India: Three and a Half Years of Modinomics...India: Three and a Half Years of Modinomics Arvind...
Transcript of India: Three and a Half Years of Modinomics...India: Three and a Half Years of Modinomics Arvind...
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Working Paper No. 2018-01
Arvind PanagariyaColumbia University
India: Three and a Half Years of Modinomics
The author is a Professor of Economics and Jagdish Bhagwati Professor of Indian Political Economy in the School of International and Public Affairs at Columbia University. Between January 2015 and August 2017, he served as the founding Vice Chairman of the National Institution for Transforming India or NITI Aayog, Government of India in the rank of a Cabinet Minister. The Prime Minister serves as the Chairman of the NITI Aayog, which replaced the erstwhile Planning Commission on 1st January 2015.
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TableofContents
1 TheLegacy............................................................................................................................................2
2 TheTurnaround.................................................................................................................................6
3 ProcessandPolicyReform............................................................................................................8
3.1 TacklingRetrospectiveTaxation........................................................................................9
3.2 EndingBureaucraticParalysis.............................................................................................9
3.3 EaseofDoingBusiness.........................................................................................................10
3.4 FDILiberalization....................................................................................................................10
3.5 ClosureandPrivatizationofPublicSectorEnterprises(PSEs)...........................11
3.6 ExitPolicy...................................................................................................................................12
3.7 DirectandindirectTaxReform.........................................................................................12
3.8 ReductioninPetroleumSubsidies...................................................................................13
3.9 DirectbenefitTransferusingAadhaar-basedVerification...................................14
3.10 Cooperative,CompetitiveFederalism.........................................................................14
3.11 AssaultonCorruption.........................................................................................................15
3.12 EaseofAccesstoServicesforCitizens........................................................................16
3.13 EndingOpenDefecation:TheSwachhBharatMission........................................17
3.14 Budget-relatedReforms....................................................................................................18
4 CriticismsandResponse...............................................................................................................19
4.1 GrowthisSlowerThantheCSOEstimates...................................................................19
4.2 GrowthhasbeenJobless......................................................................................................24
4.3 Demonetization........................................................................................................................28
5 ConcludingRemarks.......................................................................................................................32
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India:ThreeandaHalfYearsofModinomics
ArvindPanagariya1
InMay2014,anewgovernmentledbyPrimeMinisterNarendraModitook
officeinIndia.Inthreedecades,thiswasthefirstgovernmenttowinanabsolute
majorityintheLokSabha,theLowerHouseoftheparliament.Itwasalsothefirst
timeinIndia’shistorythatthewinningcandidatehadcontestedthenational
electionpredominantlyontheplatformofeconomicdevelopment.“SabkaSaath,
SabkaVikas,”whichtranslatesas“CollectiveEffort,InclusiveDevelopment,”wasthe
catchphraseModiusedtocapturetheimaginationofthevoters.
AfterthreeandahalfyearsunderwhathascometobecalledModinomics,
wheredoestheIndianeconomystand?AlthoughIndianprintandelectronicmedia
ceaselesslyrundebatesondifferenteconomicissues,welackaunifiedaccountand
assessmentoftheprogressmadebythegovernment.Thepresentpaperattempts
tofillthiscriticalgap.
InSection1,Ibeginwithabriefaccountoftheeconomyfollowingthe1991
economicreformswithspecialattentionpaidtoitsstatejustbeforetheModi
governmenttookoffice.InSection2,Idiscusstheoverallperformanceofthe
economyincludingtheGDPgrowth,macroeconomicdevelopmentsandprogressin
attractingforeigndirectinvestment.InSection3,Iofferanaccountofthekey
processandpolicyreformsintroducedbythegovernment.Thediscussionhere
1TheauthorisaProfessorofEconomicsandJagdishBhagwatiProfessorofIndianPoliticalEconomyintheSchoolofInternationalandPublicAffairsatColumbiaUniversity.BetweenJanuary2015andAugust2017,heservedasthefoundingViceChairmanoftheNationalInstitutionforTransformingIndiaorNITIAayog,GovernmentofIndiaintherankofaCabinetMinister.ThePrimeMinisterservesastheChairmanoftheNITIAayog,whichreplacedtheerstwhilePlanningCommissionon1stJanuary2015.
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showsthatthishasbeenaveryactivegovernment,seekingchangeinwidevariety
ofareas.InSection4,Iassessthecriticismsofthegovernmentinthreekeyareas:
lackofrobustnessofgrowth;poorrecordofjobcreation;andilleffectsof
demonetization.InSection5,Iconcludethepaper.
Attheoutset,Imaynotethatwhilethisisperhapsafulleraccountofthe
threeandahalfyearsoftheModigovernmentthanavailableelsewhere,itisfar
fromcomplete.Inparticular,toensurethatthepaperisnotundulylong,Ihave
deliberatelyleftouttheareasofinfrastructure,energy,agriculture,innovation,
entrepreneurship,skilldevelopmentandsocialsectors.Majordevelopmentshave
takenplaceineachoftheseareasbuttheircoveragemustawaitaseparatepaper.
1 TheLegacy
Theyear1991wasawatershedyearintheeconomichistoryofIndia.That
year,thecountrydiscardeditsfour-decade-oldcommand-and-controlmodelin
favorofapro-marketdevelopmentstrategy.Tobesure,thereformpackage
includedsomeboldreforms.Forexample,inonestroke,itputanendtoinvestment
licensingunderwhichanysignificantprivateinvestmentrequiredalicense
specifyingtheproducttobeproduced,itsquantityandthelocationatwhichitwill
beproduced.Similarly,iteliminatedtheimportquotaregimeexceptinthecaseof
finalconsumergoodsunderwhichimportofaproductrequiredobtainingalicense
specifyingthequantityoftheproductallowedtobeimported.Thereformpackage
alsogenuinelyopenedthedoortoforeigninvestment,whichhadhithertobeen
permittedunderextremelystringentconditionsasaresultofwhichhardlyany
foreigninvestmentcameintothecountry.
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Thesemajorreformsinthe1991packagenotwithstanding,theshiftfromthe
state-ledtoquasi-market-leddevelopmentwasgradualandspreadovermorethan
adozenyears.Theexistenceofmultiplelayersofregulationineveryconceivable
areaofpolicyandmyriadbureaucraticcontrolscoupledwithIndia’scontentious
democraticpolitymeantthatittookseveralyearsofsustainedefforttoputinplace
reformsnecessarytogeneratesignificantsupplyresponse.The1990sandearly
2000ssawmanyofthesereformstakeroot.Asaresult,beginninginfinancialyear
2003-04,Indiafinallytransitedintoan8%plusgrowthtrajectory.2Fornineyears
from2003-04to2011-12,therealGrossDomesticProduct(GDP)ofthecountry
grewattheannualrateof8.2%.3
ThebulkofthereformsthatpropelledIndiaintothishighgrowthtrajectory
wereundertakenunderPrimeMinistersNarasimhaRaoandAtalBihariVajpayee.
Theformerservedfrom1991to1996andthelatterfrom1998to2004.Ihave
providedadetailedaccountofthesereformsinmy2008book,India:TheEmerging
Giant.Inanutshell,thereformsincludedopeningtheeconomytoforeigntradeand
investment;fullcurrent-accountconvertibilityoftherupeemeaningforeign
exchangeforimportsofgoodsandserviceswasmadefreelyavailable;substantial
liberalizationofthecapitalaccountmeaningthatforeigninvestorscouldinvestin
IndiathroughavarietyofinstrumentsandIndianinvestorscouldborrowfunds
abroadmorefreely;endtoinvestmentlicensing;allowingentryofprivate
2DatainIndiaarereportedaccordingtoitsfinancialyear,whichbeginson1stAprilandendson31stMarch.Therefore,financialyear2003-04referstotheperiodfrom1stApril2003to31stMarch2004.3GDPfiguresinthispaperrefertowhatisreportedastheGDPatmarketpricesintheofficialstatistics.Untilrecently,IndiareportedtheGDPatfactorcostasitsofficialGDP.Butrecently,ithasswitchedtothepracticeofreportingGDPatmarketpricesasitsofficialGDPasrecommendedbytheUnitedNationsSystemofnationalAccounts.
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companiesininsurance,telecommunicationsandcivilaviation,whichhadbeen
publicsectormonopoliesinthepast;acceleratedentryofprivateIndianandforeign
banksinasectorotherwisedominatedbypublicsectorbanks(PSBs);shiftfrom
controlledtomarket-determinedinterestrates;substantialrationalizationofdirect
andindirecttaxes;privatizationofselectedpublic-sectorenterprises(PSEs);entry
tolargeenterprisesinnumerousproductspreviouslyreservedforexclusive
manufacturebysmall-scaleenterprises;andanewcompetitionpolicy.
InMay2004,BharatiyaJanataParty(BJP)governmentofPrimeMinister
VajpayeeunexpectedlylosttheparliamentaryelectiontoCongress-ledUnited
ProgressiveAlliance(UPA).TheUPAservedinofficefortenyearsuntilMay2014.
Duringthesetenyears,pro-marketreformsreceivedamajorsetback.Tobesure,
UPAdidtakesomehalf-heartedmeasuresqualifyingasreformsduringitsfirstfive-
yeartermbutitentirelyabandonedtheminthesecondterm.Itcametotakehigh
growthforgrantedandturnedcomplacent.Itchosetogoforseveralpopulist
measuresthatproveddetrimentaltosustainingthehighgrowth.
Prominentamongthesemeasureswereretrospectivetaxation,whichgreatly
underminedinvestorconfidence;recklesslendingbyPSBsonprojectsofdubious
value,whicheventuallyledtogreatweakeningoftheirbalancesheets;Land
AcquisitionActof2013,whichmadefuturelandacquisitionimmenselycostlyand
procedurallycumbersome;andsystematicdenialofenvironmentalclearancesto
majorinfrastructureprojects,whichdirectlyunderminedgrowth.Breakoutof
multiplecorruptionscandalsandgeneralparalysisindecision-makinginthecentral
governmentreinforcedtheilleffectsofthesemeasures.Poormanagementofthe
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exchangerateand13successiveinterest-ratehikesbytheReserveBankofIndia
(RBI)addedfueltothefire.
Between2004-05and2007-08,fiscaldeficitofthecentralgovernmenthad
beenhelddownbetween2.5to4%oftheGDP.Thisfiscaldisciplinewaslostinthe
subsequentyearswiththedeficitescalatingto4.5to6.5%oftheGDPbetween
2008-09and2012-13.Initially,in2008-09,populistelection-yearspendingsuchas
farmloanwaivers,hikesinsalariesofgovernmentofficialsandtheextensionofa
ruralemploymentguaranteeschemefrom200poorestdistrictstotheentire
countryraisedthedeficitto6%oftheGDP.Subsequently,ratherthanreturnto
fiscaldiscipline,thegovernmentchosetomaintainhighexpendituresonthepretext
thatitwasnecessarytocombatilleffectsoftheglobalfinancialcrisis.Inreality,by
late2009,growthestimateswerealreadyshowingsignsofasteadyrecoveryin
growthmakingthefiscalexpansionunnecessaryandundesirable.
Predictably,thesepolicymistakeshadseriousnegativeeffectsonthe
economy.Beginninginthethirdquarterof2010-11,growthratefellforsix
consecutivequarters.Withstructuralweaknesseshavingpenetratedtheeconomy
deeply,evenafterbottomingoutinthefirstquarterof2012-13,growthdidnot
recoverinarobustmanner.BasedontheoldGDPseriesinuseatthetime,the
averageGDPgrowthfellto4.9%during2012-13and2013-14,thelasttwofinancial
yearsoftheUPA.Later,whenIndiashiftedtothenewGDPseries,thisfigurewas
revisedupwardto5.9%.
Amajorhikeinoilpriceinthesummerof2008andexpansionaryfiscal
policytranslatedintodouble-digitinflationfrom2008-09to2013-14.Alongside,
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thecurrent-accountdeficit,whichmeasuresthedifferencebetweenimportsand
exportsofgoodsandservicesadjustedforremittances,balloonedto4.3%in2011-
12and4.8%in2012-13.WiththeRBIhavingabandonedthelongstandingpolicyof
managingtheexchangerateandcapitalinflowsbeingprogressivelyliberalized,the
UnitedStatesdollarappreciated26%againsttherupeeduringtheelevenmonths
endingon31stAugust2013.
ThattheeconomywasslidingdownrapidlywasbecomingapparenttoIndia
watchers.Referringtotheslowingeconomicgrowthandpoliticalroadblocksto
policymaking,theStandardandPoorrhetoricallyaskedinthetitleofa2012report,
“WillIndiaBetheFirstBRICFallenAngel?”Inasimilarvein,citingalarming
macroeconomicindicators,anAugust2013storyintheEconomistconcluded,“Itis
widelyagreedthecountryisinitsworsteconomicbindsince1991.”
2 TheTurnaround
Itwasunderthesedifficulteconomiccircumstancesthatthepresent
governmenttookoffice.Itsimmediatechallengewastorestoremacroeconomic
stabilityandaccelerateGDPgrowth.Goingbytheavailableestimatesofvarious
indicators,thegovernmentsubstantiallymetthischallenge.Whilethescopefor
additionalgrowthaccelerationremains,aninitialturnaroundhassurelybeen
achieved.
Duringthethreefullfinancialyearsfrom2014-15to2016-17,theGDPhas
grownattheannualaveragerateof7.5%.Thisis1.6-percentagepointshigherthan
therateduringthelasttwoyearsoftheUPA.Itisalsothehighestamongthemajor
economiesoftheworld.Forthefirsttime,IndiahassurpassedChinaintermsof
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GDPgrowththough,admittedly,itremainsfarbehindthelatterintermsofthe
levelsofGDPandper-capitaGDP.
Inadditiontoachieving7.5%growth,Indiahasalsoseenthereturnof
macroeconomicstabilityduringthelastthreeyears.Inspiteofcontinuous
pressuresforlargeincreasesinexpendituresbyconstituencieswithinaswellas
outsidethegovernment,thelatterhasstayedcourseonitsfiscalconsolidationplan.
From4.5%oftheGDPin2013-14,ithasbroughtfiscaldeficitsteadilydownto3.2%
in2017-18.Therehavebeennoreversalsalongtheway.
Earlyinitstenure,thegovernmentadoptedatargetof4%inflationas
measuredbytheConsumerPriceIndex(CPI)with2-percentagepointvariationon
eithersideofthistargetpermitted.Withthistargetatthecenterofmonetary
policy,theReserveBankofIndia(RBI)hassuccessfullybroughtinflationdown.It
hadstoodat10.1%in2012-13and9.3%in2013-14.Duringthethreeyearsofthe
presentgovernment,theratehasbeensuccessivelybroughtdownto5.9%,4.9%
and4.5%.
Thecurrentaccountdeficithadalsobeenhighat4.3%oftheGDPin2011-12
and4.8%in2012-13,thoughitdidcomedownto1.7%in2013-14underUPA.This
importantindicatorhascomefurtherdownto1.3%,1.1%and0.7%insuccession
duringthethreeyearsofthepresentgovernment.Thenominalexchangeratehas
beenrelativelystablewithforeignexchangereservesrisingfrom$312billionin
May2014to$380billioninMay2017.
Foreigninvestorshavereactedfavorablytotheimprovedeconomic
environment.Totalforeigndirectinvestment(FDI)hasrisenfrom$36billionin
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2013-14to$45billionin2014-15,$56billionin2015-16and$60billionin2016-
17.Thesefigurescomparewith$118billionworthofFDIin2016intoChina,which
isnowfivetimestheIndianeconomyintermsoftheGDP.Therefore,intermsof
FDIasaproportionoftheGDP,IndiahasmovedwellaheadofChina.
3 ProcessandPolicyReform
NoteveryoneagreeswiththispositivenarrativeoftheModiyears.Indeed,
polarizeddebatesonthegovernment’spoliciesandaccomplishmentscanberead
eachmorninginIndiannewspapersorviewedeacheveningontheIndian
television.Thelatestofthesedebateswastriggeredbyadeclineinthegrowth
duringthefirstquarteroffiscalyear2017-18to5.7%.Iwillreturntosomeofthe
moreimportantofthesedebatesbelowinSection4.
Presently,inthissection,Idocumentthemajorprocessandpolicyreforms
thatthegovernmenthasundertaken.Whilesomeofthesereformshaveyielded
immediatereturnstowardsraisingtheaverageGDPgrowthduringthefirstthree
yearsto7.5%,theimpactofothers,especiallythoseofstructuralnature,willbefelt
onlyafterthreetofiveyears.India’sownexperiencetestifiestothelonglags
betweentheintroductionofstructuralreformsandtheirfullimpactonthe
economy.
Asalreadynoted,toensurethatthepaperisnotoverlylong,thediscussion
ofprocessandpolicychangesinthispaperisnotexhaustive.Inparticular,it
excludesareassuchasofinfrastructure,energy,agriculture,innovation,
entrepreneurship,skilldevelopment,educationandhealth.
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3.1 Tackling Retrospective Taxation
Theimmediatetasksbeforethegovernmentupontakingofficewereto
reassureinvestorsandendtheparalysisinthegovernment.4Duringthelasttwo
yearsoftheUPArule,investors,especiallyofforeignorigin,hadbeenreelingunder
thefearofretrospectivetaxation.In2012,theUPAgovernmenthadamendedthe
IncomeTaxActof1961soastoempowerittoassesslargesumsoftaxesgoingback
severalyearsoncompanies.Thishadleftforeigninvestorsverynervous.
Therefore,oneoftheearlyactsofthegovernmentwastoassurethese
investorsthatnonewcasesunderthelawwouldbeopenedup.Incasesthathad
alreadybeeninitiatedbytheUPA,thegovernmenttookthejudiciouspathofnot
pursuingthemfurtheroncetheHighCourtruledinfavorofthedefendant.The
resulthasbeenmuchmorepredictableinvestmentclimateinsofarastaxationis
concerned.ThechangehasbeeninstrumentalinacceleratingthegrowthofFDIin
India.
3.2 Ending Bureaucratic Paralysis
Thegovernmentalsotookearlystepstoendtheparalysisindecision-making
processthatithadinherited.Environmentalclearanceswerespeededupandthe
PrimeMinisterassuredofficersthattheycouldtakedecisionswithoutthefearof
beingchargedwithwrongdoing.Healsointerveneddirectlytoimprove
coordinationamongdifferentministries.Heestablishedasystemwherebythekey
ministryhandlingaparticularissuemakesapresentationtohimwiththetop
4InanarticlepublishedinthisJournalsoonaftertheModiGovernmenttookoffice,Ihadwrittenthatendingretrospectivetaxationandbureaucraticparalysiswereamongstepscrucialtojumpstartingtheeconomy.SeePanagariya,Arvind,“ThePromiseofModinomics,”ForeignAffairs,10thJune2014.
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bureaucratsoftheotherrelevantministriespresent.Thisallowshimtosortout
manyinter-ministerialissuesonthespot.ThePrimeMinisteralsoworksona
regularbasiswiththestateChiefSecretariestoclearhurdlesfacingmajorprojects.
Thisapproachhasaccelerateddecision-makingatthecenterandhelpedunblocka
largenumberofstalledprojects.Forexample,roadministryhasseen66ofthe73
stalledprojectsithadinheritedfromthepreviousgovernmentgettingresolved.
3.3 Ease of Doing Business
Thegovernmenthasplacedspecialemphasisonimprovingtheeaseofdoing
business.Ithasworkedcloselywithstatestocutredtapeinareasuchasstartinga
business,issuanceofconstructionpermits,gettingcredit,protectingminority
investors,payingtaxes,enforcingcontractsandresolvinginsolvency.Theresulthas
beenmuchimprovedbusinessenvironmentwithIndiamovingfrom142ndto100th
positionbetween2014and2018intheWorldBank’seaseofdoingbusiness
rankings.Indeed,businessenvironmentintheleadingstatessuchasAndhra
PradeshandGujaratisfarfriendlierthanreflectedinthisrankingsincetheWorld
BankcollectsallitsdatainDelhiandMumbai,whichranklesshighlythanthese
statesintheGovernmentofIndia’sstate-levelrankingsdoneaccordingtocriteria
similartothoseusedbytheWorldBank.
3.4 FDI Liberalization
Whenthegovernmentcametooffice,foreigninvestors,especiallythosefrom
theUnitedStates,consideredahikeintheFDIcapininsurancefrom26%to49%as
thelitmustestofitswilltoreform.Thegovernmenthasnotonlydeliveredonthis
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reformbutgoneontoopenothersectorstoforeigninvestorsaswell.Itopened
defensetoforeigninvestorsfirstsettingthecapat26%andthenraisingitto49%
throughautomaticrouteand100%throughapprovalroute.Thegovernmenthas
alsopermitted100%FDIinmarketingoffoodproductsproducedinIndia;high-tech
andcapital-intensiveactivitiesintherailways;coffee,rubber,cardamom,palmand
oliveplantations;manufacturingofmedicaldevices;e-commercemarketplace;and
non-bankautomatictellermachines.
3.5 Closure and Privatization of Public Sector Enterprises (PSEs)
Afteralagofmorethanadecade,thegovernmenthasinitiatedaprogramof
closureofsickPSEsandprivatizationofthosePSEsthatdonotserveapublic
purpose.ManysickPSUshavebeenentirelywithoutanyproductionactivity
whatsoeverandyethavebeenkeptalivebytheirrespectiveministries.Assuch,
theyhavebeenanetburdenontheexchequer.Theprocessoftheirclosureis
complicatedduetodifficultiesinthedisposalofthelandtheyown.Nevertheless,
morethanadozenPSEsarenowinadvancedstagesofclosure.Ontheprivatization
front,theCabinethasapprovedthreelistsofenterprisesforstrategicsalesandput
evenAirIndiaontheblock.Unfortunately,however,keybureaucratsinthe
MinistryofFinancehavebeenslowinmovingtheprocessforward,duetowhichno
finalsaleshavetakenplaceasyet.Buttransactionsadvisershavebeenappointed
foranumberofPSEsanditisonlyamatteroftimethatoutrightsalesofPSEswill
beseentakingplace.
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3.6 Exit Policy
Ihavewrittenformorethanadecadethattheprocessofexitoffirms,
especiallylargeones,isextremelycomplexandtimeconsuminginIndia.Winding
upoffirmsnormallytakesmorethanadecadeanditisnotunusualfortheprocess
todragfortwodecadesorlonger.Thisdifficultyofexithasseriousimplicationsfor
entryofnewfirms.Giventhehighexitbarrier,potentialentrantsenterbusiness
onlywhentheyarenearlycertainthattheywouldsurvive.Thepresentgovernment
hasfinallyenactedtheInsolvencyandBankruptcyCodeof2016,whichallows
windingupoffirmsinatimeboundfashionmuchlikethebankruptcylawinthe
UnitedStates.Thislawisnowbeingusedtobringtoclosuremanyofthenon-
performingassetsofthepublicsectorbanks.
3.7 Direct and indirect Tax Reform
Therehasbeenprogressinreformingbothdirectandindirecttaxes.The
lowestdirectpersonaltaxratehasbeenreducedfrom10to5%withtheviewto
discouragepotentiallow-endtaxpayersfromevadingtaxpaymentandthusexpand
thetaxbase.Acommitmenthasalsobeenmadetobringthecorporateprofittax
downto25%from30%.Thischangehasalreadybeenputintopracticefor
companieswithturnoverbelow500millionrupees.
Ontheindirect-taxfront,theGoodsandServicesTax(GST)arguably
representsthemostimportantandpoliticallydifficultreforminIndiato-date.It
tookmorethanadecadeofeffortsbythreedifferentgovernmentstocompleteand
requiredaConstitutionalamendment,severallegislationsandconsensusamong29
statesandthecentralgovernment.ForthefirsttimeinIndia’shistory,anygiven
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commodityorserviceissubjecttoasingletaxratenationally.TheGSTreplaces
numerousstateandcentraltaxbyasingletax.Thismeansthatvehiclesmoving
goodsfromonestatetoanothernolongerhavetobestoppedattheborderfortax
relatedmatters.Thoughithasbeenwidelycriticizedforitsvariegatedstructure
acrossdifferentcommoditiesandservicesandforpoorimplementation,itremainsa
majoraccomplishmentofthegovernment.WithinthedemocraticpolityofIndia,no
majorreformiscompletedatonestroke.Forexample,tradereformwasspread
overnearlytwodecadesandstillremainsincomplete.ThesameappliestotheGST.
Withthemajorstepscompleted,amovementtofewerratesandbetter
implementationcanbeachievedintheyearstocome.Somemovementinthis
directionisalreadyunderway.
3.8 Reduction in Petroleum Subsidies
Thegovernmenthasmadeaconcertedefforttobringdownpetroleum
subsidies.Dieselandpetrolpriceswerefullydecontrolledfrom1stJanuary2015.
Thisonlyleaveskeroseneandcookinggassubsidiesaspetroleumrelatedsubsides.
Regardingcookinggassubsidy,thegovernmenthasbeenincreasingthepriceofgas
cylindersby4rupeeseachmonthwiththeviewthatthesubsidywillbeentirely
eliminatedbytheendofMarch2018.Therehasalsobeensubstantial
rationalizationofkerosenesubsidywithsomestatestakingmeasurestobecome
kerosenefree.Thetotalsubsidyandunder-recoveryonpetroleumproducts,which
hadstoodat$2.25billionin2013-14,camedownto$340millionin2015-16.5
5SeethepressnotebyPressInformationBureau,GovernmentofIndiadated25thApril2016andtitled“SubsidyonPetroleumProductsathttp://pib.nic.in/newsite/PrintRelease.aspx?relid=141145.
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3.9 Direct benefit Transfer using Aadhaar-based Verification
Amajorachievementofthegovernmenthasbeentorapidlyspreadthe
biometricidentityprogramstartedbythepreviousgovernmentandknownas
Aadhaar.Today,with1.1billionIndiansprovidedthisidentity,thecoverageis
almostuniversalexceptinthenortheasternstates.Thegovernmenthasbeen
graduallyspreadingtheuseoftheidentityinthedisbursementofsocialbenefitsvia
whatiscalledtheDirectBenefitTransfer(DBT)mechanism.Avastnumberof
CentrallySponsoredSchemesincludingsuchmajoronesasthesubsidyoncooking
gascylinders,saleoffoodgrainatsubsidizedpricesunderpublicdistribution
systemandpaymentofwagesundertheNationalRuralEmploymentGuaranteeAct
programarenowbeingimplementedthroughDBTmechanism.Biometric
verificationhasmeantthatmillionsofghostandduplicatecardsthatbeneficiaries
usedtoreceivebenefitsmultipletimesinthepasthavebeeneliminated.According
totheestimatesprovidedbythegovernment,savingsattributabletoDBT
mechanismamountedtonearly$9billionin2016-17alone.
3.10 Cooperative, Competitive Federalism
Thegovernmenthasalsobroughtaboutamajorchangeinthewaythe
centralgovernmentrelatestostates.Inthepast,thePlanningCommissionhad
exercisedconsiderableinfluenceovertheallocationofdevelopmentalexpenditures
ofthestatesthroughgrantsitgavethelatterfortheirstateplans.Acceptingthe
recommendationsoftheFourteenthFinanceCommission,thepresentgovernment
Ihaveconvertedtherupeefiguresinthepressnoteintodollarsusingtheexchangerateof65rupeesperdollar.
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replacedthesegrantsbyanincreaseintheshareofthestatesinthecentraldivisible
pooloftaxrevenuefrom32%to42%.Thischangegaveconsiderablefreedomof
expendituretothestates.
Alongside,thePrimeMinisteralsoreplacedthePlanningCommissionbythe
NationalinstitutionfortransformingIndiaorNITIAayogwithamarkedlydifferent
mandate.Asaresult,theNITIAayoghasbeguntoplayacatalyticrolein
intensifyingbothcooperationandcompetitionamongstates.Onthecooperation
front,itidentifiesthebestpracticessuchase-auctionofagriculturalproducein
Karnataka,evidence-basedpolicymakinginGujarat,schoolconsolidationin
RajasthanandspreadofbroadbandinAndhraPradeshforadoptionbyotherstates.
Onthecompetitionfront,ithasbegunpublishingoutcome-basedrankingsofstates
inareassuchaseducation,healthandwater.
Today,anintensehealthycompetitionmaybeseenamongchiefministersof
differentstatesindifferentareas.TheNITIAayoghasalsocatalyzedreformsatthe
levelofthestate.Forexample,ithaspilotedaModelLandLeasingAct,whichis
beingprogressivelyadoptedbydifferentstatestoreplacetheirantiquatedtenancy
lawsadoptedintheimmediateaftermathoftheIndependence.TheNITIAayoghas
alsopromotedthereformsinmarketinginagricultureandcontractfarming.These
areareasinwhichthestateshavetheexclusiverighttolegislate.
3.11 Assault on Corruption
InkeepingwiththepromiseofPrimeMinisterModiduringelection
campaign,thegovernmenthastakennumerousstepstocrackdownoncorruption
beginningwiththeappointmentofaSpecialInvestigationTeamonitsfirstday.
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Additionalstepsincludeenactmentofalawregardingundisclosedforeignincome
andassets;amendmentoftheDoubleTaxationAvoidanceAgreementswith
MauritiusandCyprus;developmentofanunderstandingwithSwitzerlandon
gettinginformationonbankaccountsheldbyIndiansincertaincases;amendment
oftheBenamiTransactionsAct;implementationoftheIncomeDeclarationScheme
2016;demonetizationwherebyhighdenominationnotesof500and1,000rupees
losttheirlegaltenderstatusovernighton8thNovember2016;andpost-
demonetizationinvestigationofindividualandcompanybankaccountsandtax
returns.
Atthecenter,thegovernmenthasensuredthatnobribesaretakeninthe
dischargeofnormalbusiness.Transparentauctionshavereplacedbureaucratic
allocationsofvariousresources.ThePrimeMinisterhimselfhasassuredpublic
sectorbanks(PSBs)thatunlikeundertheUPA,hisgovernmentwouldnotintervene
intheirlendingactivitiesinanyform.Theseeffortshavehadvisiblesuccess:
whereasonecorruptionscandalafteranotherhadrockedtheUPA,therehavebeen
noallegationsofhigh-levelcorruptionagainstthepresentgovernment.Whilethis
positiverecordiswidelyacknowledged,therehavebeenscathingcriticismsof
demonetization.Ishalldetailandevaluatethesecriticismslaterinthepaper.
3.12 Ease of Access to Services for Citizens
Thegovernmenthasalsotakenstepstoimprovethecitizens’accessto
publiclyprovidedservices.Ithasintroducedself-certificationofcopiesofdiplomas
anddegreeswhenapplyingforjobs.Inthepast,applicantshadtofindasenior
governmentofficeroraseniormemberofjudiciarytohavethecopiesoftheir
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diplomasanddegreescertified,arathercostlyaffairespeciallyforthoseresidingin
ruralareas.
Thegovernmenthasalsoprogressivelymovedtheprovisionofnumerous
publicservicesonlinetherebyeliminatingdirectcontactwithofficials,whichis
frequentlythesourceofpettycorruption.AdigitalapplicationcalledUmang
[UnifiedMobileApplicationforNew-ageGovernance]consolidatesnumerous
servicesdigitallyprovidedbycentral,stateandlocaladministrationsonasingle
platform.Currently,servicesprovidedby39entitiesincludingapplyingfor
passport;filingincome-taxreturns;payingvariousbills;accessinglandrecordsin
certainstates;accessinge-booksandeducationalaudiosandvideos;accessing
agriculturalextensionservices;andmakingappointmentsatgovernment-run
hospitalsareavailablethroughUmang.Governmenthasalsocreatedportal
DigiLocker,whichservesasadigitallockerserviceandenablescitizenstostore1
GBworthofofficialdocumentsonthecloud.Theserviceeliminatestheneedfor
carryingarounddocumentsinphysicalform.
3.13 Ending Open Defecation: The Swachh Bharat Mission
Thoughadiscussionofsocialprogramsofthegovernmentisbeyondthe
scopeofthispaper,thepapercannotaffordtoneglectmentioningbrieflythe
SwachhBharatMission(SBM).InhisfirstIndependenceDayspeech,PrimeMinister
NarendraModiannouncedthelaunchingoftheSBMbeginningon2ndOctober2014,
MahatmaGandhi’s145thbirthanniversary,andendingfiveyearslateronhis150th
birthanniversary.ThebroadagendaoftheSBMisastepjumpincleanlinessinall
itsaspectsinruralandurbanIndiabutitsmostimportantcomponentistheendto
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opendefecation.Whileeffortstowardsendingopendefecationarenotnew,the
progressachievedundertheSBMisunprecedented.On2ndOctober2014,whenthe
missionwaslaunched,only38.7%ofruralhouseholdshadtoilets.By2ndOctober
2017,thisproportionhadreached71%.Thoughtheprogramhasbeencriticizedon
thegroundthattheexistenceofatoiletdoesnotensureitsuse,arecentsurveyby
thegovernmentfoundthatnineoutoftenhouseholdswithaccesstotoiletsare
usingthem.Themissionhasgenuinelycaughtonwithofficialsatthestate,district
andlowerlevelsofadministrationgettingdirectlyinvolvedinbringingabout
behavioralchange.
3.14 Budget-related Reforms
Manyeconomistshadarguedforyearsthatthedistinctionbetweenplanand
non-planexpenditureswasartificialandcounter-productiveandshouldbe
discontinued.Planexpenditureshadcometobeseenasdevelopmental
expendituresandthereforemoredesirableandnon-planexpenditureascurrent
expendituresandthereforelessdesirable.Thistiltedtheexpendituresunduly
towardsplanexpenditures.Thereality,however,wasthatmanyofthelargeplan
expendituressuchassalariesofteacherandhealthworkerswerecurrent
expenditureswhilemanynon-planexpendituressuchasthoseonlawandorderand
judiciaryhadanobviousdevelopmentalangle.Keepingthisinview,thepresent
governmenthasdiscontinuedthedistinctionbetweenplanandnon-plan
expenditures.
Similarly,manycommentatorshadsuggestedforsometimethattherewas
norationaleforaseparatebudgetfortherailways.WhentheBritishstartedthe
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practice,railwaysaccountedforaveryhighproportionofthegovernment
expendituresbutthiswasnolongerthecase.Thegovernmenthasactedonthis
suggestionaswellandmergedtherailwaybudgetwiththegeneralbudget.
Finally,inthepast,withthebudgetpresentedjustamonthbeforethe
beginningofthenewfinancialyear,allocationsofexpenditurestothestatesusedto
getdelayedandvaluabletimeforimplementationwaslost.Withdelayscascading
overtime,oftenstateswereunabletospendalargeproportionofthefunds
allocatedtotheminthelastquarter.Toalleviatethisproblem,thegovernmenthas
begunthepracticeofpresentingthebudgetamonthearlierthaninthepast.Thisis
expectedtoensurethatthecentralministriesarereadytodisbursefundstothe
statesandotherspendingagenciesonthefirstdayofthenewfiscalyear.
4 CriticismsandResponse
Mostcommentatorsagreethatthegovernmenthassuccessfullyplacedthe
economyonastablemacroeconomicpath.Withthreatsofretrospectivetaxation
andotherarbitrarydecisionsrecedingintothebackground,investorconfidencehas
returned.OneindicatorofincreasedconfidenceisthehealthygrowthinFDI.But
thegovernmentisnotwithoutcritics.Threecriticismsstandout:growthisslower
thantheestimatesbytheCentralStatisticalOffice(CSO);growthhasbeenjobless;
andthecostofdemonetizationhasfarexceededitsbenefit.Thesecriticismsrequire
acloseexaminationandresponse.
4.1 Growth is Slower Than the CSO Estimates
EarlycriticsofthegovernmentarguedthattheofficialCSOestimates
overstateGDPgrowth.Thecritiquehastwocomponents:thenewCSOmethodology
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forestimatingtheGDP,introducedin2015,hasseriousflaws;andtheestimatesdo
notmatchthegroundreality.
In2015,respondingtocomplaintsofvariousshortcomingsoftheold
methodologyofestimatingtheGDP,theCentralStatisticalOffice(CSO)unveiledits
newmethodology.Thismethodologyrevisedupwardthegrowthratesbasedonthe
oldmethodologyforyears2012-13and2013-14.Italsopeggedtheadvance
estimateofthegrowthratefortheyear2014-15at7.4%.Adebatewaskickedoff
immediatelywithcriticsarguingthatthenewmethodologyoverestimatedgrowth
rates.
Thoughcriticshavebeenhighlyvocalinpointingoutflawscharacterizingthe
newmethodology,nonehasofferedimplementablesolutionsthatwouldovercome
theseflaws.Norhavethecriticsarguedthatthenewmethodologyrepresentsa
regressovertheoldone.Afairsummaryofvariousargumentsisthatthechanges
madebytheCSOmakeimprovementsovertheoldmethodologybuttherestill
remainssubstantialroomforfurtherimprovementinthequalityofdataonwhich
estimatesarebased.
Itisalsothecasethatcriticsprovidenobasisfortheircontentionthatthe
newmethodologyoverestimatestheGDPraterthanunderestimatingit.Indeed,
evenifitcouldbeestablishedthatthemethodologyoverestimatestheGDP,itdoes
notautomaticallyfollowthatitalsooverestimatesthegrowthrateoftheGDP.For
thislatterconclusion,itmustbethecasethattheoverestimationbecomes
proportionatelyprogressivelylargereveryyear.Criticshavecomenowherecloseto
establishingthisproposition.Theinevitableconclusionisthatthecritics’claimthat
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theCSOGDPestimatesoverstategrowthissolelyrootedinthedissonancetheysee
betweentheseestimatesandtheirownsubjectivegloomierassessmentoftheso-
called“groundreality.”Anyclaimsofoverestimationofthegrowthrateon
methodologicalgroundsremainunsubstantiated.
Butwhatcanwesayabouttheargumentthattheestimatedgrowthratesare
outoftunewiththegroundreality?BeforeIsubjectthisargumenttoacritical
examination,letmedrawattentiontoanimportantrelevantpointthatThe
EconomistmadeayearagowhenreviewingthebookProgressbySwedisheconomic
historianJohanNorberg.TheEconomistwrote,“Peoplearepredisposedtothink
thatthingsareworsethantheyare,andtheyoverestimatethelikelihoodof
calamity.Thisisbecausetheyrelynotondata,butonhoweasyitistorecallan
example.Andbadthingsaremorememorable.”6Anexaminationoftheevidenceon
whichcriticsbasetheirassessmentofthegroundrealityrevealsthatthereismuch
truthinthisproposition.
Criticsdefendtheirgloomierassessmentofgroundrealitybypointingtothe
poorperformanceofoneormoresectorsoftheeconomyandtolowratesof
corporateprofits,corporateinvestmentsandtotalinvestment.Invariably,these
assessmentshavebeensubjectiveandpartialwithnoeffortatacomprehensive
assessmentoftheeconomy.Worseyet,someoftheindicatorsofpoorperformance
thatcriticsofferturnouttobefalsewhenassessedagainsthardstatistics.
True,someofthelegacysectorssuchastextiles,steelandconstruction,
whichsufferfromstressedbalancesheetsonaccountofbadinvestmentsmade
6SeeTheEconomist,3rdSeptember2016,“Betterandbetter,”pp.70-71.
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duringtheUPAyears,havebeenperformingpoorly.Butthepoorperformanceof
thesesectorshadalreadybeenincorporatedintotheGDPestimatesforthelasttwo
yearsoftheUPA.Whathaschangedistheperformanceofsectorsthatdidnotsuffer
fromstressedbalancesheet.Itisthesuperiorperformanceofsectorssuchastwo
wheelers,automobiles,machinerysector,chemicals,pharmaceuticals,softwareand
otherservicessectorsthathaspulledtheoverallgrowthrateupby1.6percentage
pointsonaverageduringthelastthreefullyears.
Asregardstheclaimsoflowratesofcorporateprofits,corporateinvestment
andthetotalinvestment,systematicdataprovethemfalse.Inarecentarticle,Ihave
documentedthatbothcorporateprofitsandcorporateinvestmentasproportionsof
theGDPhavebeenhigheronaveragein2014-15and2015-16thanduringyearsin
whichtheeconomyhadgrownfasterthan8%onaverage.7Systematicevidencealso
failstosupporttheclaimsbycriticsofacollapseinthetotalinvestment.True,the
totalinvestmentasaproportionoftheGDPhasseenasmalldeclinebutitremains
healthyat30%oftheGDPorhigher.8
ThereleaseofGDPgrowthestimateforthefirstquarterof2017-18(April-
June2017)hadreignitedthedebateongrowthintheIndianmedia.At5.7%,this
growthhappenedtobethelowestquarterlygrowthunderthepresentgovernment.
Moreover,itrepresentedthefifthconsecutivequarterlydecline.Thesefactsledtoa
returnofthecriticstothecenterstageofpolicydebate.Themoreextremeamong
7Datafor2016-17arenotyetavailable.8Fordetails,seePanagariya,Arvind,“Floorhasn’tfallenthrough:Don’tgoby‘feel’,economicdatacallformeasuredratherthanprecipitateaction,”TimesofIndia,September25,2017athttps://blogs.timesofindia.indiatimes.com/toi-edit-page/floor-hasnt-fallen-through-dont-go-by-feel-economic-data-call-for-measured-rather-than-precipitate-action/(accessedon20thOctober2017).
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themwentontoassertthattheeconomywasina“tailspin”andthatIndiamaybe
headingfora“majordepression.”Thecriticismsassumedspecialsignificance
becauseaformerFinanceMinisteroftheVajpayeegovernmenthadbeenatits
forefront.
Therearegoodreasonstoviewthisroundofcriticismswithskepticismas
well.InJanuary-March2016quarter,GDPgrowthhadtouchedthehighof9.1%.
Withthemedium-termannualaveragegrowthrateat7.5%,oddswereheavilyin
favorofadownturninthequarterlygrowthfromthishighrate.Assuchthefallin
thegrowthrateinthefollowingtwoquartersto7.9%and7.5%washardly
surprising.Themainissueiswhythedeclinecontinuedforanotherthreequarters
insteadofreversingitself.Theexplanationforthisfactliesintwoback-to-back
supply-sideshockstotheeconomy:demonetizationinNovember2016andfirming
upoftheexpectationthattheimplementationoftheGSTwouldbeginon1stJuly
2017.
Demonetizationon8thNovember2016hadrenderedillegal86%ofthe
currencyincirculationintheformof500-and1,000-rupeenotes.Thefactthat
despitesuchalargeshockgrowthratefellfrom7.5%inJuly-September2016
quartertojust7.0%inOctober-December2016quarterand6.1%inJanuary-March
2017quartertestifiestotheresilienceoftheeconomy,notitsweakness.
Undernormalcircumstances,mostlikely,thegrowthratewouldhave
experiencedrecoveryduringApril-June2017quarter.Butthesecondshock—
firmingupoftheexpectationbytheendofMarch2017thattheimplementationof
theGSTwasimminent—preventedthisrecovery.RecognizingthatnoGSTrebate
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willbeforthcomingonindirecttaxespaidontheinventoryaccumulatedpriorto1st
July2017,retailers,wholesalersandmanufacturerstemporarilystoppedorslowed
downinventoryaccumulation.Theresultwasasharpreductioninmanufacturing
growth,whichlargelyaccountedforthefallintheoverallgrowthto5.7%duringthe
quarter.
TheCSOhasnowreleasedtheGDPgrowthestimateforJuly-September2017
quarterplacingitat6.3%.Thedeclineinthegrowthratehasthusbeenreversed
andgoingbythecommentarybyanalystsatvariousbanksandotherinstitutions,
thistrendisexpectedtocontinue.Nearlyallforecastersplacethegrowthratefor
fullfiscalyear2017-18at6.5%orthereaboutsandfor2018-19wellabove7%.
4.2 Growth has been Jobless
Thesecondmajorcriticismofthegovernmentpolicieshasbeenthatthey
haveproducedjoblessgrowth.Inofferingthiscriticism,criticshavereliedontwo
mainsourcesofinformation:mediareportsofworkerlayoffsandemployment
creationestimatesfromaquarterlyenterprisesurveyconductedbytheLabor
BureauoftheMinistryofLaborandEmployment.Bothsourcesofinformation
sufferfromseriousproblems.
Fewinformedanalystswoulddisagreethatanyconclusionregardingjob
creationonthebasisofmediareportsispatentlyunscientific.Indeed,sincebad
newssellsalotbetterthangoodnews,itisjoblossesthatgetdisproportionately
greaterplayinthemedia.Ifoneweretosystematicallyanalyzemediareports,oneis
likelytofindthatineveryyear,joblosseshaveoutnumberedjobadditions.Correct
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evaluationrequiresscientificsurveysthattakeintoaccountalljobcreationandall
joblosses.Anyclaimsbasedsolelyonnewsreportsmustberejected.
Asregardsenterprisesurvey,inIndia,ittoosuffersfromseriousproblems.
ThisisbecauseaverylargeproportionofthelaborforceinIndiaiseitherself-
employedoremployedinverysmallenterprisesthattypicallydonotformapartof
theenterprisesurveys.Therefore,ifself-employedworkersfindajobinalarger
enterprisecoveredbytheenterprisesurvey,nochangeinthetotalemployment
wouldhavetakenplaceandyetthesurveywouldreportincreasednumberofjobs.
Symmetrically,ifaworkerislaidofffromalargeenterpriseandfindsemployment
inasmallenterprisethatisnotcoveredbytheenterprisesurvey,wewould
concludethatthenumberofjobshasfallendespitenonetchangeinthisnumber.
TheLaborBureauenterprisesurveyonwhichmanycriticsrelysuffersfrom
thisandotherflaws.Itisconfinedtoenterpriseswith10ormoreworkersina
selectedsetofsectors.InIndia,theseenterprisesaccountforaverysmall
proportionofemployment.Evenwhenweincludeallsectors,accordingtotheSixth
EconomicCensus,conductedin2013-14,enterpriseswith10ormoreworkers
accountforonlyone-fifthofnon-agriculturalworkers.Byexcludingtheself-
employedandemployeesofenterpriseswithlessthantenworkerseach,thesurvey
failstocoverfour-fifthofnon-agriculturallaborforce.Thisexclusionmeansthat
nothingfromthesurveyallowsustosayanythingaboutthetotalemployment.
Thesurveyhasotherproblems.UntilDecember2015,theselectionoffirst-
stageunitsinthissurveywaspurposiveratherthanrandom.Asaresult,any
inferencesfromsampleunitsforthepopulationarerenderedstatisticallyinvalid.
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Surveyreportshavenotedthisflawbutcriticshavepaidnoheedtoit.Furthermore,
thecoverageofsectorsandstatesinthesurveyhaschangedovertime.Thisis
particularlytruebetweensurveysconductedbeforeandafter2015.Hadthe
selectionbeendoneonarandombasis,thiswouldnotmatter.Butthisnotbeingthe
case,comparisonsofestimatesovertimearewhollyinvalid.
Claimsofjoblessgrowthbycriticsthuslackvalidempiricalfoundations.In
aneconomyinwhichdisproportionatelylargenumberofworkersareself-
employedoremployedinverysmallenterprises,onlylarge-scalehousehold
surveys,whichextendtotheentirepopulation,canofferreliableestimatesof
employmentandunemployment.Indiahasconductedthesesurveyseveryfive
yearssince1972-73andtheydonotsupportthehypothesisofjoblessgrowth.
Basedonusualprincipalstatusoftheworker,thesesurveysconsistentlyplace
unemploymentrateatorbelow5%withlimitedvariationovertime.Forinstance,
theunemploymentratewas4.9%in2013-14and5%in2015-16.9
Simpleeconomiclogicsupportsthehypothesisthatrapidgrowthincluding
thatunderthepresentgovernmentcouldnothavebeenjobless.Asapurely
accountingmatter,growthintheGDPistheresultofgrowthininputsand
productivity.Studiesoverwhelminglyshowthatinthebestoftimes,productivity
growthdoesnotcontributemorethan3-percantagepointstoGDPgrowth.
Therefore,asubstantialproportionofthe7.5%GDPgrowthexperiencedduringthe9ThemostcompleteandcomprehensiveestimatesofemploymentandunemploymentinIndiacomefromhousehold-basedlarge-scaleEmployment-UnemploymentSurvey(EUS),whichtheNationalSampleSurveyOffice(NSSO)hasconductedapproximatelyeveryfiveyearssince1972-73.TheEUSusesthepopulationcensusasthesampleframeandthereforecoverstheentirepopulation.AlthoughthelastNSSOEUSwasconductedin2011-12,theLaborBureauhasbeenconductingasimilarlarge-scalehouseholdsurveywithsomemodificationstothesurveydesignapproximatelyannuallysince2010.
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lastthreeyearshastohavebeencontributedbygrowthincapitalandlabor.
Recognizingthatgrowthincapitalhasseenaslightdecelerationduringthepast
threeyears,asamatterofpurearithmetic,laborinputgrowthcouldnothavebeen
anyslowerthanduringtheearlieryearsofrapidgrowth.
Criticismsofjoblessgrowtharethusseentobewithoutsoundempiricalor
logicalfoundation.Butitdeservesnotingthatthoughtheunemploymentratein
Indiaislow,thecountrydoessufferfromaseriouslong-termunderemployment
problem.Giventhelimitedavailabilityofsocialsafetynets,nearlyalladultsinIndia
mustengageinsomeeconomicactivitytosurvive.Butthereisnotenough
economicactivitytogenuinelyemploymostworkersfull-timeatwhatis
conventionallyconsideredthenormallevelofeffort.Therefore,oftentwoormore
workersarefoundperformingtasksthatoneworkerworkingfulltimeatthe
normallevelofeffortcouldperform.Asanexample,ifaplumbingjobistobedone,
frequently,twoormoreworkerswouldshowup.Andasoneoftheworkers
performsthejob,theotherssimplywatchhimdoit.
Toputthematterdifferently,alongstandingproblemafflictingIndiasince
beforeIndependencehasbeenthelackofrapidgrowthinhigh-productivity,high-
wagejobsforlow-skilledorunskilledworkers.Innearlyallcountriesthathave
achievedrapidtransformationinthepost-Second-World-Warera,suchas
Singapore,Taiwan,SouthKoreaandChina,thesejobshavebeencreatedbyexport-
orientedlabor-intensiveindustriessuchasapparel,footwear,furnitureandother
lightmanufactures.Withtheseindustrieshighlyfragmented,fartoomanyworkers
inIndiaremainself-employedoremployedintinyenterpriseswheretheirlaboris
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grosslyunderutilized.Growthinthecountryhasbeendrivenbycapital-andskilled-
labor-intensivesectorssuchasauto,autoparts,twowheelers,machinery,
petroleumrefining,telecommunications,pharmaceuticals,informationtechnology
andfinance,whichcreatefewjobsfortheunskilledorlowskilled.Consequently,
underemploymentofadisproportionatelylargepartoftheworkforceinheritedat
Independencecontinues.Thisisakeyweaknessneedingurgentredress.
4.3 Demonetization
Ihavealludedearliertodemonetizationasoneoftheseveralmeasuresthat
thegovernmenttooktocombatcorruption.On8thNovember2016,thegovernment
discontinuedlegaltenderstatusoftwolargest-denominationcurrencynotes,Rs.
500andRs.1,000,whichaccountedfor86%ofthetotalcurrencyincirculationat
thetime.Thoseholdingthecurrencynoteswereaskedtobringthemtobanksby
certaindatewithbanksauthorizedtoconvertsmallsumsintonewcurrencynotes
andtaketherestasdepositswithproperrecordsofthetransactionsmaintained.
Thelogicbehindthemeasurewasthatthoseholdingunaccountedwealthinthese
large-denominationcurrencynoteswillnotbeinapositiontoexplainthesourceof
theirwealthandthereforewouldchoosenotbringtheircurrencyholdingstobanks.
Inthisway,unaccountedwealthheldinlarge-denominationcurrencynoteswould
beexpunged.
Intheevent,nearlyallcurrencyreturnedtothebankingsystem.Thereare
reportsthatthosewithunaccountedwealthinthediscontinuedcurrencynotes
foundavarietyofavenuestolegallychannelingthemintothebankingsystembut
thisremainstobeverified.Forinitialseveralweeks,demonetizationproducedlong
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queuesatthebanks.Becauseittookthreemonthstoadequatelyremonetizethe
economy,therewassomedislocationofeconomicactivity.
Commentatorshaveofferedthreemaincriticismsofdemonetization:(i)It
ledtosubstantialinconveniencetopeoplewhohadtostandinqueuesatbanksfor
longhoursforseveralweeks;(ii)Economicactivitywasdislocatedleadingtoa
declineinthegrowthrate;and(iii)Becausenearlyalldiscontinuedcurrencynotes
returnedtothebankingsystem,theobjectiveofcombatingblackmoneywasnot
fulfilled.
Inevaluatingthesecriticisms,letmebeginbynotingthatthegovernment
hadsurelyanticipatedthatdemonetizationwouldproducelongqueuesforsome
weeks.Ittookthatriskinthebeliefthatpublicatlargewassupportiveofthe
government’sresolvetocombatcorruption.Thatbeliefturnedouttobetrue.Ina
countrywherequeuesformovieticketsorforcollectingsubsidizedfoodgrainat
governmentshopscanleadtoargumentsandsquabbles,thelongqueuesforweeks
togethertriggeredhardlyanysuchincidents.Thecommonmanstronglywelcomed
thefactthataleaderhadfinallycomealongwhowaswillingtofrontallyattack
corruptionandthecorrupt.Theelite,whoseeaninsultinhavingtostandinany
queue,mayhavebeenappalledbythosequeuesbutthecommonmanwashappy
thatthistimearoundtherichtoohadtostandalongsidethemtodeposittheir
moneyandexchangeoldcurrencyfornew.Thedecisivevictoryofthepartyofthe
primeMinisterintheUttarPradeshelections,whichfollowedsoonafter,strongly
suggeststhatpeoplewelcomedhisassaultoncorruption.
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Inasimilarvein,thegovernmentalsounderstoodthatsometemporary
dislocationofeconomicactivitywouldtakeplaceinresponsetothewithdrawalof
86%ofthecashfromtheeconomy.Whatisremarkable,however,ishowlimited
thisdislocationturnedouttobe.Duringtwofullquartersimmediatelypriorto
demonetization,growthhadsuccessivelydeclinedto7.9%and7.5%from9.1%.
Duringthequarterinwhichdemonetizationtookplaceandtheonethatfollowedit,
growthratefellto7%and6.1%,respectively.Thesedeclineswerefarbelowwhat
nearlyallcriticshadpredictedimmediatelyfollowingtheannouncementof8th
November2017.
Thefirsttwocriticismsmentionedaboveare,thus,greatlyoverstated.The
cruxofthematter,therefore,iswhetherdemonetizationachievedmuchsuccessin
movingthefightagainstcorruptionforward.Herecriticshaveseizedonthefactof
thebulkofthecurrencyhavingreturnedtothebankingsystemasdecisiveevidence
thatnoprogressinthisregardwasmade.
Butthisisanonsequitursincethelackofreturnofunaccountedcashtothe
bankingsystemwasonlyoneamongmanyavenuesthroughwhichdemonetization
couldhavehelpedcurbblackmoney.Whilethisavenuedidfailtopenout,atleast
threeotheravenuesopenedbydemonetizationhavesuccessfullycontributedtothe
fightagainstunaccountedwealth.
First,thoughnearlyallmoneyhasreturnedtothebankingsystem,ithas
returnedwiththenameoftheownerattachedtoit.Thelattermustnowexplainthe
sourceofhisorhermoney.Thosewhohaveengagedinsuspiciousactivitiestohide
thesourcearenowunderinvestigationandfacetheprospectsofprosecution.
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Already,theMinistryofCorporateAffairshasidentifiedandde-registered224,000
companiesanddisqualified310,000individualsforfuturedirectorshipof
companiesasaresultoftheinvestigationstriggeredbydemonetization.The
IncomeTaxDepartmentisundertakingsimilarinvestigations.Asapartofits
“OperationCleanMoney,”ithasidentified100,000“highrisk”casesoftaxevasion
andpicked20,572taxreturnsfordetailedscrutiny.
Second,avastvolumeofunaccountedmoneyisheldinrealestate.Inone
stroke,demonetizationcuttherealestatepricesbyaquarter.Thisamountstothe
destructionof25%oftheblackwealthheldinrealestate.10Thepricedeclineand
demonetizationalsomakefutureaccumulationofunaccountedwealthinrealestate
lessattractive.
Finally,demonetizationandinvestigationslaunchedinitsaftermathhave
sentastrongsignalthatthepresentgovernmentisfullycommittedtocombating
corruptionandwillnothesitatetotaketoughactions.Thisfactbyitselfpromisesto
actasadeterrenttofuturecorruption.Withtheeffectivecostofaccumulationof
blackmoneythushavinggoneup,onthemargin,wemustseeadeclineinsuch
accumulationinthefuture.
Whilecontributingtothecentralobjectiveofcombatingcorruptioninthis
manner,demonetizationhasproducedseveraladditionalpositivesideeffects.The
currencyincirculationhascomedownby12to13%ofitslevelon8thNovember
2017andthecurrency-to-GDPrationowstandsatalevelsimilartothosein
10Somecriticsrespondthatthishasbeenharshonhonesthouseownerswhohavealsoseenthevalueoftheirhousesdeclineby25%.Thisisafalseargumentsincetheoriginalincreaseinthehousingpricesitselfwastheresultoflargeinvestmentsofunaccountedwealthintherealestate.
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comparablecountries.Theamountofdirecttaxrevenuecollectedandthenumber
ofincome-taxpayershaveseenasignificantrise.Therehasbeenastepincreasein
digitalpayments.StonepeltinginKashmirandleft-wingextremismineasternstates
havewitnessedasharpdeclineduetotheblowdemonetizationadministeredto
financingoftheseactivities.
5 ConcludingRemarks
Inthisarticle,Ihaveprovidedthefirstcomprehensiveevaluationofthe
economyduringthefirstthreeandahalfyearsoftheModigovernment.Thearticle
beginsbysummarizingtheeconomicconditionsunderwhichthegovernmentcame
tooffice.Itarguesthathavinginheritedaneconomywithlowgrowth,highinflation
andlargefiscaldeficit,thegovernmenthassuccessfullystabilizedit.Duringthefirst
threeyearsofthegovernment,theeconomygrew7.5%onaveragecomparedwith
5.9%duringthelasttwoyearsofthepredecessorUPAgovernment.
Thearticlegoesontosummarizethekeyprocessandpolicyreforms
introducedbytheModigovernment.Thisdiscussionshowsthatwithinthreeanda
halfyears,thegovernmenthasbeenabletoconsiderablywidenanddeepen
reforms.Whilesomeofthesereformshaveyieldedimmediateresults,theeffectof
manystructuralreformssuchastheInsolvencyandBankruptcyActandtheGoods
andServicesTaxwillbegenuinelyrealizedoverthelongertimehorizonofthreeto
fiveyears.Thearticlealsosubjectstocriticalexaminationtheargumentsbycritics
inthreeareas:overestimationofgrowthrates,jobcreationanddemonetization.
Tolimitthepapertoareasonablelength,Ihavenotdiscussedtheprogress
madeininfrastructure,energy,agriculture,innovation,entrepreneurship,skill
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developmentandsocialsectors.NorhaveIdiscussedthereformsthatthe
governmentmustundertakeduringitsremainingtermandsubsequentlyshouldit
returntopowerfollowingthe2019parliamentaryelections.11InthefollowingI
brieflytouchonsomeofthesereforms.
Firstandforemost,thegovernmentmustadvanceandhopefullycomplete
someofthereformsalreadyinthepipeline.Theseincludeprivatizationofpublic
sectorenterprisesthatdonotserveanypublicpurposeincludingAirIndia;cleanup
ofthenon-performingassets(NPAs)andrecapitalizationofpublicsectorbanks;
passageoftheNationalMedicalCommissionBill,whichaimtobreathnewlifeinto
medicaleducationbothquantitativelyandqualitatively;passageoftherelatedbills
onhomeopathyandIndianmedicalsystemseducation;andfinancialandacademic
autonomytobetter-performinguniversitiesandcolleges.
OncethegovernmentacquiresmajorityintheUpperHouseofthe
Parliament,itmustalsogetdowntothebusinessofwholesalereformoflaborlaws.
Thisisnecessaryevenifnotsufficienttocreateanemployment-friendlyregimein
thecountry.Alsoimportantistorevisitthereformoftheperniciousland
acquisitionactthatthegovernmentinheritedfromtheUPA.OnceNPAshavebeen
dealtwithandbanksrecapitalized,thegovernmentmustconsolidatepublicsector
bankintofiveorsixandgraduallyprivatizethem.Aroadmapofhowpreciselythe
twotasksshouldbeaccomplishedmustbedrawn.Manyofthefuturereformswill
havetobedoneatthelevelofthestatesandcitiesandthiswouldrequirecontinued
11TherecentlybroughtoutThreeYearActionAgenda:2017-18to2019-20providesacomprehensivediscussionofthedesirablereformsinnearlyallareasofpolicy.Theinterestedreadermustconsultthisdocument.Itmaybedownloadedfromhttp://niti.gov.in/content/three-year-action-agenda-2017-18-2019-20.
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cooperationbetweenthecentralgovernmentandstatesandbetweenstatesand
cities.UrbanizationisgoingtobeIndia’sbiggestchallengeintheyearstocomeand
bothcentralandstategovernmentsmustcooperatetomeetit.