Working Paper No. 2018-01 India: Three and a Half Years of Modinomics Arvind Panagariya Columbia University The author is a Professor of Economics and Jagdish Bhagwati Professor of Indian Political Economy in the School of International and Public Affairs at Columbia University. Between January 2015 and August 2017, he served as the founding Vice Chairman of the National Institution for Transforming India or NITI Aayog, Government of India in the rank of a Cabinet Minister. The Prime Minister serves as the Chairman of the NITI Aayog, which replaced the erstwhile Planning Commission on 1st January 2015. TaBle of Contents 1 The Legacy ............................................................................................................................................ 2 2 The Turnaround ................................................................................................................................. 6 3 Process and Policy Reform ............................................................................................................ 8 3.1 Tackling Retrospective Taxation ........................................................................................ 9 3.2 Ending Bureaucratic Paralysis ............................................................................................. 9 3.3 Ease of Doing Business ......................................................................................................... 10 3.4 FDI Liberalization .................................................................................................................... 10 3.5 Closure and Privatization of PuBlic Sector Enterprises (PSEs) ........................... 11 3.6 Exit Policy ................................................................................................................................... 12 3.7 Direct and indirect Tax Reform ......................................................................................... 12 3.8 Reduction in Petroleum SuBsidies ................................................................................... 13 3.9 Direct Benefit Transfer using Aadhaar-based Verification ................................... 14 3.10 CooPerative, Competitive Federalism ......................................................................... 14 3.11 Assault on CorruPtion ......................................................................................................... 15 3.12 Ease of Access to Services for Citizens ........................................................................ 16 3.13 Ending Open Defecation: The Swachh Bharat Mission ........................................ 17 3.14 Budget-related Reforms .................................................................................................... 18 4 Criticisms and ResPonse ............................................................................................................... 19 4.1 Growth is Slower Than the CSO Estimates ................................................................... 19 4.2 Growth has been Jobless ...................................................................................................... 24 4.3 Demonetization ........................................................................................................................ 28 5 Concluding Remarks ....................................................................................................................... 32 ii India: Three and a Half Years of Modinomics Arvind Panagariya1 In May 2014, a new government led By Prime Minister Narendra Modi took office in India. In three decades, this was the first government to win an aBsolute majority in the Lok SaBha, the Lower House of the Parliament. It was also the first time in India’s history that the winning candidate had contested the national election Predominantly on the Platform of economic develoPment. “Sabka Saath, Sabka Vikas,” which translates as “Collective Effort, Inclusive DeveloPment,” was the catch phrase Modi used to caPture the imagination of the voters. After three and a half years under what has come to Be called Modinomics, where does the Indian economy stand? Although Indian print and electronic media ceaselessly run debates on different economic issues, we lack a unified account and assessment of the Progress made By the government. The present paper attempts to fill this critical gap. In Section 1, I begin with a brief account of the economy following the 1991 economic reforms with special attention paid to its state just before the Modi government took office. In Section 2, I discuss the overall Performance of the economy including the GDP growth, macroeconomic develoPments and Progress in attracting foreign direct investment. In Section 3, I offer an account of the key process and policy reforms introduced By the government. The discussion here 1 The author is a Professor of Economics and Jagdish Bhagwati Professor of Indian Political Economy in the School of International and PuBlic Affairs at ColumBia University. Between January 2015 and August 2017, he served as the founding Vice Chairman of the National Institution for Transforming India or NITI Aayog, Government of India in the rank of a CaBinet Minister. The Prime Minister serves as the Chairman of the NITI Aayog, which replaced the erstwhile Planning Commission on 1st January 2015. shows that this has Been a very active government, seeking change in wide variety of areas. In Section 4, I assess the criticisms of the government in three key areas: lack of robustness of growth; poor record of job creation; and ill effects of demonetization. In Section 5, I conclude the PaPer. At the outset, I may note that while this is PerhaPs a fuller account of the three and a half years of the Modi government than available elsewhere, it is far from complete. In Particular, to ensure that the paper is not unduly long, I have deliberately left out the areas of infrastructure, energy, agriculture, innovation, entrePreneurshiP, skill develoPment and social sectors. Major develoPments have taken place in each of these areas but their coverage must await a seParate PaPer. 1 The Legacy The year 1991 was a watershed year in the economic history of India. That year, the country discarded its four-decade-old command-and-control model in favor of a pro-market develoPment strategy. To Be sure, the reform Package included some Bold reforms. For example, in one stroke, it Put an end to investment licensing under which any significant Private investment required a license specifying the Product to Be Produced, its quantity and the location at which it will Be Produced. Similarly, it eliminated the import quota regime except in the case of final consumer goods under which import of a Product required oBtaining a license sPecifying the quantity of the Product allowed to Be imported. The reform Package also genuinely opened the door to foreign investment, which had hitherto been Permitted under extremely stringent conditions as a result of which hardly any foreign investment came into the country. 2 These major reforms in the 1991 Package notwithstanding, the shift from the state-led to quasi-market-led develoPment was gradual and sPread over more than a dozen years. The existence of multiPle layers of regulation in every conceivaBle area of policy and myriad Bureaucratic controls coupled with India’s contentious democratic Polity meant that it took several years of sustained effort to put in place reforms necessary to generate significant suPPly response. The 1990s and early 2000s saw many of these reforms take root. As a result, beginning in financial year 2003-04, India finally transited into an 8% plus growth trajectory.2 For nine years from 2003-04 to 2011-12, the real Gross Domestic Product (GDP) of the country grew at the annual rate of 8.2%.3 The Bulk of the reforms that ProPelled India into this high growth trajectory were undertaken under Prime Ministers Narasimha Rao and Atal Bihari VajPayee. The former served from 1991 to 1996 and the latter from 1998 to 2004. I have Provided a detailed account of these reforms in my 2008 Book, India: The Emerging Giant. In a nutshell, the reforms included oPening the economy to foreign trade and investment; full current-account convertibility of the rupee meaning foreign exchange for imports of goods and services was made freely availaBle; suBstantial liberalization of the capital account meaning that foreign investors could invest in India through a variety of instruments and Indian investors could Borrow funds aBroad more freely; end to investment licensing; allowing entry of private 2 Data in India are rePorted according to its financial year, which Begins on 1st April and ends on 31st March. Therefore, financial year 2003-04 refers to the Period from 1st April 2003 to 31st March 2004. 3 GDP figures in this PaPer refer to what is rePorted as the GDP at market Prices in the official statistics. Until recently, India rePorted the GDP at factor cost as its official GDP. But recently, it has switched to the Practice of rePorting GDP at market Prices as its official GDP as recommended By the United Nations System of national Accounts. 3 companies in insurance, telecommunications and civil aviation, which had been PuBlic sector monoPolies in the Past; accelerated entry of private Indian and foreign banks in a sector otherwise dominated By PuBlic sector Banks (PSBs); shift from controlled to market-determined interest rates; suBstantial rationalization of direct and indirect