Modi At Eighty Percent To 2019
We now have four years of ‘Modinomics’ by which we can assess his record as an economic reformer. At CSIS, we refer to our ‘The Modi Government’s Reform Program: Scorecard’ where we track progress on thirty of the significant reforms that were pending when Modi took office. We find that the Modi government made several significant reforms early in its tenure, then slowed the pace in recent years. This is surprising when we consider that Modi’s hand has significantly strengthened over time due to success in state government and Rajya Sabha elections. But it likely also reflects the political reality that big reforms take time to take root, and can cause immediate discord.
The world had high hopes for the Modi government when it came to office in May 2014. Based on his ‘Mr. Business’ persona as chief minister of Gujarat, the world expected a big push to deregulate the economy, welcome foreign investment, reduce the role of state-owned enterprises, and strengthen India’s trade ties with the world. At that point, Modi did suffer from some serious impediments to policymaking: the BJP held only 42 of 243 seats in the Rajya Sabha, and that it was in charge of only five of India’s 29 states. Moving legislation involves garnering the support of opposition parties, and Constitutional amendments—which require the consent of a majority of states—would also entail negotiations with the Congress and other regional leaders. Some pundits also expected we would see a flurry of joint sessions of Parliament called so the BJP could strengthen its legislative hand, or that a high number of bills would be deemed money bills which only require Lok Sabha approval. The former hasn’t happened, and the latter has only been used sparingly.
Despite these legislative hurdles, the BJP was able to pass several key economic reform bills in its early days in office. These include:
- The Insolvency and Bankruptcy Code (May 11, 2016),
- The Coal Mines (Special Provision) Bill (March 20, 2015),
- The Insurance Laws (Amendment) Bill (March 12, 2015), and
- The Constitutional Amendment to create a national Goods and Services Tax (August 3, 2016).
To its credit, the Congress Party has been a far more responsible opposition party than the BJP. Most of the bills noted above had been first drafted by the Congress Party while in office.
The Congress has been more reluctant to support other reforms such as land acquisition laws, which would have amended legislation that Congress itself enacted.
The Modi government initiated several reforms that deregulated key sectors, and to reduce restrictions against foreign equity. In four years the government has made over 40 positive changes to the extant foreign investment rules— a historic base based on recent prime ministers’ records, looking back at DIPP Press Notes and legislative FDI changes like in insurance. There have been other moves to extend the validity of industrial licenses, allow self-reporting of some business compliance rules, removing the last vestiges of the ‘Reserved Small Scale Industry’ list, and introducing fair and transparent auctions of government resources like mining licenses and spectrum.
Another area of reform that does not get sufficient attention is the reducing instances of ‘tax terrorism’.
Yes, the Vodafone and Shell cases persist, and the Income Tax Act has not been amended to remove the retrospective provision. But a committee was formed to review any new attempts to use the provision, which has blocked new cases from arising. There are new norms for personnel reviews of tax assessors that account for the quality of assessments. Advanced tax rulings have a new framework and are becoming more common, adding certainty to a company's tax planning. In addition, the government of India has reduced discretion in determining transfer pricing assessments.
Since coming to office, the BJP has certainly strengthened its hand, in terms of controlling states and expanding its grip on the Rajya Sabha. The party is today in charge of 15 states by itself, and 17 if we include states where it is the minority partner in a coalition. The BJP’s seat total in the Rajya Sabha has increased from 42 seats in 2014 up to 69 seats today – 29 percent of the body’s total seats.
Using our Modi Reform Scorecard to look at India’s domestic reforms, of the nine ‘completed’ reforms, six came in the Modi government’s first year in office.
The last significant reform was the rollout of the Goods and Services Tax in July 2017.
Looking at the pace of foreign investment reforms, the Modi government made 38 positive changes to India’s FDI rules in its first three years in office, and only three positive changes in the last year.
The reform agenda appears to be more closely aligned with the political agenda than we have seen in the past. Not because of political opposition to the process of reforms. Instead, it is likely linked to the fact that reforms themselves require time to take root, and big reforms like the GST can cause immediate economic pain. The Vajpayee government learned the hard way, as their crucial reforms in telecommunications, insurance, and information technology only yielded economic fruit once they were out of office, helping trigger the very high growth rates in the early years of the Manmohan Singh government. Prime Minister Modi does not want to make this same mistake. As with any democracy, politics eclipses economics.
Richard Rossow is the Wadhwani Chair in U.S. India Policy Studies at The Center for Strategic and International Studies in Washington D.C.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.