Challenges facing Narendra Modi

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Parthasarathy Chaganty | 24 May, 2014
"No power on earth can stop an idea whose time has come" is a favourite quote of the outgoing Prime Minister Manmohan Singh. If ideas can come in the form of men, Narendra Modi, set to be sworn in as India's new prime minister, is one such manifestation.

Thirty years after 1984, the last time a single party was returned with an absolute majority in Lok Sabha elections and when a consensus has evolved that the era of single party rule was over for good, there emerges Modi who almost single-handedly led a grueling election campaign to secure an unprecedented 282 seats out of 543 for his Bharatiya Janata Party (BJP). Together with allies, the National Democratic Alliance (NDA) has romped home with a comfortable tally of 336 seats, beating predictions of all but a lone pollster.

The BJP's decisive victory is even more remarkable for the decimation it has caused of the Grand Old Party. While a Congress defeat had been widely expected, even its worst detractors could not have imagined its count to plummet from 206 in 2009 to just 44. Clocking an average of 7.5 percent per annum of growth over a 10-year period of rule is no mean achievement for any coalition. But averages are for economic historians; what seemed to matter to the voter was the sub-5 percent growth during the last two years. The problems of the outgoing Congress-led United Progressive Alliance (UPA) were further compounded by the spate of corruption scandals that surfaced during the past few years.

The challenges facing the Modi government are largely defined by the legacy of the UPA rule. The prime object of the new government should be to take the economy back to the high growth (8 percent plus) trajectory at the earliest. This calls for a slew of carefully considered measures, administrative as well as legislative. A major legacy left by the UPA is the raft of rights-based legislation, notably right to work and right to food. The land acquisition law gives a better deal for the landowners, but correspondingly makes it harder and costlier for industries to acquire land. These supposed welfare measures may not have saved the day for UPA, but remain as statutes on the book, which the new government will have to deal with.

Even if the BJP reconciles itself to such measures in ideological terms, it needs to undertake a critical evaluation of the various schemes so as not to fall in the same rut as the previous government. More than Rs.2 trillion were spent on rural employment by the UPA during its tenure, but there is little to show in terms of physical assets like check dams, roads and levelled fields. Apart from large-scale leakages, payments under the scheme are mostly viewed as entitlements rather than wages for productive work. A collateral damage is the serious impairment of the work ethos among large sections of rural labour which can have an adverse effect on farm output if left unchecked.

Contrary to popular perception, barring retail, the BJP welcomes FDI in almost all other sectors (even up to 100 percent in certain cases), especially where it brings in new technology or innovation. Whether it is FDI or investment from domestic industry, it is the "ease of doing business" that matters most. Inordinate delays in project approvals and numerous hurdles at various stages of implementation can sap the energy of even the most enthusiastic and committed investors. Ensuring time-bound approvals and implementation of projects holds the key to spurring investment and growth.

If there is one measure that will have a significant impact on easing of supply constraints, it will be to scrap state monopoly on coal mining and permit merchant mining, with allocation of coal blocks through auction. Rolling out the much delayed Goods and Services Tax (GST), for which the necessary spade work has been done, will send out a positive signal and aid growth. It is also necessary to bring about an investor-friendly tax regime.

Reining the fiscal deficit is a prerequisite for ensuring sustainability of growth. Any laxity on this front will not only lead to crowding out of private investment but also severely limit policy options of the Reserve Bank of India in combating inflation. One factor that merits close attention in this context is the subsidy burden. Doing away with diesel subsidy should not be a problem now. However, scrapping fertiliser subsidy will be a challenge for which the requisite political courage needs to be mustered. Notwithstanding the BJP's reservations on "Aadhar" (unique identification scheme), serious thought should be given to direct cash transfers to targeted beneficiaries, which will go a long way in checking leakages.

Lastly, as the new government lacks majority in the Rajya Sabha, every effort should be made to enlist the cooperation of the opposition groups wherever possible as calling joint sessions of the houses for passage of bills on a regular basis cannot be a practical solution. A cooperative approach is needed vis-à-vis state governments as speedy implementation of projects is not possible without their support at the ground level.

From all indications, the prime minister-designate, Narendra Modi, appears to be a man equal to the task.

(The author is a Mumbai-based commentator. The views expressed are personal.)