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Business News/ Opinion / A year of economics in politics
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A year of economics in politics

If economics is beginning to dominate politics of the country, it's a good sign

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

For those who believed that the Narendra Modi government, backed by a majority in the Lok Sabha, will unleash big bang economic reforms that will quickly translate into high economic growth, some disappointment is natural. Investors in the stock market believed that nothing could go wrong with India anymore and were willing to buy everything that came their way. As a result, the benchmark indices gained about 30%, making 2014 the best year for Indian equities since 2009.

But after a year, clearly, the excitement has tapered a bit. Investors are beginning to realize that a turnaround in economic activity takes time and, despite the government having been voted into office with full majority, some of the reforms have to go through the lengthy political process. For example, the bill related to goods and services tax (GST), after the subject having been in consultation and consensus building stage for many years, has now been sent to a select panel of the Rajya Sabha. This will only delay its passage, and sentiment on the street has been hurt, though the government has reiterated its commitment to implement the GST from 1 April 2016.

However, at a boarder level, apart from some minor deviations, in the past one year, the government has been on the right track. Consequently, business confidence has improved and there is macroeconomic stability. Though the industrial and investment activity has not picked up the way markets expected, that is largely because of reasons not directly in control of the government. Banks, for example, are still struggling with non-performing assets and companies are still trying to cope with leveraged balance sheets. However, the government on its part has shown the intent to revive the investment activity in the country with a thrust on the infrastructure space, though how much actually gets translated on the ground remains to be seen. Indian Railways, for instance, plans to invest about 1 trillion in the current financial year with a budgetary support of 40,000 crore. The government also intends to spend 1 trillion on urbanization in the next five years. As is being reported in the media, the government is also in the process of pushing activity in the road sector. Besides, it has made several other proposals that will increase the ease of doing business in the country over time. For example, finance minister Arun Jaitley in his budget speech announced that the government will bring a bankruptcy code in the current financial year. This is important. In a market economy, businesses should be allowed to fail and wind up seamlessly. Currently, India ranks 137 out of 189 countries in the ease of doing business ranking of the World Bank group in terms of resolving insolvencies.

The finance minister also announced that corporate tax will be brought down from 30% to 25% in the next four years. This will make investing in India more attractive and profitable.

However, the most interesting initiative in the past one year on the part of the government has been the financial inclusion drive and the thrust on creating a financial security net across income groups. Critics argue that most of the accounts opened under Pradhan Mantri Jan Dhan Yojana are inoperative. So be it. There is immense potential and these accounts can serve multiple purposes, apart from bringing the unbanked into the banking net. The government has successfully implemented the direct transfer of subsidy in the case of liquefied petroleum gas and this can be extended to other areas, such as transfer of food subsidy, which will cut leakages. Further, now the Jan Dhan accounts are being used to provide insurance and an opportunity for account holders to invest for retirement. Among other benefits, this will add to the overall effort of the government to push financial savings.

While the government has done many right things in the past one year, there have been some disappointments as well. For one, it deviated from the stated fiscal consolidation path and pushed the target of bringing down the fiscal deficit to 3% of the gross domestic product by a year to 2017-18. Also, the ordinance route to change the land acquisition law was ill-advised. Since land is a contentious issue and if the government indeed wanted to change the law, following the normal parliamentary procedure would have been a better idea, as changes anyway have to be cleared by both houses of Parliament.

So, the government, in its attempt to push reforms, has actually ended up creating uncertainty on this front.

Moreover, what the ordinance has done politically is that it has united the opposition and has made things difficult for the government. To its credit, the opposition is mixing the land acquisition issue with the reported distress in the farm sector, which has further complicated things for the government. Markets and economy need faster movement on reforms and a resurgent opposition is making life tougher for the government as it doesn’t enjoy majority in the Upper House.

Interestingly, in a recent conversation, a senior money manager said that economic decisions and legislations should be kept out of politics. I disagree. In fact, if economics is beginning to dominate politics of the country, it’s a good sign.

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Published: 27 May 2015, 07:26 PM IST
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