Budget 2015: PM Narendra Modi must keep reforms process going

"As for what the FM should do, the answer is simple, control the fiscal deficit and remove subsidies," writes Lord Meghnad Desai Professor Emeritus at LSE.

Lord Meghnad Desai        Last Updated: February 10, 2015  | 16:44 IST

I am quite happy about the feel good factor which Prime Minister Narendra Modi has been able to create about India to the world. Investors invest due to positive sentiment which the prime minister has been able to create through his foreign tours. Of course, Pandit Jawaharlal Nehru too projected India to the world, but Nehru always projected India as a "weak country" with moralistic principles. This is not the case with Modi. With his foreign policy successes, there's no doubt he sees India belonging in the top 10, or the top five of the world nations.

Coming to the economy, the government has sent out the right signals to the industry. It has introduced 100 per cent FDI in some railway projects, 49 per cent in the defence sector - through approval of the Foreign Investment Promotion Board -FIPB of course. On the rural side, I would want the government to encourage more foreign investment in agriculture. There are areas of India, where agriculture is doing extremely well and the whole stereotype of the 'peasant' is long past. This can be a buoyant sector provided the government gives investors the right incentives.


As for what the FM should do, the answer is simple, control the fiscal deficit and remove subsidies. The Congress-led UPA had put forth this wrong notion that all subsidies are for the poor. They are not.

Most subsidies help the rich and not the poor, who need direct cash transfers instead. I am very happy the prime minister and Mr Jaitley are acting on this. After petrol and diesel, a deregulation of urea is expected to be announced in the Budget.

Currently last year's figures show that the subsidy for imported urea is around Rs 12,300 crore, while domestic urea is Rs 36,000 crore. This is something that is urgently needed to change if the economy is to grow at its projected seven and half per cent per year. I expect more divestment if the government is to control the fiscal deficit.

The big challenge to the economy will not be from inside, but outside. The challenges to the Euro if Greece withdraws; fluctuating world oil prices and the challenges in Syria and the Middle East - all of this will have big effect on world stock prices, which can lead to lower growth and deflation. India must prepare for "global shocks" but fortunately so far the exchange rate has remained stable at Rs 60-61 to the dollar, which is good news for the government and the economy. However, there is no doubt that at some time India must be ready to face the music. So what is the outlook for the Indian economy? I see much of the status quo continuing with little to rock the boat for the next few years.

This may not be a bad thing given the fact that India has large inequalities in society and economic reforms - despite the media rhetoric - neither happen overnight and even when they do, the knock on effect takes time to occur. What I do like about the PM is that he seems to be a micro-manager and exudes efficiency. The promise of increased FDI in insurance and the proposed rollout of Goods and Services Tax (GST) by April 2016 is something I welcome. GST will induce higher output, more employment opportunities, and economic inclusion, which is something India needs.


But the government still has its work cut out to convert these Ordinances into Acts and for this we have to see the attitude of the Opposition, particularly chief ministers in non-BJP ruled states. The intent for reform is there but much work still needs to be done.

While there are positive indicators that the government is on the right track, I would like to caution those who are expecting large-scale reforms. Let's be clear. This is a new government; the mandate is not there in the Rajya Sabha and Modi and Jaitley will be conscious of not alienating core sections of society - who will no doubt protest against reforms.


The proposed Land Acquisition Act is a key example. I expect bolder reforms if and when the government gets a Rajya Sabha majority. Indeed, if Modi had had the kind of majority that Rajiv Gandhi had, I would have expected them now. But that is just wishful thinking.

Speed, whether it comes to policy and decision making is something both Indians and the world will expect from PM Modi. The NDA will be conscious that the UPA-II policy paralysis was what caused it to lose the public vote and the world's confidence in India. Modi must not make the same mistakes and to keep the reforms process going. He must also be prepared for criticism by various sections of society that reforms are not happening fast enough. However, he and the government must keep their heads down, control the fiscal deficit, end subsidies, and explain to people that the results of the reforms process may take three to four years to fructify - possibly in NDA-II. It is no easy task but he will somehow have to manage it.

(Lord Desai is Professor Emeritus of Economics at LSE)

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