no prospect for the BJP to get a majority in the Rajya Sabha anytime soon, the only hope for the government in pushing forward its legislative agenda lies in reaching a compromise. But there appears to be no reason why the opposition parties will oblige easily, especially since the BJP stalled several key legislation, like the GST bill, during the UPA’s tenure. It’s tit for tat in Parliament while the nation suffers.
But even the progress of economic reforms that did not require legislative approval has been sluggish. For instance, the modest disinvestment target of roughly $11 billion has been postponed. There is no clear strategy to recruit better managers for PSUs. The bankruptcy bill is yet to be made into law. The problem of non-performing assets in public-sector banks remains unresolved. There has been little progress on energy reforms and there is only a slight improvement in the ease of doing business index.
The government had a unique opportunity afforded by the Bali package of the WTO — to reform the PDS and domestic food subsidy regime — but it has shelved those plans and ignored the Shanta Kumar Committee report on reforming the Food Corporation of India. And no efforts are underway to set right the distorted fertiliser subsidy.
Inflation has come down but this, too, is largely due to the decline in global commodity prices. The revised (but questionable) GDP series has bumped up the growth rate by two percentage points, and this is being used by the government to claim that it is the world’s fastest growing emerging economy. But the level of investment remains lower than desired and import demand continues to be weak. In fact, there are no financial or business indicators that suggest the economy is growing as rapidly as suggested by the new GDP estimates. A modest recovery is underway but it is much weaker than what is being claimed.
The recovery has also been slowed down by the RBI’s stubborn insistence on keeping interest rates higher than mandated by the underlying inflation. The RBI finally lowered interest rates but it could further help the recovery by lowering them by another 50 basis points.
The Central government’s fiscal deficit has come down and the BJP has maintained fiscal rectitude. But the combined Central and state fiscal deficit has gone up since 2010-11. With the 14th Finance Commission recommending that more funds be devolved to the states, it will be important to start looking at combined fiscal deficit numbers.
So what are the prospects for India in 2016?
At the end of 2013, declining growth, persistently high inflation, and sharp rupee depreciation signalled an impending crisis. This placed the political elite under some pressure to pursue reforms. But since then, inflation has declined and a new GDP series paints us as the best performing global economy. This has reduced the pressure for reforms.
After raising expectations, Prime Minister Narendra Modi has transitioned into a marathon runner. He even appears to have acquired the silence and loneliness of a long-distance runner. But something is off. Mike Fanelli, the famous running coach, says, “I tell our runners to divide the race into thirds. Run the first part with your head, the middle part with your personality, and the last part with your heart.” The PM might wish to heed Fanelli’s advice, since, at present, he appears to be running the race in reverse order. The Bihar results showed that he must build coalitions to win elections and the GST fiasco exemplified that he needs to compromise in order to regain the reform momentum.