The Narendra Modi government has received a lot of flak in recent months for the way it has managed the Indian economy. Economic growth in the June quarter slumped to its lowest level in three years. The twin shocks emanating from demonetisation followed by the overdue shift to the new goods and services tax (GST) came at a time when the economy had already begun to lose momentum, as the benefits of the sharp decline in global oil prices dissipated.
Far less attention has been paid to the hard work put in by the Modi government to introduce reforms that will pay off in the medium term. These include the shift to GST that will unite the Indian economy, a new monetary policy framework focused on keeping inflation under control, a modern bankruptcy code that will help redirect capital from failing enterprises to successful enterprises, subsidy reforms based on the Aadhar system of biometric identification, and the recent recapitalisation of ailing public sector banks. The two recent pieces of good news — the sudden jump in the Ease of Doing Business rankings by the World Bank followed by the decision by international credit rating agency Moody’s to upgrade India’s ratings — should be seen as recognition for the reforms that have been put in place over the past few years.
The ratings upgrade is all about the sustainability of public finances. The rise in the ease of doing business rankings is about the business climate for enterprises. The first should help lower the cost of international borrowing by Indian companies. The second should make it easier for companies to invest in new facilities. However, it is important to see that both the improved credit rating as well as the higher ranking on the ease of doing business are the end result of policy reform, rather than a policy goal in themselves. What this means is that the Modi government needs to focus on the next round of reforms.
{{/usCountry}}The ratings upgrade is all about the sustainability of public finances. The rise in the ease of doing business rankings is about the business climate for enterprises. The first should help lower the cost of international borrowing by Indian companies. The second should make it easier for companies to invest in new facilities. However, it is important to see that both the improved credit rating as well as the higher ranking on the ease of doing business are the end result of policy reform, rather than a policy goal in themselves. What this means is that the Modi government needs to focus on the next round of reforms.
{{/usCountry}}The GST system needs to be streamlined; a new fiscal policy framework that complements the monetary policy framework is needed; the direct tax reforms agenda is still unfinished; land and labour markets need to be liberalised, the banking sector needs deep governance reforms, if not outright privatisation. However, a comprehensive reforms agenda that ties it all together is still missing.
The Indian economy is due for a cyclical recovery. The bigger task is to help push economic growth to a higher trajectory over the next two decades, so that ten million new jobs are created every year. The ratings upgrade and the improvement in the business climate should be seen as signals to press the reforms accelerator.