Gradualism is the way forward

After the remarkable victory of the BJP and formation of the Modi government at the Centre last May, expectations climbed too far, too fast. Business, consumer and investor confidence improved significantly in expectations of big bang reforms and quick turnaround in economic growth trajectory. In other words, exuberance was becoming irrational at one point and therefore some disappointment was inevitable. But at the same time it may not be appropriate to conclude that nothing has changed in last one year.

Remember that it was Prime Minister Narendra Modi who transformed the electoral narrative of caste, class and clientalism into one of growth and development for all. It was a remarkable achievement. Therefore, it is important that his policies must not sit at odds with that narrative. Else, the nation risks losing the narrative of development.

It is true that the Modi government has adopted a more incremental approach (a process of small but continuous changes) to reforms/policy making and not a radical one which perhaps many expected. But incremental approach may have its own advantages - through extensive deliberation it takes into account plurality of factors and accumulated knowledge, thus leading to a more considered set of policy changes; something which a diverse nation as India perhaps needs. Also radical changes may lead to sudden erosion of political capital of the government, which can jeopardize the reform process itself. Of course, all this means that changes would only be gradual.

In my view, the government has done a fairly good job so far. One can start with inflation. Prudent food policies both in terms of setting Minimum Support Prices (MSPs) and associated procurement policies have certainly contributed to decline in inflation, which was the most pressing macroeconomic problem of last 5 years.

Second is the liberalization of Foreign Direct Investment (FDI) regime, especially in key sectors such as defense, insurance and to some extent in railways. Historically India has relied on more portfolio flows and foreign loans rather than FDI, which is very different from China where FDI has been a remarkable success story. So paying attention to FDI regime is extremely critical. Besides liberalizing the FDI limits, it is also important to create conducive operating environment to attract flows and here also the government is making good progress - ease of doing business, liberalizing labour laws, and planning to revamp bankruptcy code.

The government is also making swift progress on direct benefits transfers (DBT), especially in case of transferring LPG benefits. Over time when fully implemented, it could lead to significant fiscal savings (by eliminating fake accounts and preventing theft) and much improved social outcomes.

Another area which deserves mention is the increased autonomy to states in terms of spending powers under the guidelines of 14th Finance Commission. Since the local authorities (state governments) have better understanding of the state's needs rather than the government sitting in Delhi, it makes sense to delegate more power to states. Surely, there are apprehensions about how well the states are equipped to design and monitor social sector schemes but I would guess that gap can be bridged overtime. Perhaps, NITI Aayog can play an important role here.

Further, the government must be commended for the way it has shown urgency and effectiveness in carrying out coal auctions. As Dr. Rajan - RBI governor, argued, India's institutions for allocating natural resources, granting clearances, and acquiring land were overwhelmed during the period of strong growth. Thus, there was urgent need to fix them. With the government's move on coal auctions, one can be hopeful that we are moving in right direction.

The list is by no means exhaustive. Modern monetary policy framework of inflation-targeting, initiating PSU bank reforms are other areas where the government has covered ground. Indeed, the government is also mindful of the near-term imperatives which bringing back demand in the economy. In that regard, relaxing fiscal targets and giving push to infra-spending in roads and railways is a very welcome move which can have positive multipliers on consumption. Having said that, a lot needs to be achieved still -land acquisition, GST, agriculture sector reforms, privatization of state monopolies etc., but as it seems gradualism is the way forward.

However, the fundamental challenge of undertaking reforms is that they deliver benefits only in medium to long-term whereas political class, which tends to focus on next election, needs to deliver quickly. In other words, in a democracy, political considerations often trump economic ones and near-term objectives often blur long-term imperatives. Therefore the real concern is not that reforms are progressing gradually but that political considerations should not elbow out the narrative of growth and development.

Rashesh Shah, chairman & CEO, Edelweiss Group