The Road Ahead for Team Modi

WHEN NARENDRA MODI MET NDA politicians handpicked by him for his new ministry on the evening of May 30th, just before their swearing-in, he gently reminded everyone that he knew that most of them had spoken to the media before they arrived to meet him at the Prime Minister’s Office (PMO). “I got the call,” is something each of those lucky to have made it to any ministry would tell their friends in the media—and he or she would tell them first so that the rest of the world knew about it shortly.

After that humorous yet matter-of-fact remark, the Prime Minister counselled his new team, especially those new in Government, not to leave for home in a hurry and instead stay back in the national capital to learn the various functions of ministries they would be part of. Modi, who led his party to a resounding and consecutive win, the first Prime Minister since Pandit Jawaharlal Nehru to do so after serving a full term in office, told those in attendance not to dawdle and waste time, but to work hard to make their stint in the NDA ministry as productive as it could be creative. Yet, a few allegedly managed to sneak away to their constituencies only to get calls from New Delhi prompting them to fly back.The Prime Minister also asked each minister to have a five-year plan for themselves. The urgency of purpose that the Prime Minister insisted from his colleagues perhaps captured the new dispensation’s drive to forge ahead furiously with its plans and promises, whether or not they are likely to kick up a storm.

For a campaign spearhead in a parliamentary democracy, Modi had made the poll combat look more or less like a presidential exercise, appealing to people to cast each vote as though he was their local candidate. And his emphasis on national security and nationalism had raised a lot of expectations, as outlined with flourish in the manifesto of the BJP. His emphatic triumph only raised further hopes among his diehard loyalists. Which was why he wanted men and women chosen to assist him to learn quickly and work hard to meet the goals the winning coalition had set for itself.

AMONG THE SENIORS, the Prime Minister, who himself seems pleased to shoulder most of the work, is sure to rely heavily on Amit Shah, his party chief, confidant and now Home Minister to set things right, especially on the internal security front where the Government continues to face myriad challenges besides charges of not having been effective enough on a few counts, including Maoist violence, Jihadist threat and turmoil in Jammu and Kashmir. Among the others are, of course, Nirmala Sitharaman, Finance Minister, who faces the daunting task of putting the economy back on track, and S Jaishankar, former foreign secretary and Modi’s surprise choice as External Affairs Minister, who has to tackle crucial problems not only in the near neighbourhood but also far away. Modi has also brought in some unexpected names to his Council of Ministers, which reflects his propensity for rewarding those he considers diligent.

For his part, Shah, the de facto No 2 in the new Government, has already set the ball rolling chairing a meeting of senior ministers that included Cabinet ministers such as Sitharaman, Jaishankar, Petroleum Minister Dharmendra Pradhan and Railways and Commerce Minister Piyush Goyal besides key bureaucrats. He has also reviewed a plan to meet poll promises as regards Jammu and Kashmir, the trouble-torn state that continues to be the biggest internal security question for any government at the Centre. Though the Union Home Ministry has denied any such concrete plans, there is a perception that Shah and team may zealously pursue legal options for delimitation in Jammu and Kashmir, apparently to correct regional imbalance in the state, which, some policymakers claim, is currently in favour of the Kashmir region. Legal recourse will be necessary to go ahead with any such plan because in 2002 the then state government had passed a law to freeze delimitation until the figures of the first Census taken after 2026 are published. The BJP has, in fact, for more than a decade, demanded delimitation, claiming that the Jammu region is under-represented in the state Assembly. The 2002 Delimitation Commission set up by the Vajpayee Government had decided against including Jammu and Kashmir as part of redrawing of constituencies. Meanwhile, courts had upheld the freeze on delimitation in the state, but indications are that the Centre will leave no stone unturned in its pursuit towards this.

Professor Sumantra Bose of London School of Economics, who is also the author of the stellar work, Kashmir: Roots of Conflict, Paths to Peace, is among those who say that there is no demographic justification for delimitation. “The Jammu region is equitably represented in the J&K Assembly, and possibly slightly over-represented, relative to its population. It has 37 seats to the Valley’s 46—that is, four-fifths of the Valley’s seats—but its population is less than four-fifths of that of the Valley. Moreover, two-thirds of the Jammu region’s Assembly seats are Hindu- majority seats, which is consistent with the two-thirds Hindu majority in the Jammu region. There is no rationale for increasing Ladakh’s four seats because its population is very small.” He adds, “Such a move risks jeopardising both the regional and the communal balance in J&K.”

NOW THE BJP has declared in its manifesto that its Government will work towards scrapping Article 370 that bestows special powers for the state as well as Article 35A, which offers a raft of special rights for its people. With Shah at the helm of the Home Ministry and Ajit Doval as National Security Adviser with a Cabinet rank for the next five years, pundits and Army officers that Open spoke to aver that such measures are likely to be taken up sooner or later, considering their priorities in the region. “One shouldn’t be surprised about the BJP going ahead with its plans in that direction,” a senior Army officer who has served for years in the border state told Open. Holding elections in the state where the BJP was in power in alliance with the Mehbooba Mufti-led Peoples Democratic Party (PDP) until the Assembly was dissolved in November last year by the Governor will prove to be a tough task, and plans to enact the Citizenship (Amendment) Bill, 2016, which is meant “for the protection of individuals of religious minority communities from neighbouring countries escaping persecution” retains the potential to cause unrest in the Northeast, especially Assam, where BJP allies are up in arms against the move.

As Home Minister, Shah has to also contain problems elsewhere, mostly in Maoist turfs. General Deependra Singh Hooda, Northern Army Commander during the ‘surgical strike’ of September 2016 that earned Modi a lot of goodwill among a large section of Indians, is of the view that “trans-continental terrorism” from Jihadists, as the one in Sri Lanka, is a menace that continues to grow in India. “Battling it requires a long-term, meticulous plan,” says the general who had prepared a national security document for the Congress party before the polls. “Quick fixes won’t suffice,” he says, referring to the Kashmir engagement by the previous Modi Government. “Their record speaks for itself,” he says with a wry smile. “The point is we have to factor in all ramifications before taking a policy decision, be it that on Kashmir, Maoist or Islamists,” he notes. Hooda emphasises that without such a long-term perspective, which includes maintaining friendly ties with China and not being overly dependent on any other power, India won’t be able to protect its national interests.

Ever since Jaishankar—who is seen as pro-American by a section of foreign policy wonks—has been named External Affairs Minister, worries abound that the fine balancing act in diplomatic ties with neighbours may be thrown out of gear. But a senior bureaucrat who has known him for long says that “all that is humbug”. He feels that the new Foreign Minister is a very efficient diplomat who can assist the Prime Minister in securing goodwill in the neighbourhood and beyond. “The same set of countries that are looking for an opportunity to warm up to the US but are not able to do so are behind these canards,” he says. Senior career diplomat TCA Raghavan tells Open in an interview that the country faces a lot of pressing and difficult challenges in foreign policy. He points out that besides our near-neighbourhood, new developments in the extended neighbourhood, especially in Afghanistan and Iran, also throw up grave challenges for the new dispensation. Engagements with global powers will also see a lot of action when India tries to stabilise ties with them, he forecasts, outlining challenges for the new foreign minister.

SITHARAMAN IS SOMEONE whose elevation to the coveted post of Finance Minister came as an unexpected move, something that has the signature of Modi, evident as early as 2014 when he promoted Smriti Irani to Cabinet rank. To say Sitharaman has too much in her hands is an understatement. She would be grappling with more issues than perhaps any other minister to hold the portfolio in recent years. Soon after she took over, the first shock that awaited her was the sputtering growth figures released on the last day of May. Economic growth in the last quarter of FY 2018-19 had tumbled to a 20-quarter low at 5.8 per cent and the annual figure for 2018-19 had dipped below the psychologically vital 7 per cent-mark. At 6.8 per cent, it was a five-year low.

Sure, India’s indifferent economic performance—if one ignores tags like ‘the world’s fastest growing economy’—is due to a mix of short- and long-term problems. The short-run problems in a complex democracy like India occur with unfailing regularity. For one, there is always uncertainty before and during elections. Anywhere from six to eight months are frittered away due to this factor. For another, India’s financial sector witnessed a scare last year after IL&FS, a large Non-Banking Financial Company (NBFC) linked with many other parts of the system, began experiencing a meltdown. The ripple effect of that event continues to be felt even today. Many NBFCs have hoarded up cash in a bid to signal the market that matters are normal. The result is a jam of sorts in the financial sector that has affected, among others, mutual funds many of whom have run into redemption problems. One attempt to resolve the issue has been through the aegis of the central bank by releasing a large amount of liquidity, an essential step in such crises. The hoarding of cash points in a different direction: a crisis of credibility.

What can be done about this? And more importantly, what should not be done? For one, the forthcoming Union Budget should present a credible fiscal deficit target that is believable for markets. A clear and realistic projection of revenue and expenditure—without resorting to off-balance sheet hiding of expenditures—is essential for imparting calm in the system. In the immediate aftermath of the election results, bond yields fell quickly, a signal that bond markets believed that better days lay ahead. It is important that this signalling be carried forward through the Budget process.

What the Union Government ought not to do is to engage in a fiscal stimulus—basically enhanced government spending— to give a boost to economic growth. There are good reasons to avoid that. In a recent note, Sajjid Chinoy, a JP Morgan economist, estimated the total Public Sector Borrowing Requirement (PSBR)—a broad but realistic measure of the government’s fiscal situation—at nine per cent of GDP. Technically, the Government has stuck to its fiscal deficit target of 3.4 per cent of GDP but in reality, that is a narrow measure of the gap between the government’s revenue receipt and its total expenditure. It does not include the fiscal position of the states and some borrowings that are not included in the calculation.

“This absorbs virtually all of household financial savings. Unsurprisingly, therefore, India’s yield curve has remained steep and kept borrowing costs elevated. How then will a private capex (capital expenditure) be financed?” Chinoy asks.

One solution for which many were clamouring was a policy rate cut by the Reserve Bank of India (RBI). As expected the central bank has reduced its policy rate—the one at which banks borrow money from it—by 25 basis points. One basis point is one hundredth of a percentage point. To an extent, a cut in the policy rate is warranted as inflation remains in check. Will this kick-start the process of growth, especially investment growth?

This is a divisive issue. If it were just a matter that companies are starved of funds at reasonable rates, then a reduction in rates could help, in theory. But this is not strictly true: over the last two years, the flow of credit from the banking system to the commercial sector has risen from 4 per cent of GDP in 2016-17 to 7 per cent of GDP in 2018-19. But during this time growth has tapered off. While the two processes are not strictly synchronised as there are other reasons for the decline in growth rates, interest rate is not the sole ingredient that determines the rate of growth.

Here is where the ‘India story’ gets complicated. In the last 15- odd years, there have been few major economic reforms. Apart from the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC), there have been virtually no growth- enhancing reforms. On the contrary, the 2013 land acquisition law, ostensibly meant to modernise the process of acquiring land, was designed to jam this important market.

If that were not enough, a strange sight mars the economic landscape. On the one hand, unemployment is at a 46-year high as revealed by the recently released Periodic Labour Force Survey (PLFS). On the other hand, the ‘effective cost’ of labour is very high. Both factors hamper economic growth. The effective cost of labour is high for reasons of both demand and supply. On the demand side, strict labour laws dampen the demand for labour, something primarily responsible for a feeble rate of increase of quality jobs. On the supply side, the kind of labour required is not available. This is due to skill and educational mismatches.

These kinds of economic pathologies, rising availability of credit but poor investment and unemployment along with high cost of labour, reflect wrong policy choices that have accumulated over the years due to political reasons.

Keeping these in mind, the agenda before the new Government is clear. One, bring in a new land acquisition law to replace the draconian 2013 law. Two, simplify labour laws into a simple code after eliminating those laws that prevent quick hiring and firing. Both reforms are essential if India is to move from a 7 per cent to 8 per cent growth trajectory. This is easier said than done. For one, the window for such reforms is always restricted to the first 16-18 months of a new government. For these reforms to pick up and translate into economic growth that benefits people who are allegedly at the losing end due to these reforms, requires a period of 3-5 years. From that perspective, there’s not much time left from the initial drafting stage to the point when the law is passed by both houses of Parliament. For another, the nature of India’s politics over the last two decades, especially from 2004 onward, is such that no government—even if it enjoys a comfortable majority in the Lok Sabha—can carry these reforms without unease about their political consequences. At the level of policy analysis, the link between these reforms and higher economic growth is clear; the uncertainty is because of India’s highly contested politics where both an insecure ruling Government and a disparate, desperate opposition can turn any issue into a political opportunity.

Meanwhile, the Prime Minister on June 5th created two Cabinet committees to address growth and job-creation worries— after having skirted economic shortcomings for a while. One of them will deal with investment and growth, while the other with employment and skill development. The same day he reconstituted the Cabinet Committee on Security comprising, besides the Prime Minister, Defence Minister Rajnath Singh, who is mandated to revamp the outdated weaponry that Indian armed forces use; Shah; Sitharaman and Jaishankar. The members of the Cabinet panel on growth and investment will consist of Transport and MSME Minister Nitin Gadkari, Shah, Sitharaman and Goyal. The thrust of this committee that will be chaired by the Prime Minister, it is expected, would be on manufacturing. The other committee will comprise the Prime Minister, Shah, Sitharaman, Narendra Singh Tomar, Goyal, Ramesh Pokhriyal, Pradhan, Mahendranath Pandey, Santosh Kumar Gangwar and Hardeep Singh Puri.

Experts have lauded this move, yet the prevailing uncertainty leads to an uncomfortable question: Has India’s economic growth hit a plateau from where it cannot rise without risking macroeconomic imbalances? A new paper by Niranjan Rajadhyaksha, the research director of the IDFC Institute, a think tank in Mumbai, looks at the four-cornered frameworks of macroeconomic targets, each created at a different time, within which growth has to ‘adjust’. It is hard to resist the conclusion that growth beyond a point is difficult without encountering major risks.

‘The experience of the past 10 years suggests that the growth rate that India can sustain within the constraints set by the other macroeconomic targets is 7 per cent rather than 8 per cent, or perhaps even lower,’ Rajadhyaksha argues in The Indian Macro Policy Playbook: Time for a Fresh Look.

He argues: ‘The tricky political economy decision for the next government is whether to ease some of the economic stability constraints such as the fiscal deficit, the current account deficit and retail inflation in a bid to maintain economic growth at 8 per cent; or continue to prioritise hard-won economic stability while facing the risk of social unrest as lower economic growth fails to provide the adequate number of jobs in formal enterprises; or put in place policy reforms that can help raise potential growth without creating periodic bouts of macroeconomic instability.’

These are difficult questions to which there are no simple answers. The third option above—of raising potential growth without instability—is the ideal one. But if the experience of the last decade is any indicator, this is a tough goal to achieve. The two reforms—land and labour—are essential if India is to raise its potential growth. Both require lifting a heavy political weight.

Perhaps there is awareness, however dim, that there are limits to the rate of growth India can achieve. Maybe there is a deeper reason that the first Narendra Modi Government undertook rural development plans that critics said did not contribute much in economic terms. The ‘housing for all’ programme and the PM- Kisan scheme that hands out Rs 6,000 to farmers—now extended to all farmers—makes sense in a way. From the second Five-Year Plan until almost now, agriculture has been considered a ‘bargain sector’ for the purposes of economic growth. Basically, the cheap food—grains and other commodities produced in rural India— served as the ‘surplus’ that allowed India to industrialise. After more than 65 years, all that has led to is a thin layer that enjoys the fruits of growth. Unless growth is ‘deepened’ below this thin layer, India cannot easily cross the 7 per cent growth threshold. What India needs is a virtuous mix of deepening growth and economic reforms that can allow this.

AS OF NOW, Modi, with 303 of 543 Lok Sabha members from the BJP, clearly is the numero uno of Indian politics, but his concerns ought to include those besides jobs, agrarian crisis, economy, foreign policy and national security. Aware of the writing on the wall, he has made efforts to reach out to minorities to allay their fears of a majoritarian rule. Which is why while blaming the opposition for using Muslims as merely a vote bank, he asked his party workers to make an outreach to the Muslim community, which accounts for 19 crore, forms 14 per cent of India’s population, and faced harassment at the hands of self-appointed custodians of the Hindu faith while Modi was in power from 2014 to 2019. Irresponsible statements from leaders who are adept in polarising people along religious lines bode ill for a country where the Constitution is supreme. The ruling party will have to live up to the message that its Prime Minister sought to give at the Parliament soon after being elected as the leader of the NDA, when he bowed and touched a copy of the Constitution of India with his forehead.

Translating such grand gestures into action cannnot be anything short of a spectacular feat.

Amit ShahdiplomacyNarendra Modinew cabinetpolitics