The government of Prime Minister Narendra Modi took power in mid-May with high expectations that it would strengthen India’s fragile macroeconomy and faltering investment and growth. An assessment this early is a little unfair. Additional major policy announcements will be made in the budget on July 10. But to its credit, the government has not been idle or inactive. What and how much has it done?
The respected journalist Swaminathan Aiyar offered his assessment recently. The table below presents my economic scorecard, describing the measures taken and/or planned for the near future, assessing them (on a scale, ranging from A to F), with commentary that includes explanation, exoneration, or excoriation. The measures are ranked in decreasing order of their grade.
The list is somewhat arbitrary, containing acts of commission and omission. Unavoidably, the assessment and commentary reflects my conscious (and unconscious) slant. But these pitfalls are hopefully outweighed by its benefits.
On balance, the government has made a good start with many, not all, positive steps taken (grades of A– or higher). Any assessment should take into account difficult circumstances, especially a disappointing monsoon that threatens to reduce agricultural output and fuel already high inflation.
I plan to update this scorecard periodically.
|A Provisional Economic Scorecard for Modi Measures, June 2014|
|Measure||Economic objective served||Grade||Explanation|
|Moderate increase in minimum support prices for rice and pulses||Tackle high inflation||A||Given the rapid increase in these prices in the recent past, these actions, by moderating significantly the pace of increase, are a positive step.|
|Encourage states to liberalize movement of fruits and vegetables||Tackle high inflation||A||The Center has limited authority because this issue is controlled by the states. But in Delhi, temporarily ruled by the Center, this measure will soon be implemented. This measure could "travel" to other states, especially those ruled by the Bharatiya Janata Party (BJP).|
|Roll back labor laws||Boost manufacturing output and employment||A||Although this action is under consideration in only one state—Rajasthan—it is happening with the active blessing of the national government and could "travel" to other states if successful.|
|Increase rail tariffs and partially roll them back||Rationalize railway pricing and reduce budget deficit||A–||The increase in tariffs is substantially less than necessary to fill the hole in the railway budget. But the action was bold nevertheless, especially since it was done in advance of the formal budget. Some see the rollback as spineless caving in to the Mumbai lobby in advance of elections, but it likely reflected a shrewd political calculation that allowed some increase to be achieved.|
|Impose minimum export prices for vegetables||Tackle high inflation||B||Ideally, more basic reforms are needed, but given the magnitude of the potential threat from inflation this is not an unreasonable measure.|
|Extend forbearance on nonperforming loans of corporate sector||Boost private sector investment by blessing their balance sheets as not as bad as appears to be the case||B–||This measure, likely decided jointly by the government and the Reserve Bank of India (RBI), has ambiguous effects. On the one hand, it gives time to address the problem of weak balance sheets, and the hope is that if growth picks up in the meantime, balance sheets will self-correct to some extent. On the other hand, this action delays and even fudges ("extend and pretend") the real adjustment that corporates have to make. This action would be more effective if accompanied by a credible framework for such restructuring.|
|Extend excise concessions for the automobile sector||Boost manufacturing and provide stimulus||C||Special handouts to selected sectors are always problematic, and this sector has few special claims to legitimate help.|
|Increase sugar subsidies and imposing import duties on sugar||Unclear||D||Aimed at appeasing the sugar lobby in Maharashtra but also in Uttar Pradesh, this measure is problematic. Apart from its many problems, it leads to water-intensive and water-wasting resource allocation, which is bad for the medium term given India’s plunging water tables but especially so in a drought year. If the aim was to help sugar farmers being paid their dues, this was a very inefficient way of doing so.|
|Delay increases in natural gas prices||Rationalize energy pricing and attract investment into this sector||Deferred||An increase in natural gas prices is essential. But controversy on the pricing formula, as well as the Kejriwal critique of cronyism to which this government is sensitive, probably justifies additional reflection and time before action is implemented.|
|Delay phaseout of diesel subsidies||Rationalize energy pricing and reduce budget deficit||Deferred||This measure is long overdue, but only if the budget fails to take action should it be adversely judged.|
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