The scale of Narendra Modi’s victory in the Lok Sabha elections four years ago, on May 16, 2014, was such that many observers believed a long-delayed course of economic reform would be implemented, using an unprecedented Lok Sabha majority in recent years. In the years since, Modi’s government has lived up to expectations in terms of the amount of energy it has brought to policy making — but its record is divided between hits and misses.
Politically, Modi’s most important economic achievement has been the taming inflation since 2014. In this, his government has been helped by the collapse in oil prices since he took office, and that has reduced prices all-round. But the government has also been careful about increasing minimum support prices to farmers, which has helped control food inflation.
The most lasting economic achievement of this government is surely be the introduction of the goods and services tax or GST — a comprehensive reworking of the entire indirect tax structure in India, which required a political consensus and a constitutional amendment. While glitches attended its roll-out and the tax is not as simple as originally planned, many hope the GST Council will stabilise the tax and improve the tax-GDP ratio.
In terms of reforming welfare-focused economic schemes, the Modi government focused on increasing the efficiency of the transfer pipeline, using what it called the JAM trinity — short for Jan Dhan, Aadhaar and mobile connectivity. The number of basic bank accounts under the Jan Dhan scheme has vastly increased, as has the coverage of Aadhaar. While the legal challenges to Aadhaar are yet to be settled, there is no doubt that the architecture for direct benefit transfers has been established.
The government will also point to its road-building record and the Ujwal DISCOM Assurance Yojana (UDAY) scheme, which transferred the debt of electricity utilities to the books of state governments, allowing them to buy and supply power once again. But more influential perhaps will be the Insolvency and Bankruptcy Code (IBC), a big step towards greater flexibility for capital.
Modi’s signature economic policy, however, must be his decision on November 8, 2016, two and a half years into his term, to withdraw high-value currency notes as legal tender overnight. Demonetisation was a deeply divisive policy. While politically popular, given that it had been sold as an assault on black money, most economists predicted it would have fewer benefits than costs. So it has proved, with most of the cash withdrawn returning to banks and very little behavioural change in evidence. Many hoped for a decisive shift to digital payments in the wake of demonetisation, but as time passes the use of cash in India appears to be returning to the pre-demonetisation norm. While politically successful, in terms of economic policy demonetisation did not achieve its various stated aims.
The first big policy direction that Modi gave to the government, in his first address from the ramparts of the Red Fort on August 15, 2014, was ramping up manufacturing. ‘Make in India’ became a central slogan for the government in its first years, but there is little to show for it at the end of four years. In fact, India went through a major trade slowdown and a crisis in private investment, which hampered attempts at growth revival.
The investment trough was partly caused because of neglecting the non-performing assets or NPAs in public sector banks. The introduction of the IBC has meant that there is now a structured process to revive the assets caught up in the twin balance sheet problem. Yet it is untested, and the larger question of what to do with PSBs remains unaddressed. Half-way steps like recapitalisation, Indradhanush and the Banks Board Bureau have failed to restore confidence in the sector.
Politically, however, Modi will be most wary of his government’s record on job creation. The past year has been marked by sharp disagreements over how many jobs have been created. Yet the government’s shift of focus from the provision of jobs, under ‘Make in India’ to boosting entrepreneurship using the Micro Units Development and Refinance Agency Bank (MUDRA) scheme of small loans, tells its own story. Many economists believe till structural reform of land and labour laws is undertaken, India will continue to underperform in terms of job creation and growth.