Modi government's approach will be incremental, although moving – ideology-wise – in the right direction. The goal is that the government machine will become more efficient, which will be positive for productivity and growth, says Nomura
As the Narendra Modi government completed its first three months in office there has been a raft of analysis of its performance in the first 100 days. The main question of course is, “Where are the reforms?” Amid some murmurs of disappointment, there is general agreement that the government needs to be given more time.
"Looking for Big Bang reforms may mean missing the wood for the trees – most of the changes are micro, rather than macro in scale. Broadly speaking, there are two kinds of reforms: those focussed on oiling the machine i.e., getting work done, and then those that are more strategic and/or long term, " says Nomura in a research report.
Investor perceptions of government performance have often been gleaned from the media in the past, though Nomura said it believe that with the Modi administration this may do it a disservice. Compared to the previous government, the level of Prime Minister Modi's engagement and communication with the media is limited. For instance, on his travels abroad he has opted to bring a limited press entourage. "The focus, perhaps, is to let the work speak for itself. This has two implications: 1) it means harder work for journalists and researchers to ascertain the reality; and 2) at some point the hard work will reflect in better economic data. However, until that happens, there may seem to be a vacuum of sorts, while the reality may be very different," the report said.
According to Nomura, over the past three months, the Indian government's focus has primarily been on oiling the machine; getting work done and getting it done faster. Inter-ministerial co-ordination has improved. Accountability at the ministry level has risen due to the abolishment of the empowered group of ministers, group of ministers and standing committees, it added.
"Other changes," Nomura said, "are more hearsay."
'Deliverables' is the new buzzword. Monthly targets have been assigned to departments and performance review meetings are held frequently. Progress by different ministries on the announcements made by the prime minister during Independence Day and by the finance minister in the union budget is monitored closely.
According to Anil Swarup, an additional secretary in the Project Monitoring Group of the Cabinet Secretariat, “In the previous government, our job was just to see that the clearances would happen and we would assume that it was translating to work on the ground. The present government has asked us to do the legwork and make sure that it is.”
Nomura said, "These changes do not make for interesting headlines, but their economic impact cannot be underestimated. Few have doubted India's potential to grow, but execution has usually been the country's weak point. If work can be done, if delivery can match the promise, then the large inefficiencies in the system can be reduced and productivity, which fell sharply in the last five years, can be reversed."
According to Nomura, the second set of reforms deals with addressing more structural challenges facing the economy, such as food inflation and boosting productivity in agriculture, a structural fiscal correction with a focus on both cutting subsidies and raising revenues, reducing corruption, dealing with the challenge of urbanisation, governance reforms in public sector companies and public sector banks, and creating jobs for the young, which is linked to boosting the manufacturing sector, especially small and medium-sized enterprises.
"In this regard, performance so far has been underwhelming. On food inflation, minimum support prices -MSP- have risen at a slower pace and the government has included potatoes and onions under the Essential Commodities Act, which empowers states to undertake de-hoarding operations to control prices. It has also urged state governments to remove vegetables, fruits and other perishable commodities from the Agricultural Produce Market Committee (APMC) Act, aiming to bring the farmer and consumer closer. However, a lot more needs to be done on food inflation and the use of trade policies to control prices is a longer-term disincentive to private sector investments," the report said.
Nomura said, there is as yet no clear game-plan to tackle subsidies and this decision has perhaps been deferred to the expenditure commission. Diesel under-recoveries have largely vanished, but this is due to the previous government's staggered price hikes. Hence, the government seems to be using its political capital very cautiously. Perhaps, it has the upcoming state elections in mind and wants to consolidate its position in the Rajya Sabha, or Upper House.
According to the report, the broad interpretation, therefore, is that Big Bang reforms are unlikely. It said, the Modi government's approach will be incremental, although moving – ideology-wise – in the right direction. The goal is that the government machine will become more efficient, which will be positive for productivity and growth, but the verdict on other structural changes is still out.
Nomura feels that indigenous production appears to be the policy focus for the NDA government. "The hike in foreign direct investment (FDI) limit in defence is aimed at boosting domestic manufacturing of defence equipment. One of the targets of the digital India campaign is to boost domestic manufacturing of electronics and target zero net electronic imports. The government's push to digitally empower the country, and a bank account for every rural household (under the Jan Dhan Yojana), can be used to better-target subsidies, cut down leakage and create a wider tax network, which could aid fiscal consolidation. Similarly, the move towards online project approvals will automatically lower the scope for corruption," it added.
Another focus of Modi government is on improving the ease of doing business. Apart from online clearance of projects, the government has proposed some amendments to the Apprentice Act to increase the availability of skilled manpower through on-the-job training. There is a desire to move towards lesser regulation: the period of validity of industrial licenses has been extended; states are urged to scrap the Boiler (Inspection) Act and move to self-certification; and a committee has been set up to review and repeal archaic rules and regulations.
Labour matters in India fall under both central and state jurisdiction. At the central level, the government is actively considering amendments to a number of labour laws, including: an increase in overtime hours, relaxing the earlier bar on employing women in factories for night shifts, and initiating a single unified web portal for online registration and inspection reports, among other things, to reduce the amount of paperwork.
Nomura said, "These changes are happening on the micro level, but if they can be made, they may have a more far reaching effect and can act as a bridge to the longer-term goals of better infrastructure, creating jobs, boosting competitiveness and developing the manufacturing sector.
Maybe there is a method to the possible madness."