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But to be fair, part of the problem is that
expectations were too high—perhaps unreasonably
so. As chief minister of the state of Gujarat,
Modi delivered good governance and believed in
responsive and effective government machinery.
His actions since taking office have not been
very different. It is too soon to write off Modi
altogether, given that many of his reforms are
long-term in nature. Investors who are overly
fixated on the short term could miss out on
potentially large and enduring gains.
REFORMING INDIA, BIT BY BIT
Modi rode to power on the twin planks of good
governance and development. Many of his policy
initiatives reflect these planks. It is also clear that
they mark a major departure from the past and
set India on a new course.
Farewell to subsidy leakage and corruption?
One big change is to India’s subsidy architecture.
The country’s massive subsidy programs often breed
corruption and are prone to leakages. To combat
these problems, Modi accelerated the issuance
of unique identification numbers for all residents
and restarted direct cash transfers for the cooking-
gas subsidy, which the previous government had
suspended after half-hearted efforts. This saved
Modi’s government nearly (US) $2 billion in the first
year as leakages were plugged.
Such targeted subsidy delivery has been made
possible with a financial inclusion plan to ensure
that every household has a bank account. Since
Modi took charge, 176 million households have
opened their first bank account; health and
accident insurance schemes, available at nominal
cost, are linked to these accounts.
With these in place, the government is now
moving towards cash transfer of other subsidies
like food. In doing so, it not only tackles leakages
and corruption but also eases the heavy subsidy
burden, which should help fiscal consolidation
over the long run. These game-changing reforms,
together with moves to deregulate petrol and
diesel prices, could cut India’s subsidy bill by
about 10 per cent this fiscal year.
Equally important, the old way of doing
business is changing. Crony capitalism, a
ubiquitous feature of India, has ebbed. Recently,
the government, through a transparent e-auction
process, successfully sold resources such as
spectrum and coal—without any controversy.
Contrast that with the telecoms scandal in 2008,
and the alleged coal scam between 2004 and
2009. A new law to seize illegally acquired or
undisclosed foreign assets is further evidence of
the government’s resolve to reduce corruption.
It is worth noting that by building a tightly knit
and overtly centralised administration, Modi has
been running a corruption-free government for
the past 18 months. Whether he stays the course
will determine India’s trajectory over the next 10
to 15 years. A less corrupt India should result in
better allocation of capital and resources and will
prove more attractive to foreign investors.
No demographic dividend without
investments and jobs
Investments are the engine of economic growth
and job creation. Encouragingly, tangible efforts
are being made to boost that on the policy and
legislative fronts. The private sector is unlikely to
kick-start the investment cycle given overcapacity
in certain areas, the decline in global commodity
prices, and the overleveraged balance sheets of
many infrastructure developers, construction and
commodity companies. Hence the government
has forged ahead with sizeable project spending
in sectors like roads, railways and defence.
Taking steps to turn India into a manufacturing
powerhouse, the ‘Make in India’ campaign
was launched in 2014 with the goal of raising
manufacturing’s share of gross domestic product
(GDP) from 17 per cent to 25 per cent. A strong
manufacturing sector is essential if India is to
harness its demographic dividend. Modi’s hectic
schedule of overseas visits is indicative of his aim
to deepen global economic engagement and in
turn attract investments in manufacturing.
On the legislative side, the government has
succeeded in increasing foreign direct investment
limits for different sectors. It has also ramped
up efforts to improve the business climate by
cutting red tape, transferring decision-making
power to the state level, promoting federalism
and competition, and using technology to drive
transparency and speed up decision-making. In
areas where Modi has failed to amend the law
(such as land and labour), the government is urging
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