You have to dream before your dreams can come true.” This famous quote of former President APJ Abdul Kalam, who himself turned his dream into a reality as a nuclear scientist and has “ignited” many minds with his ideas, is perhaps the most appropriate theme for present day India aspiring to become an economic and knowledge superpower.
It is the culmination of the dreams of 1.2 billion people that has led Prime Minister Narendra Modi to ideate his plan of making the $2 trillion economy a $20 trillion behemoth within the next two decades, eradicating poverty and making India a knowledge society.
What has happened in the last one year is just the conceptualisation of the Big Dreams—Make in India, Digital India, Smart Cities, Jan Dhan and Swachh Bharat. The list is getting longer with every passing day–housing for all, 24x7 power for all, 100-GW solar energy capacity, Diamond Quadrilateral Network of High-Speed Rail, Sagar Mala port connectivity, Bharat Mala road network along borders and coasts and three more industrial corridors apart from the ongoing Delhi-Mumbai and Amritsar-Kolkata corridors.
Along with the flagship infrastructure projects, there has been a deluge of new social schemes that underline Modi’s core strategy of ameliorating the lives of millions of poor. Starting with Jan Dhan, Modi and his team unveiled more than a dozen initiatives like Pradhan Mantri Suraksha Bima Yojana, Atal Pension Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, Mudra Bank, Deen Dayal Upadhyay Gramin Kaushal Yojana, Pradhan Mantri Krishi Sinchai Yojana, Soil Health Card, Beti Padao Beti Bachao and Pradhan Mantri Vidya Lakshmi Karyakram.
Not surprising, US President Barack Obama in a TIME magazine article termed Modi as the “reformer-in-chief” going by his over-arching vision for India, the fury of reform wave and the speed of execution. Most important, Obama acknowledges the inclusive growth agenda of Modi’s reform tsunami.
“As a boy, Narendra Modi helped his father sell tea to support their family. Today, he’s the leader of the world’s largest democracy, and his life story—from poverty to Prime Minister—reflects the dynamism and potential of India’s rise. Determined to help more Indians follow in his path, he’s laid out an ambitious vision to reduce extreme poverty, improve education, empower women and girls and unleash India’s true economic potential...,” wrote the world’s most powerful leader.
At home, Modi’s announcements on mega schemes have raised eyebrows and critics started questioning whether things are actually changing on the ground. A closer look at what Modi is trying to drive at will throw some light. What is common to all of the ambitious schemes is the quantum of investment especially public capital expenditure that will have a multiplier effect on output growth and jobs. The schemes are a big stimulus to the economy that had started slowing at the end of UPA regime due to policy inertia. In the first year of Modi government, the growth rate has inched up to 7.3 per cent in FY15 from 6.9 per cent in FY14 (last year of UPA) as per CSO’s new data series.
Modi has deliberately pushed these long-term projects in the first year so that work can start now and gets completed in the next 5-10 years, which in turn would lay the foundation of $20 trillion economy. He has also become a frequent flyer to G7 nations to woo big doses of investment, secure energy supplies including nuclear fuel and invigorate trade amid a feeble global economic recovery.
While prima facie Modi’s strategies may look like “pro-industry”, the reality is somewhat different. An indepth insight of the government policies shows Modi has cleansed the power corridors of corruption and distanced himself from industrialists, lobbyists and crony capitalists.
But it will be wrong to say that Modi Government has become anti-industry. The government has carried out a series of changes in company laws and other rules to improve “ease of doing business”. In a recent speech, Modi vowed to end era of “red tape” and instead roll out “red carpet” that is built on trust. One of the most important reforms, according to Modi, was the self-certification in various activities of documents and processes. Many more are on the anvil.
Finance Minister Arun Jaitley has rightly pointed out that reforms have become “absolutely necessary” in the areas of land, labour and taxes to attract investors. The government’s push for Land Acquisition bill and Goods and Services Tax (GST) bill are necessary to unleash the true potential of the Indian economy.
Test of Modinomics
What Modi has achieved in Gujarat—10 per cent growth for a decade—with his common sense economic policies now coined as ModiNomics is under test for the entire country. The first year of the Modi Government has gone in shaking up the administration from inertia of policy paralysis and preparing the grounds for the country to leap forward. In his self appraisal of one year of government, Modi while addressing a rally in Mathura, said bad days of misgovernance was passé, minimum government and maximum governance is a reality and farmers are at the heart of the government policies.
Economists and industrialists have taken cognisance and endorsed Modi’s performance in the first year saying that while not everything can be achieved in the first year, the broader policy outlook is now clear.
Modi has indeed ended the policy paralysis and set the reform agenda rolling. He has cleverly modified many of UPA government’s good policies and implemented them on a war-footing.
Jan Dhan Yojana, for instance, is an extension of UPA’s Swabhimaan scheme of 2012 that envisaged opening no-frills bank accounts, and offer micro-insurance and micro-pension in the next stage. Modi carried forward the financial inclusion cause in a mission mode and brought more than 150 million poor into the banking network within a year. UPA’s National Manufacturing Policy was languishing but Modi rechristened it as “Make in India” and set the cog-wheels moving. The earlier National e-Governance Programme (NeGP) has been rebranded as Digital India.
In terms of legislative reforms, UPA’s unfinished reforms on GST, FDI hike in insurance; coal and mining reforms, black money bills and debt management are being aggressively taken forward by Team Modi. While former Finance Minister P Chidambaram’s dream work—Direct Tax Code (DTC)—has been scrapped, Jaitley has already incorporated DTC’s core idea of reducing corporate tax rate to 25 per cent.
Former Prime Minister Manmohan Singh’s dream of revamping the Planning Commission was also done in letter and spirit—Modi has replaced the Nehruvian institution with the Niti Aayog.
While governments have changed, India’s reform process has continued. Manmohan Singh’s team picked up the threads from Atal Bihari Vajpayee-led NDA government’s reforms on FRBM, VAT and other tax reforms and infrastructure building. The Modi Government is no exception to this rule. What is exceptional for Modi is the pace of implementation.
UPA’s last few years had seen many of the good schemes including the social schemes languishing. Modi has to be credited for giving an impetus to social schemes that will ameliorate the lives of millions of poor in the days to come.
The thrust of implementing social schemes outlines Modi’s focus on inclusive growth. The proof of the inclusive growth strategy can be gauged from the fact that the first scheme that has hit the ground running was the Jan Dhan Yojana. Indeed, the Pradhan Mantri Jan Dhan Yojana (PMJDY) created world records by roping in more than 150 million poor into the formal banking network in less than a year’s time, a feat that otherwise was beyond the dreams of policymakers in India or any other developing country.
Bankers may have complained of stiff targets but it is a fact that millions of poor are now under the banking network, a feat not achieved in more than six decades after Independence. While critics may still point out that more than half the accounts are still void of any funds, the spread of Aadhaar-based direct benefit transfer (DBT) will ensure that the poor have an operational bank account which will entail an overdraft facility.
The icing on the cake came when Modi launched three more social security schemes making a transformation from Jan Dhan to Jan Suraksha. From a mere bank account with a RuPay debit card, a health insurance cover and an overdraft facility, Jan Dhan has consolidated financial product that will try to cater to the basic financial needs of the poor—credit, health and life insurance and pension.
While the Pradhan Mantri Suraksha Bima Yojna will cover accidental death risk of Rs 200,000 for a premium of just Rs 12 per year, the Pradhan Mantri Jeevan Jyoti Bima Yojana will provide both natural and accidental death cover of Rs 200,000 for a premium of Rs 330 per year or less than one rupee per day for the age group 18-50 year.
The Atal Pension Yojana will provide a defined pension, depending on the contribution, and its period. The government will contribute 50 per cent of the beneficiaries’ premium limited to Rs 1,000 per year, for five years, in the new accounts opened before 31st December, 2015. Moreover, the government will use unclaimed deposits of about Rs 90 billion in the PPF and EPF corpus to create a Senior Citizen Welfare Fund to subsidise the premiums of vulnerable groups such as old age pensioners, BPL card-holders, small and marginal farmers and others.
The government is also trying to dissuade the unbanked population from hoarding gold to a productive investment avenue through launch of Gold Monetisation Scheme, Sovereign Gold Bond and Indian Gold Coin. These schemes will be launched in the coming months.
More than anything else, the government has laid out the roadmap for making Jan Dhan an avenue to transfer all entitlements to the poor. The Jan Dhan-Aadhaar-Mobile (JAM) trinity to transfer benefits in a leakage-proof, well-targeted and cashless manner is a welcome move. What remains to be done is providing a legal backing to Aadhaar which would have made it more fool-proof. The government also has to deduplicate the Aadhaar accounts to prevent leakages.
While banks have done a commendable job in the opening of the Jan Dhan accounts, the government has nudged the Department of Posts to venture out as a payment bank. It may be a good start for the cash-strapped postal department, the ultimate aim of the government should be to make India Post a full-fledged bank that can offer credit apart from savings, investment and remittance facilities.
Another neglected area that has received some attention is the credit flow to the rural sector through Nabard. The Budget has allocated Rs 250 billion to RIDF administered by NABARD. Though such booster dose does offer temporary relief, it is high time that the institution is revamped as Nabard has failed to address the problem of rural poverty even if it keeps on pumping billions of rupees into the sector.
Though the formal banking sector has been aggressive in the noble cause of financial inclusion, it is MFIs that have deepened their roots in the remote areas. The Budget had proposed setting up of MUDRA Bank to refinance MFIs through bank finance. The Pradhan Mantri Mudra Yojana should be pursued with utmost urgency.
While financial inclusion is one important aspect of the overarching strategy of reducing poverty, the government has attempted to address the other aspect of skill development and self employment by allocating Rs 15 billion for Deen Dayal Upadhyay Gramin Kaushal Yojana. It would be better if the FLCCs were linked to all skill development programmes and monitoring the outcomes of RUDSETIs in job creation.
On Swachh Bharat, it was good to see the government biting the bullet in the Budget by proposing a Swachh Bharat cess at 2 per cent on service charges apart from offering 100 per cent I-T deduction for contributions to Swachh Bharat Kosh.
Overall, the Budget took some great strides on accelerating inclusive growth but Modi’s team has to walk miles before it rests. It would have been a great idea to set up a fund for furthering the cause of Financial Inclusion just as government’s USOF for rural telephony.
Without social and digital inclusion, financial inclusion will not be enough to root out poverty. Here, the government has to work hard for empowerment of women, rural youth and the economically weaker sections. While DBT is a welcome move and subsidies need to be continued for some time, relying on doles alone will not take India to the next level in development. The country has to move over from doles to development.
Housing for All
One of the biggest steps towards inclusive growth came from the launch of Housing for All Mission. Empowering citizens to play the pivotal role in deciding the future course of their cities, Modi recently launched three major initiatives—Smart Cities Mission, Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Housing for All (Urban) to address the burning problems of growing urbanisation especially for the aspiring middle class and the poor.
The three ambitious schemes, which will entail an investment of over Rs 4 trillion in the next five years, will provide a major booster dose to the real estate sector. “Urbanisation should be viewed as an opportunity and urban centres should be viewed as growth engines,” Modi said while launching the scheme.
For the first time in India, a challenge has been floated in which the citizens of urban India could contribute in the formulation of development vision of their cities. Those cities which were able to competitively meet the required parameters would be developed as smart cities. This competitive mechanism would end the top-down approach and lead to people-centric urban development.
The new urban development schemes were not prepared by the government alone, but involved perhaps the biggest consultation exercise ever taken by the government involving all stakeholders and examining global best practices.
Modi has set tall targets for the planning of smart cities saying it has to be a step or two ahead of people’s aspirations. Technology, transportation, energy efficiency, walk-to-work and cycling were some elements that are required in a smart city, he said.
The Prime Minister has directed policymakers and town planners to take the “collective responsibility” for bettering the quality of life for 40 per cent of India’s population that lived in cities or were dependent on cities for their livelihood.
Most importantly, the government aims to balance the aspirations of migrants from rural areas and slum dwellers with the changing global environment.
India’s housing shortage is estimated at 20 million units and the government aims to bridge the gap by 2022, which will be the 75th year after the Independence.
Till now, lack of holistic vision about urban planning has led to a situation where expansion was driven by property developers. Which is why, the policy framework of AMRUT has been designed in a way that will give cities themselves a chance to plan their future growth.
The Housing for All by 2022 scheme will aim at slum rehabilitation with participation of private developers using land as a resource, promotion of affordable housing for weaker section through credit linked subsidy, affordable housing through PPP mode and subsidy for beneficiary-led individual house construction or enhancement.
Public investment of Rs 480 billion has been budgeted for Smart Cities Mission and Rs 500 billion for AMRUT while it will be close to Rs 3 trillion for Housing for All.
The government has identified 500 cities having 100,000 and more population for the AMRUT project, he said, adding that neither the Centre nor states will have any discretion in choosing 100 cities through a competition for smart cities scheme.
Once implemented, the housing scheme will be not just an engine of growth but one of the best inclusive growth strategies of the world.
Agenda For Coming Years
Modi can’t be blamed entirely if the economy has not shown a remarkable improvement in one year—CSO’s advance estimate puts FY15 GDP growth at 7.4 per cent as compared with 6.9 per cent in FY14, UPA’s last year in power. Chief Economic Adviser Arvind Subramanian says initial indications show GDP growing by 7.5 per cent and the government was adhering to FY16 growth target of 8-8.5 per cent. Monsoon rains in June has been above normal level. This is likely to push up rural demands.
Going forward, Modi has to aim at 10 per cent plus growth in the long-term through radical reforms and deft implementation of his ambitious policies if India has to transform a $2 trillion economy into a $20 trillion superpower within two decades. In the medium-term, the government should target 8-10 per cent growth in the next four years, something that UPA-I achieved between FY06-FY08.
The first uphill task ahead for Team Modi is to revive the investment cycle. Modi’s tactful foreign policy must be backed by administrative reforms to attract big doses of FDI in coming years. Modi has already secured close to $50 billion investment from China, United States, Japan, South Korea and some other countries.
While there was a scope in FY16 Budget, Jaitley must cut the corporate tax by 1-2 percentage points in FY17 and raise the income tax exemptions on savings (under Section 80C of I-T Act) to spur investment.
Working for a single-window clearance mechanism should be pursued actively both at the centre and state levels.
In case of legislative reforms, the first task before the government is to remove irritants in the tax regime and roll out GST, speed up clearances and easier land acquisition. Passage of GST and Land Acquisition bills will be crucial to speed up infrastructure development.
The Real Estate bill needs to be taken up for regulating the sector and facilitating faster urbanisation. Much of the success of Smart City, AMRUT and Housing for All missions depends on the regulation of the real estate sector. The country must have local regulators whose task is to prevent cartelisation and undue price rise. Smart Cities without sound regulation will result in miles of concrete jungle without much human habitation. Only a handful of rich will be the occupants in such cities.
Legislations to set up sectoral regulators including that for railways should also be taken up by the government. This will prevent operators from inflating fares and foster competition and efficiency in the sector.
Since India Inc’s balance sheet is stretched, the government must step up capital expenditure significantly even if it means a slower fiscal adjustment. In the first year, Jaitley has toed his predecessor P Chidambaram’s line of cutting capital expenditure to adhere to fiscal target. Since the FRBM target of attaining 3 per cent deficit has been pushed back by a year to FY18, Jaitley must now step up public capex significantly from FY16 onwards. But government should not take its eyes off the FRBM target.
Cash-rich PSUs like Coal India should be told to pull up their socks and invest more rather than building up reserves. Profitable PSUs should be asked to invest in related infrastructure that adds synergy in the operation—Coal India and SAIL, for instance, can invest in railway, port and logistic projects to enable faster transportation of minerals from mines to industrial units.
With inflation coming into grips, RBI should not hesitate in reducing the interest rates in the coming months to lift investors’ sentiment. While Jaitley has been pitching
for rate cuts, senior BJP leader Yashwant Sinha has recently said it is feasible for RBI to cut rates as much as 150 bps.
RBI Governor Raghuram Rajan is bound by the monetary policy framework of keeping CPI inflation within 6 per cent. He should not hesitate to cut rates now that inflation is below 5 per cent. RBI can always tighten if inflation goes beyond the mandated limit.
Make in India efforts to revive investment and cutting rates may not be enough to lure foreign firms unless the government offers sector specific incentives and improves ease-of-doing business. Given that 70 per cent of the clearances have to come from local authorities, states should be encouraged to compete with each other to make “Make in India” a success.
While the Land Acquisition Bill provides for easy land purchase rule across industrial corridors, states need to judiciously use their land bank to help build the corridors.
If cities are to drive growth and reduce the pressures of urbanisation in the coming decades, the government needs to quickly put in place the master plan and identify potential smart cities based on various criterions. States must also be infrastructure ready for such smart city projects including land, electricity, water and other amenities.
Bridging the digital divide and increasing efficiency in all spheres of life would be crucial for increasing the growth rate. The Digital India can be leveraged to improve connectivity, improve productivity and governance. The government should step up efforts in laying fibre optic network and extend state wide area network to connect all villages.
The time for labour reforms has come. Amendments in the Industrial Disputes Act to ease the restriction on hiring and firing may not be taken up by the centre in near-term but states can follow the footsteps of Rajasthan. The government needs to push for the comprehensive laws to ease labour law compliances. While full capital account convertibility may not be possible in a year, the government and RBI must open up the economy more to attract higher foreign investment and eventually make the rupee an international currency.
While Modi’s dynamism has helped in rolling out a series of initiatives in the first year, the coming years will test his power to implement these reforms and to roll out new initiatives.
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