Modi yet to overcome biggest challenges

ISLAMABAD: India’s Modi has still some biggest obstacles to sort out even after more than three years since he steered the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) to a spectacular victory in the parliamentary elections in May 2014.

According to ‘TodayOnline’ from Singapore, the biggest economic challenge for India’s Prime Minister Narendra Modi is to create enough jobs for the country’s large and growing youth population.

The Indian PM came to office enjoying the image of a strong and capable economic administrator.

He was widely expected to push ahead with economic reforms and clean up the messy regulations that make India a difficult place to do business in.

His signature “Make in India” initiative, launched within a few months of assuming office and aimed at making India a global industrial powerhouse, resonated well with the early impression of what he might achieve.

Mr Modi’s government significantly liberalised foreign investment rules in “sensitive” sectors that were previously either blocked to foreign investment, or only allowed it to a small degree under tight conditions.

These enabling policies and Modi’s personal image have been major drivers of a surge in investor interest. India attracted about US$60 billion (S$81.5 billion) in foreign direct investment (FDI) in 2016-17, making it one of the world’s largest recipients of foreign investment.

The excitement about the lift in investor interest and high FDI inflows has nonetheless been accompanied by disappointment about the unfinished reform agenda. Efforts to amend the land acquisition regulations, enacted by Mr Manmohan Singh’s administration, which increased the cost of acquiring land for infrastructure projects, did not succeed.

Regulatory reforms to ease labour market inflexibility are also yet to be implemented. Both reforms are essential to improve the investment climate and ease of doing business in India.

The Indian economy today nurses serious weaknesses despite high rates of GDP growth. Foremost is the lack of jobs for the country’s large and growing youth population. Mr Modi’s biggest economic challenge is to create enough jobs to ensure that the demographic dividend does not turn out to be a massive liability instead.

The socio-economic ramifications of fewer jobs are compounded by agrarian distress. The incidence of farmers committing suicide due to bankruptcy continues to increase, forcing large states such as Uttar Pradesh, Maharashtra and Punjab to write off big chunks of agricultural lending.

These debt waivers force national banks, already saddled with large volumes of non-performing loans, to further raise their perception of the risk of agricultural loans, exacerbating the squeeze on rural credit.

While farmers are forced into debt by crop failures precipitated by climate change-induced weather events, loan waivers are merely an ad-hoc political response to agrarian distress.

The Modi government is yet to find a solution to the structural issue of sustaining farmer incomes and improving their ability to service loans.

The lack of job opportunities and a troubled agricultural sector could become serious political challenges for Mr Modi, given that youth and farmers comprise a big slice of the electorate.

Two of the Modi government’s most far-reaching economic initiatives were the demonetisation of more than 80 per cent of currency in circulation in November last year, and the introduction of the goods and services tax (GST) from July this year.

The sudden lack of access to cash inflicted by demonetisation hit the informal sector of the economy, forcing a contraction in economic activity.

With its multiple tax rates, significant commodities such as crude oil, petroleum products, alcohol and electricity are not caught under its ambit.

Both demonetisation and the GST reform are examples of the Modi government’s proclivity to inflict reform “shock” on the economy and manage what are desirable policy changes ineptly. By ignoring the costs of implementing these measures on an economy where the bulk of livelihoods are delivered through the informal sector, the government’s drive to formalise the economy risks leaving important parts of the community behind.

Regarding his foriegn policy, India’s enthusiasm to work with its neighbours has had mixed success. While relations have improved remarkably with Bangladesh and Sri Lanka, and partly with Nepal, ties with Pakistan are yet to be repaired. There have also been continuing spats with China, including the recent border dispute. But, on other fronts, the Modi government has been more pragmatic in collaborating with China, particularly in forums such as Brics, the Shanghai Cooperation Organisation and the Asian Infrastructure Investment Bank.

The policy establishment is allergic to imports, and the “Make in India” initiative appears to be a mere repackaging of the old import-substitution strategy.