Flood of fiscal promises leaves Modi high and dry

Hindu priests pray for the monsoon. Photo by AFP.
10 July 2014
Hindu priests pray for the monsoon. Photo by AFP.

As with many new governments around the world, the realities of office mean India's prime minister Narendra Modi may have trouble delivering on his campaign promises, writes HAMISH McDONALD.
The god of rain, Parjanya, has not been kind to India's prime minister, Narendra Modi, in his first weeks in office.
The annual monsoon, which usually starts sweeping across the parched country from the southwest in late May - about the time this year Modi's Bharatiya Janata Party won a sweeping election victory - arrived late and was producing rainfall well below average through June.
Rather than to the god, India's meteorologists look to the distant El Niño effect in the Pacific Ocean for bad wobbles in the rain pattern, which occur on average every decade or so.
But the coincidence is bad luck for Modi, previously a pragmatic premier in his home state of Gujarat, who came to office on widespread hopes he could repeat Gujarat's rapid economic growth on a national scale.
The lapse of India's growth rate from 10.3 per cent in 2010 to around 4.5 per cent annual in the last two fiscal years (April-March), combined with large-scale corruption cases in telecoms and coal licensing, shattered faith in the former Congress Party government.
Though the Indian economy is no longer a story of the monsoon, as economists put it decades ago, agriculture still makes up 14 per cent of gross domestic product and supports two-thirds of the population. Lower harvests, in addition to reducing GDP growth, can feed inflation which remained at a high 8.3 per cent in May.
With the rupee steadily declining, due partly to worries about Middle East oil supplies and cautious foreign and domestic investment levels, Modi and his finance minister, former barrister Arun Jaitley, have been played a difficult hand to deliver promises of catching up steadily with China.
As with many new governments around the world, the realities of office may mean they have to eat some of the words uttered during campaigning.
In particular they may have to address the causes of India's notorious 'black economy' rather than its symptoms, like widespread inward gold smuggling and the hiding of wealth offshore.
Modi vowed to go after the secret wealth stashed away in Switzerland and other tax havens, and promptly set up a Special Investigation Team for the purpose. The Swiss have reportedly obliged with a list of deposits held by Indians, but the total is disappointingly small, some $US2.3 billion, instead of the "trillions" commonly talked about.
Part of the remedy would be greater independence for the Reserve Bank of India to apply the inflation-targeting priority it seeks, and letting the public sector banks raise new capital from the market rather than seeking cash from the government. Another would be a courageous lifting of limits on foreign investment and private sector involvement in key sectors, a streamlining of taxes including a long-advocated goods and services tax, and better focus of welfare to free government funds for infrastructure and education.
These seem to be the recognised goals of at least one of Modi's principal advisors, the former Asian Development Bank chief economist Arvind Panagariya, now at Columbia University. It will be a huge disappointment if Jaitley's first budget, due on July 10, does not deliver.
Importantly, Modi needs to restore the "animal spirits" of India's entrepreneurs and the trust of investors in its capital markets.
India has long had a stock market envied in other "emerging" economies, backed by well-developed institutions and professional skills. Yet as the respected financial writer Sucheta Dalal recently pointed out in her Mumbai-based MoneyLife online newsletter, the investor population has dwindled from about 20 million to 10 million over the 25 years the Securities and Exchange Board of India has been in operation. Dalal wrote,
This has happened, despite automation, trade guarantees, tax concessions and a sharp decline in brokerage charges, over the years. But investors went out in droves because SEBI stood by and watched their investments get decimated due to shady practices with no availability of redress. Barring occasional blips, the primary market remains dead and mutual funds are also unable to attract retail money. The biggest indictment of SEBI's poor regulation is that people prefer to put their money into taxable bank fixed deposits knowing fully well that inflation is gnawing away their savings. Or invest in dangerous ponzi schemes, gold and real estate.
Cracking down on corrupt or obstructionist bureaucracies, or setting up 'single windows' and 'one-stop shops' tends to be temporary in effect. Systemic change will allow the winds of enterprise and empowerment to flow through India's under-performing manufacturing and service sectors - and help its farmers too.
Meanwhile, in Modi's home town Ahmedabad, Hindu priests were last week immersing themselves in cauldrons of water and flower petals as part of the ritual prayer Parjanya Varun Yagam to the rain god for the monsoon to pick up.
Hamish McDonald is Journalist in Residence at the ANU College of Asia and the Pacific.


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