NDA coalition led by Prime Minister Narendra Modi has made an emphatic comeback after a bitterly fought and a vitriolic campaign! Despite the distress in rural economy, joblessness and disruptions caused due to various measures taken during the last five years, the nation has put back its faith in the government. So, how has Modi did it?? What has clicked with the masses? Here is a look at the economic rationale for the victory.
The biggest and the boldest economic measure undertaken during last five years was the decision on demonetization. It may be recalled that the menace of black money was among the biggest issue during the election in 2014. The measure was out of the blue and caused considerable short term disruption yet seems to have struck a chord with the people of the country. While the measure did not help get rid of black money as most of the currency notes came back to banking system, yet it has created a sense of caution among the segments of the economy such as real estate dealing in black money. However, the fight against the black money is still on and the next five years are certain to see more unanticipated measures!
The next important decision was implementation of GST, being deliberate upon for over a decade. While it would not be correct to give entire credit to this government for the implementation, it does deserve extra credit for its proactive monitoring of the evolving situation and quick remedial measures to alleviate stress. The GST council met almost every month during the initial phase and took large number of steps to reduce the inconvenience being caused. Most importantly, the council was liberal and bold in its decision to reduce tax rates which probably also helped to keep the economy moving and acted as carrot to reduce the grievances of all stakeholders.
Government’s effort in providing support to the financial sector, in a fragile state five years back, is probably not sufficiently understood. Banking sector was staring at a huge pile of bad loans as a result of indiscriminate lending undertaken during 2006-12. More worryingly, huge part of this was given without adequate due diligence, a result of collusion among several corporate houses, their patron in government and bank officials. This resulted in sector’s gross NPA going beyond Rs 10 lakh crore from just about Rs 2 lakh crore. Government has pumped in almost Rs 2 lakh crore in the banks over last two years itself to maintain their credibility and confidence in the sector. The return of the government certainly spells a tougher time ahead for the economic offenders.
Banking sector consolidation is another important and bold reform undertaken by the government. This is more so considering the serious resistance put up by the employee unions and other such interests. Government is also considering a professionally managed company which would hold government’s share in all the banks and monitor them. This would further reduce government’s ability to influence their operations, lending decisions and help maintain governance standards.
Insolvency & bankruptcy code (IBC) is another important reform, more so, as this was conceptualized and implemented during the last five years itself. The committee to provide the framework for this law was formed towards the end of 2014 which submitted its report within a year. The law was passed soon after and was in place within next one year. Even though the code is still trying to find its feet, it has dramatically changed the behavior of corporate houses that used to consider companies as their personal property and would find a legal recourse to retain control despite defaulting on loans. IBC gives lenders the power to wrest control over a defaulting company in one swipe.
Initiation of mechanism for transparent auction of national resources primarily coal and other mines is another important achievement. While ‘Make in India’ has not been able to make much progress, indigenization of defense manufacturing as a part of this, having huge long term implication, does have gained some ground. It may be noted that nation spends something like Rs 1 lakh crore every year on arms, ammunition and other defense needs which are capital in nature. Most of these are technology driven, high margin items and indigenization would not only precious foreign exchange for the nation but also offers an opportunity for exports.
Yet, it is probably the socio-economic issues such as Jan Dhan Yojana, direct benefit transfer ensuring transparent transfer of funds to the beneficiary and social issues such as gas cylinders in every house, medical insurance, toilets and so on which caught the attention of the nation more than the economic issues.
So, what next?? End of the road for economic offenders, for sure. Corporate governance and business practices will have to realign and get used to a new normal. Land and property records digitization could be done more vigorously to reduce benami properties.
Will Rs 2,000 note also find its way out??!