At the height of the days of “Great Moderation”, when the US economy seemed to be on a never-ending upward spiral and its stock market was seemingly unstoppable, the then Federal Reserve chairman described the phenomenon as “irrational exuberance”.
India is current going through a spell of exuberance. The current euphoria is on a rational expectation that there will be a change in government and a Narendra Modi-led BJP government should give the country a new direction.
The Indian stock market is rising, the rupee is rising and investment bankers and credit rating agencies are gung ho. If Modi comes, the rocket scientists of financial sector are predicting that the rupee should claw back to 45 to the dollar. Many others are more circumspect and saying the rupee should touch at least 57 to the dollar from current levels of a little over 61.
The stock market is bullish and the BSE index has breached 22,000 and could just as well soar past 22,500 in days. No less than $2.75 billion has flown in, in this month alone, according to reports. Huge money is thus being put on bet that once Modi comes to power and forms a government, India should turn around dramatically.
Imagine, given the uncertainties of Indian democracy, what if that does not happen?
It is difficult to foresee what levels the rupee will touch or what depths the stock market will plumb. But one thing is certain: whichever government comes to power, it will not have an enviable job in hand.
But if Modi comes to power with a reasonable number of seats in the Lok Sabha, if coalition partners fall in line and we get a stable government, will Modi be able to deliver and meet the expectations?
Before this, only Narasimha Rao could carry through a cogent reforms programme which had transformed India. Like Rao will Modi be able to bring about as much change in the economy as Rao did to justify the current euphoria?
That is difficult to believe. Rao had come to power at a time when the entire old regime had come to a halt and the system in place was not functioning. Today, the Indian economy is in far better health. Despite the incumbent UPA government, the economy is in good shape, thanks to the reforms that Rao had introduced in his first two years. Industry is no longer tethered to the Industrial Policy Resolution, the exchange rate is no longer administered by the RBI and the government “coffers” are not exactly empty.
Modi thus has a different situation to face. Rao’s reforms were far simpler compared with the changes we need today. The Rao government’s contribution involved changing the rules and restrictions on the functioning of the economic agents that had been in place for over forty years. A new government today has tougher tasks.
Take for instance the issue of land for industry. Resolving the question of land for industry can give the biggest boost to the economy. Not that industry needs all the cultivable land in the country, but the few parcels of land required for critical projects like mining or new integrated plants are difficult to secure. Can a new government immediately untie the knots around land acquisition for some of the biggest projects, involving large flow of funds from abroad?
The land question might have been easily tackled by Modi in Gujarat. But a Modi government at the Centre might not be in a position to tackle such issues in Odisha or Chhattisgarh or West Bengal. Feel good factor about India will not depend on only what happens in Gujarat, but in the entire country. We have to be able to take stock of the extremely sensitive issues around tribal ownership of land. This is important because if you have minerals lying in tribal land, you either have to mine in tribal lands or leave the resources untouched.
If India has to make progress and enjoy a stable macro-economic environment, it is imperative that we restart the upstream industries involving mining of essential raw materials. Iron ore and manganese have to be extracted, coal mines must be opened up, gas fields explored and developed. We have been importing these over the last decade, instead of tapping into our own resources. These contributed, inevitably, to our current account deficit.
Secondly, can a Modi government introduce the much-needed tax reforms? GST could not be introduced despite almost all technical work having been completed for its launch. It is the BJP-ruled states which stood in the way of a national GST. Will the Modi government at the Centre push through the constitutional amendments needed for its introduction?
Thirdly, for faster growth and development we have to overcome the current approach towards government clearances, particularly ones involving the environment. The absence of standardised environmental norms and lack of compliance with these norms had given government decision-makers certain discriminatory powers. We should be able to tackle NGO hyper-activism and the professional protestors in the country.
Fourthly, this leads us to the thorny issue of reforms at the states. While lots of policy reforms have taken place, the states have continued with their old ways, and have been notoriously inept in clearing projects. Superior performance of only a handful of states cannot be the answer. All states must be at the same level of functioning, at least somewhat close to a certain level of competence.
Lastly, will a Modi government really modify the Indian bureaucracy, both at the Centre and in the states?
These are tangible changes which Modi may not achieve immediately. However, there are a few intangible changes which he might bring about. A new government can make a difference by bringing about a change in attitude. India’s economic policy used to be suspicious of business because of its socialistic tilt. One hopes that Narendra Modi will replicate the Gujarat model of industrialisation in the rest of the country.
Ideas are no idle business. They rule the destiny. The idea of a cooperative spirit with business can drive our growth. It is this idea that had built Japan and then China. A BJP government under Modi presents us that new spirit of the times — best captured by the German word zeitgeist.
The author is a Delhi-based analyst and commentator