Author: sachin nandha, trustee and director
Can PM Modi’s government deliver what India needs?
India faces significant long-term economic challenges that require substantial policy reforms to unlock its true potential. Despite being branded as “Modinomics,” the economic policies under Prime Minister Narendra Modi’s tenure have not deviated significantly from interventionist and socialist practices. This branding should be dropped from the popular lexicon, as it serves more as political marketing than an accurate representation of transformative economic policy. Real change necessitates a move towards promoting private enterprise, reducing regulatory burdens, and embracing market-driven solutions.
The Reality Behind “Modinomics”
The term “Modinomics” suggests a radical new economic strategy, but in reality, it masks the continuity of traditional policies. India’s economy remains heavily interventionist, with significant government control over key sectors. Despite rhetoric about economic liberalization, substantial reforms to foster private enterprise and reduce state intervention have been limited.
For example, the recent budget, while avoiding overtly populist measures, still reflects an interventionist approach. The allocations to states like Andhra Pradesh and Bihar are framed as resource mobilization through multilateral development banks, yet they maintain central oversight and control. The fiscal deficit is set to reduce from 5.1% to 4.9%, bolstered by a significant $22 billion dividend from the RBI. While this is fiscally prudent, it is not indicative of a significant shift towards a market-driven economy.
Positive Aspects of the Budget
1. Employment Generation Focus:
– With India’s official unemployment rate hovering around 7.8%, but in reality could be much higher, the budget’s emphasis on job creation is crucial. The announcement of schemes incentivising employers to hire more regular workers is a positive step. These measures acknowledge the urgent need for employment opportunities and align with sound economic principles. This becomes even more apparent when considering that India faces a young population that is largely unskilled and in many cases unemployable. The government has launched a variety of skills development programmes, as well as incentives for employers to employee low skilled workers and to train them through apprentice style programs.
10-12 million new job seekers enter into India’s job market per annum.
2. Agricultural Productivity and Natural Farming:
– Agriculture, which accounts for about 18% of India’s GDP and employs nearly 50% of the workforce, needs urgent reform. The budget’s focus on raising agricultural productivity through a review of the agricultural research establishment is noteworthy. Additionally, the expansion of the natural farming package to 10 million farmers could revolutionise the sector. Studies show that natural farming can increase farmers’ incomes by reducing input costs and improving soil health.
3. Urban Redevelopment:
– Recognising the importance of cities in driving economic growth, the budget proposes initiatives for urban redevelopment. India’s urban population is projected to reach 600 million by 2031, making urban planning crucial. Targeting 14 major cities for transit-oriented development, reducing stamp duties for women homeowners, and building housing for the urban poor and industrial workers are commendable steps. These initiatives can help address the urban housing deficit, which is estimated to be around 18.78 million units. The sheer scale of this makes the UK’s housing problem miniscule.
Missed Opportunities
1. Privatisation of Public Sector Enterprises:
– The budget could have set ambitious targets for privatising public sector enterprises, especially given their high market valuations. Public sector banks, for instance, have a combined market capitalisation of over $120 billion. Privatisation could enhance efficiency and reduce the fiscal burden, with proceeds potentially reducing the public debt to GDP ratio, which stands at around 84%. Of course there are many reasons why the government is reluctant to do this, as it gives politicians significant power to intervene and drive economic incentive schemes of their liking.
2. Asset Monetisation:
– There is a lack of a concrete plan for asset monetisation, which could convert underutilised government assets into productive use. The National Monetisation Pipeline (NMP) targets raising $72 billion by monetising core assets, but this budget missed an opportunity to accelerate these efforts. Revenues from such initiatives could significantly reduce public debt and interest pay-outs, which consume nearly 40% of tax revenues.
3. Regulatory and Compliance Reforms:
– Small and medium enterprises (SMEs) continue to be burdened by regulatory and compliance requirements. The World Bank’s Ease of Doing Business Index ranks India at 63rd out of 190 countries. A time-bound plan to reduce these burdens, along with finalising the long-pending labour codes, would have been highly beneficial. Simplifying the compliance landscape could help SMEs, which contribute about 30% to India’s GDP and employ over 110 million people.
Reflections
While the budget presents a long-term vision focused on employment generation and sustainable growth, India’s economic landscape still faces significant challenges. The country must address regulatory inefficiencies, promote privatisation, and streamline compliance to unlock its true potential. These reforms, though politically sensitive, are essential for India’s economic transformation. Only through such bold measures can India hope to sustain high growth rates and realise its latent potential.
India, although having arrived at an inflexion point, is still at a very nascent stage in its development. India is poised for significant economic growth over the next 25 years, driven by its demographic dividend, rapid urbanisation, and expanding middle class. By 2050, India is expected to become the world’s third-largest economy, with a GDP projected to reach $35 trillion, up from $3.5 trillion in 2023 (Goldman Sachs, 2023). Today these figures by Goldman look fanciful, but considering that even if India fails to make the reforms it so badly requires, it will nevertheless less reach $20 trillion in the worst case scenario. This will still make India a centre for economic, cultural, and military power. The country’s working-age population is set to peak at nearly 1 billion by 2050, providing a substantial labour force for economic activities (World Bank, 2023). Additionally, the rise of the middle class, expected to encompass 1 billion people by 2030, will drive consumer demand and investment (Brookings Institution, 2023).
What India ultimately lacks and so desperately requires is better politics.
References:
1. “RBI Transfers Record Rs 1.76 Lakh Crore Surplus To Government,” NDTV, 2023.
2. “India Unemployment Rate,” Centre for Monitoring Indian Economy (CMIE), 2024.
3. “Sector-wise contribution of GDP of India,” Statista, 2023.
4. “Impact of Natural Farming on Farmer’s Income and Resource Conservation,” NABARD, 2022.
5. “Urban population in India to reach 600 million by 2031,” Ministry of Housing and Urban Affairs, 2023.
6. “Housing Shortage in Urban India,” Ministry of Housing and Urban Affairs, 2023.
7. “Market Capitalization of Public Sector Banks,” BSE, 2023.
8. “India’s Debt-to-GDP Ratio,” International Monetary Fund (IMF), 2023.
9. “National Monetization Pipeline,” NITI Aayog, 2023.
10. “India’s Interest Payments as Percentage of Tax Revenue,” Ministry of Finance, 2023.
11. “Ease of Doing Business Rankings,” World Bank, 2020.
12. “Contribution of MSMEs to India’s GDP,” Ministry of Micro, Small and Medium Enterprises, 2023.
13. Goldman Sachs. (2023). “India’s Economic Outlook: Opportunities and Challenges.”
14. World Bank. (2023). “India’s Demographic Trends.”
15. Ministry of Housing and Urban Affairs. (2023). “Urban Population Projections.”
16. Brookings Institution. (2023). “The Rise of India’s Middle Class.”
Special thanks to Pahle Foundation, Delhi, India.
