Three Years Of Modi Govt: Work In Progress
The overall strategy does not seem to have spurred the overall investment growth perceptibly
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The last two decades have brought about huge transformations in our economy and efforts to modernise our macroeconomic management. In the last three years, adoption of an inflation targeting framework, and now finally, the repositioning of the domestic indirect tax regime in the form of GST, are significant steps in this direction. These economic reforms have not been seamless from the previous efforts, but largely cumulative. The new government inherited a macroeconomic environment, which was struck by policy uncertainty, not just in India but also elsewhere. The long-drawn recovery from the 2008 global economic crisis was still weak, which meant there were challenges to policy makers everywhere, challenges emerging from perceptions of inconvenient parts of globalisation processes. At the same time, there was also the shale oil that changed the global energy markets. The domestic economy was faced with the troubling persistence of high inflation — a double digit food inflation in 2012-13 and 2013-14 — and modest economic growth by our own standards of pre-2008 days. The overall economic environment inherited by the new government was as much a challenge to be overcomed as it was a factor that led to the emergence of the new political mandate. It was also an opportunity to reset a policy agenda that addressed the roadblocks to accelerated development.
It should also be said that fairly strong economic growth up to 2011-12, despite the global economic crisis of 2008, had enabled ramping up investments in infrastructure and strengthening of an important social protection scheme: the rural employment guarantee. A large foodgrain stock with the public distribution system was also useful. Infrastructure and industrial investments met with challenges of environmental impact and land acquisition. The puzzle of dominance of services over manufacturing growth deepened, raising concerns over the quantum and quality of employment to benefit from the demographic dividend that had emerged. The financial approaches to resolving agricultural distress appeared to have provided only symptomatic relief.
Challenges to the new government were therefore clear, and expectations from it, high. A major part of the strategy of the new government appeared to be to streamline policy implementation. Focus on improving the ‘doing business’ perceptions set out the intentions to streamline the processes, and efforts to attract foreign investment, the latter paying some dividend. Further, liberalisation of the foreign direct investment policy, speeding up environmental clearances, and the ‘Make in India’ campaign were set to liven up investment. The overall strategy does not seem to have spurred the overall investment growth perceptibly.
On a broad level, a major relief on the economic front was the dramatic decline in inflation rate, particularly food inflation, which nearly halved in the first two years of the new government. While the halving of global crude oil prices was a major causal factor, action on the policy front, with respect to MSPs (minimum support price), removed the other trigger for inflationary pressure. Adverse rainfall conditions in the first two years of the new regime were harsh. It was a double hit on agricultural producers: little growth in output and moderation in output prices.
Most macro level outcomes are not just result of one set of policies. Navigating the agenda for policies is affected by other forces: the central finance commission set new rules for sharing the resources of the government, and monetary policy reforms became necessary as the experience of persistent inflation is unlikely to be ignored for some time. Major legislative measures of economic reforms were not easy to achieve. However, for sustained investment growth, policy stability over the investment horizon is necessary. Fight against corruption is necessary and will be a long one, but must not be merely a disruptive action. With accelerated investment growth as an indicator to the overall performance of economic policy in the coming years, setting the environment for this is still work in progress.
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