The next 100 days

The second Narendra Modi government completed 100 days in office last week. Although the government had not set explicit targets for itself, it is still an important milestone to assess the direction of governance and impending policy challenges. Undoubtedly, the biggest decision of the government in the first 100 days was to end the special constitutional status given to Jammu & Kashmir and bifurcating the state into two Union Territories. While Kashmir is still far from the desired normalcy and would demand considerable attention, the government would do well not to lose sight of the rising challenges on the economic front. The next 100 days will be extremely important for the Indian economy.

Economic growth slipped to a six-year low of 5 per cent in the first quarter of the current fiscal year. In nominal terms, growth hit a 17-year low. A slowdown sharper than expected, along with anecdotal evidence of weak economic activity from the ground, has dented investor confidence significantly. Thus, the government needs to act convincingly to show that the India story is alive.

Though the global economic environment is not favourable and US-China trade tensions will continue to induce uncertainty, India’s problems are more domestic in nature. Several economies are growing at a higher rate in the same global environment. To be sure, responding to the slowdown, the government has taken several steps over the past few weeks and has promised to do more. But what India needs now is a comprehensive policy reset. For instance, the government recently decided to further consolidate public-sector banks. However, it is not clear how this makes the system more efficient.

Similarly, the government liberalised rules for foreign investment in single-brand retail but doesn’t want to touch multi-brand retail. Further, India is moving in the opposite direction on the trade front by increasing tariffs and promoting import substitution. As economist Amita Batra wrote in this newspaper recently, India’s integration with global value chains, which drives global trade, is not only among the lowest in G20 countries but has actually declined in recent years. This is certainly not a recipe for rapid economic growth. Clearly, random steps here and there, or tinkering with the goods and services tax rate for a particular sector, will not help the Indian economy in the long run. Both domestic and foreign investors would be keenly watching how the government responds to the slowdown in the coming weeks and months.

By the end of the next 100 days, the government would start preparing for the next fiscal year’s Budget. If investor confidence is not restored by then, things would become more difficult for the Indian economy. As things stand today, in the current year,  revenue collection might fall short by a significant margin and, despite a higher than expected transfer from the Reserve Bank of India, the government might have to cut expenditure or resort to off-balance sheet borrowing to meet the fiscal deficit targets. Management of government finances is another area that needs a major overhaul to bring transparency and boost confidence. The biggest problem of course is consumer confidence, which has been severely dented. An absence of a massive shift in policy thinking in the coming weeks would be unfortunate, because India has a stable government with a comfortable majority which can make fundamental changes to take the economy to a sustainable and higher growth path.

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