The last ten years under Prime Minister Modi have seen a large number of economic reforms that have made India the fastest growing major economy and brought it to the threshold of becoming the world’s third largest economy. While many articles have been written about individual reforms, it is important to get a sense of overall progress and the intellectual underpinnings of what is being attempted.
The economy inherited by Prime Minister Modi in 2014 was the outcome of two decades of intermittent market-oriented reforms that had created a larger private sector but not a common internal market, world class infrastructure or a process of “creative destruction” crucial for an entrepreneurial culture. Moreover, there was the immediate threat of macro-economic instability resulting from the policy response to the Global Financial Crisis of 2007, including an irresponsible expansion of the financial system. The first term of Prime Minister Modi, therefore, needs to be seen as a response to these challenges.
The first priority of the government was to anchor macro-economic policy and re-establish credibility. This led to the introduction of an inflation targeting framework in 2016 that established an explicit inflation target range of 2% to 6%. This has been a very successful framework as India has shifted from being a country that normally suffered inflation in the 8-12% range to one that rarely strays from the target range. Indeed, it performed better than most developed countries during the post-Covid inflation spike.
The next problem was creating a common internal market. This required physical infrastructure but, more importantly, an indirect tax system that was evenly applied across the country. The solution was the Goods and Services Tax (GST) introduced in 2017. The inefficiencies of the new system is now often debated (and these issues do need to be resolved), but one should not forget how GST is a radical improvement on the earlier system.
At around the same time, the government decided to use the brand new Insolvency and Bankruptcy Code (IBC) to clean up the banking system. This was a major innovation as IBC was untested and the conventional wisdom of that time was that non-performing assets (NPAs) should be shifted to a “Bad Bank”, and that banks should be quickly recapitalized in order to avert a systemic cash-flow gridlock. The government, however, took the view that a Bad Bank would just become a tax-payer funded warehouse for festering NPAs like the erstwhile Board for Industrial and Financial Reconstruction. Instead, IBC was used to directly sell-off NPAs. This decision dramatically changed India’s credit culture: many defaulters voluntarily repaid their loans even as NPAs were taken over by better management. The result is that India now has a healthy, well-capitalised banking system.
The second term of Prime Minister Modi, unfortunately, was hit by the Covid-19 shock. Two years were lost fighting the pandemic but, even under duress, a large number of sectoral reforms were done. For instance the drones, space and geo-spatial mapping sectors were liberalized, and Air India was privatised. The liberalisation of agricultural markets, however, was rolled back due to political opposition. It is important to remember, nonetheless, that the economic logic of farm sector reforms has never been contested by any credible economist.
As the country emerged from the Covid Crisis in 2022, the government embarked on a cycle of large-scale investment in infrastructure. Some of the projects were already underway, but a renewed effort was directed at highways, airports, railways and new public buildings. The new Parliament building was completed in 2023, two massive airports are nearing completion near Delhi and Mumbai, a complete overhaul of the transportation Mumbai’s system is underway, and so on.
So, what are the new focus areas that are emerging? First, there now an explicit goal of making India a technology leader. This requires a research and development effort from both the government and the private sector. The intellectual property ecosystem is being revamped in anticipation of this shift (the patenting process, for instance, has been dramatically expanded). Similarly, a well-funded Anusandhan National Research Foundation has been established a few weeks ago. Other measures are in the pipeline.
Second, Indian policy-making is being given a maritime orientation that has been oddly missing for a country with such a long coastline. A big effort is being made to expand ports as well as encourage ship-building, and vessel ownership. In August, Prime Minister laid the foundation stone of a brand new mega-port at Vadhavan, Maharashtra, that would entail an investment of Rs76,220 crores.
Third, there is an effort to build out a safety-net (as opposed to freebies) for vulnerable segments of society. One example is the extension of the Ayushman Bharat health insurance of Rs5 lakhs to all senior citizens above the age of seventy.
Of course, economic reforms are a continuous effort and many new policies and projects will be announced in the next few years to pave the way for a “Vikasit Bharat” by 2047. Major challenges remain such as the need to upgrade the administrative and legal system. However, this article will hopefully provide readers a flavour of how Prime Minister Modi and his policy-team think about the economic reform agenda.
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