Modi Seeks to Re-Energize Regime with Reforms

PM appears to be trying to emulate India’s 1991 reforms package

By: John Elliott

The Indian government has tried over the past week to offset some of the serious economic and social effects of Covid-19 on the poor and on business, while at the same time using the urgency of the crisis to announce a series of potentially significant economic and business reforms.

The plans – some extremely tentative and several not entirely new – have included extensive overall privatization of the public sector, specific increased private sector involvement in defense manufacturing, space activities, coal mining and power distribution, plus open market access for farmers to sell their produce.  Aid measures have included financial and other help for small firms, farmers and migrant workers.

India’s economy has been crippled and the poor have been left destitute over the past two months. The country has more than 90,000 confirmed cases of coronavirus including more than 56,000 currently active. Reported fatalities have been relatively low at nearly 2,900, but the economic and social effects have escalated since Prime Minister Narendra Modi – who came to power six years ago this week – ordered one of the world’s strictest lockdowns on March 24. The lockdown has been extended to May 31, with varying degrees of relaxation around the country.

Modi heralded this week’s Covid-19 and other initiatives when he addressed the nation on May 12 and announced what was billed as a (much exaggerated) US$ 284 billion economic package of past and future plans for “land, labor, liquidity and laws.” This would lead to what the prime minister dubbed an Atmanirbhar Bharat or self-reliant India. (Economists estimate the actual government outlay is nearer $28 billion)

That was followed by five daily televised media conferences, which ended May 17 when Nirmala Sitharaman, the finance minister, listed Modi’s proposals on aid measures and broad-brush policy changes.

Migrant workers breaking state barricades on May 17

Modi’s speech and subsequent twitter messages were so impressive that there was even speculation he might be planning to use the Covid-19 crisis to trigger major reforms in the same way that Congress Prime Minister Narasimha Rao and Finance Minister Manmohan Singh dramatically opened up the economy to tackle a deep financial crisis in 1991. That initiative led to the development of modern India, but the pace of further reform has been slow and, for the past 20 years, there has been speculation about what sort of crisis would be needed to push a government into another mega initiative.

Modi has undoubtedly tried to reach out to domestic and foreign companies to persuade them to invest and help to revive the economy, but the measures – many of which re-package plans announced in the past – are too uncertain to match up to the 1991 initiatives.

Nirmala Sitharaman at a media conference last week

They have also not met the need for an economic stimulus because they do little to accelerate demand. They ignore some key areas including the hard-hit tourism industry and private healthcare (though curiously there is a Rs500 million allocation to help 200,000 beekeepers).

Even more importantly, they have specifically failed to tackle the continuing social misery – and potential economic problems – of tens of millions of migrant workers fleeing home from big cities since the sudden March 24 shutdown.

Little has been done to help these workers, maybe as many as 90 million of whom have trudged their way hundreds of kilometers with little food. A total of 130 have been killed on the roads. Overcrowded trains have been provided but not in sufficient numbers.

This week’s measures have provided them with free food for two months (why only two months is unclear), and with countrywide ration cards. The Government has also made a substantial allocation under a rural work scheme (MGNREGS) to provide employment in their home areas.

Migrant workers

There are estimated to be a total of some 170 million migrant casual workers in India and they play a key role in many industries. Employers in the cities are now beginning to worry that they might not return as the economy recovers, upsetting the chances of a quick recovery. Some companies must also now be regretting that they treated casual workers as little better than slave labor and not as valued employees.

In his speech, Modi said that self-reliance would be based on five pillars – an economy “that takes quantum jumps and not incremental change,” modern infrastructure; a technology-driven system; vibrant demography as a “source of energy;” and a strong demand and supply chain.

The biggest potential reform is that there is to be a policy for the private sector to be allowed to invest and operate in all parts of the public sector apart from industries selected as “strategic.” All public sector enterprises in non-strategic areas would be privatized while, in strategic areas, between one and four enterprises would remain in the public sector, the remainder being merged or brought under a holding company.

Stranded migrant workers wait to board a special train home from Chennai. ToI photo

This seems most unlikely to be implemented any time soon – the government’s statement ominously said, “timing to be based on feasibility etc.” The first step will be the publication of a policy, but there will be considerable opposition from trade unions and from right-wing forces in the ruling Bharatiya Janata Party’s broad Sangh Parivar (family or organizations) that have already started to protest.

Earlier announcements last week said that the private sector’s involvement in defense manufacturing would be boosted with a list of weapons and systems that would not be open to foreign companies. The government hopes this will encourage foreign direct investment by major international defense companies, which will be allowed 74 percent FDI stakes (up from 40 percent) on an automatic basis for high technology equipment.

Farmers’ markets

The big initiative for farmers is that restrictions on how they sell their produce are being lifted so that they can avoid bureaucratic and often corrupt mandis (local public sector markets) that currently have a statutory monopoly. This idea of de-regulation has been mooted for some 20 years and is basically a subject for states, not the central government, so it is not clear how far the proposal will go. Selling across state borders will also be freed under Modi’s broader theme of “one nation one market.”

To offset the impact of the Covid-19 shutdown, financing of businesses as small as street vending is being eased with special credit facilities, and farmers are being provided with emergency funding and credit arrangements. Bankruptcies are to be stalled for a year without companies being considered to be defaulters for bad loans. Other measures include liquidity is being boosted for non-banking finance companies.

Overall, there has been criticism that Modi chose this time, when the priority is dealing with the immediate crisis, to launch medium and long-term economic reforms, and that there were not adequate cash handouts and other measures to provide relief, especially for the poor.

It was characteristic of Modi to over-egg the proposals – for both relief and reform – in his initial speech. That will not matter however if what has been laid out in the past week is implemented, but Modi’s track record on execution is not good.

John Elliott is Asia Sentinel’s South Asia correspondent. He blogs at Riding the Elephant.