The govt is strong, so why can't it undertake bold economic reforms?

Prime Minister Narendra Modi is wildly popular with his supporters for his ability to take bold decisions. In the early days of his second term, for instance, he continued where he left off from his first with a surgical strike against Article 370 that altered the status of Jammu & Kashmir and divided it into two Union Territories. Odd, then, that his government is yet to demonstrate the same sense of chutzpah — or even urgency —when it comes to addressing the problems of the economy and unemployment. 

That the economy is in the doldrums is self-evident, never mind if economists argue over whether the causes are cyclical or structural (even his economic advisory council cannot agree on this point). Or whether Mr Modi’s “bold” first-term decisions of demonetisation and an advanced Goods and Services Tax deadline helped create what former Prime Minister Manmohan Singh called a “man-made slowdown”.   
 

Whatever the cause, there’s been general consensus across the ideological spectrum that Something Needs to be Done Now. Over several days in the last week of August, as it became clear that the Q1FY20 GDP numbers would be anaemic, the government manfully obliged. Those announcements ranged from correcting policy mis-steps, tinkering with the foreign direct investment rules, some efforts to revive the automobile sector, reorienting the public sector banking system and disinvestment. 

Will this August story provide the elixir for India’s languishing economy? 

Let’s take the August 24 tranche of announcements. The rollback of surcharge on foreign portfolio investors has done little to cheer the stock markets, which have been bleeding out ever since. To reverse the slide in automobiles, the state is stepping in as purchaser of first resort by lifting the ban on vehicle purchases by government departments, increased depreciation rates till March 2020. It has also deferred the rule for one-time registration fees to June 2020. All of these initiatives may bump up sales for a bit, but they do not address the dynamics of the automobile markets. The government stopped being the dominant buyer of automobiles more than two decades ago. The ordinary buyer’s propensity to give dealer showrooms a miss these past three years is the most potent expression of a failure of consumer confidence, which is manifest across white goods and fast moving consumer goods. 

Okay, so let’s look at August 28, which eased foreign direct investment for single brand retail, coal mining, contract manufacturing and digital media. These announcements created considerable media excitement because they meant that Apple would be bringing their famed and much-awaited Apple Stores to India. But one Apple, assuming it enters India at lightning speed, cannot turn around an economy even if improved contract manufacturing laws means more iPhones may be Made in India. Also, the FDI policy is only the start. As Apple contract manufacturer Foxconn discovered, a commitment from a state leader (Maharashtra Chief Minister Devendra Fadnavis) need not translate into a shovel in the ground. 

On August 31, hours before the dismal Q1 GDP numbers came the announcement that 10 state-owned banks would be merged into four. How, precisely, can this be classified as a reform? Perhaps because the government plans to create large banks with strong balance sheets. The problem is that several banks shortlisted for merger are what Percy Mistry called “zombie banks,” overstaffed entities with almost no business. How their merger with healthier banks will help spur credit growth is a question that awaits answers. Finance Minister Nirmala Sitharaman later clarified that not one single job will be lost as a result of these mergers, nor any branches closed. This defies business logic of mergers, which is to derive synergies. If no staff is to be cut or branches closed, then what’s the point of merging? 

Taken together with the circular disinvestment route — making one public sector entity buy the government’s share in another — these so-called economic reforms reflect a failure of the imagination and/or an unwillingness to opt for deeper structural reform of land and labour rules and the reorienting of agricultural markets. It has been argued that these issues are in the hands of the states, so the Centre has little leeway to change much. This is a specious argument. In fact, the political situation has rarely been more propitious to align policies, with more than half the states ruled by the ruling party at the Centre in majority or in alliance. To put it another way, a strong government is in unique a position to go boldly where no government has gone before.