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The real litmus test

Most important aspect for Modi to keep in mind is political inclusion

The thumping majority with which the new government has won demonstrates India?s aspirations for growth and development. This message was carefully crafted almost as early as September 2013, when Narendra Modi was declared BJP?s prime ministerial candidate. The clear message from the citizenry debunked freebies and subsidies and was not polarised around urban v/s rural or the capitalism v/s socialism. It was around aspirations of the young?of employment opportunities and jobs, of entrepreneurship, of basic necessities of power, water and infrastructure to fuel a better tomorrow through inclusive growth.

These are the questions and challenges that Modi and his government will have to seriously introspect and come up with answers to. Once the initial euphoria of this win sinks in and the right people get the appropriate portfolios to manage, the real litmus test of setting the economy?s trajectory on the growth path will be begin.

Immediate challenges

* The policy paralysis tag of UPA-II was primarily due to the significant logjam at bureaucratic levels. The NDA government in the past has spoken of setting up an administrative reforms commission and this could reduce bureaucratic delays.

* Correcting the perception of corrupt and crony capitalism that the political establishment suffers from currently.

* Sticky and high Inflation as well as huge fiscal deficits of the previous government are other important areas that the new govt needs to resolve. The looming EL Nino factor leading to lower rainfall could provide a fresh challenge for controlling inflation.

* Rejuvenating the infrastructure sectors like power, road, railways will be the top of the list items for him

* Opening up manufacturing across sectors and loosening multitudes of controls is an important area needing immediate government attention.

The government can address these issues by initiating corrective action in the following areas.

Steps towards strong fiscal consolidation

The new government will need to strongly focus on fiscal consolidation from Day 1. The finance ministry, headed by P Chidambaram, cut government spending by $13 bn and pushed back a subsidy burden of about $16 bn to reach an impractical fiscal deficit target of 4.6% in FY14. These austerity measures put economic growth on the back burner. The new government needs to take strong and constructive action to put the economy back on the growth path. This may not be easy since our tax-to-GDP ratio has slipped to 10.2% from a peak of 12.5% in 2007-08.

A realistic and fiscally prudent budget is critical to shore up both domestic as well as global confidence. There is also a need for transparency in the public distribution system, to reduce leakages and thereby enabling better utilisation of government finances. Another way to reduce the deficit is to initiate select PSU divestments, signalling concerted efforts to increase revenue and also increase the efficiency of these enterprises.

Steps towards boosting export and reducing CAD sustainably

The recent sharp contraction of CAD of 2.2% of GDP from the record high levels of 4.8% in the previous fiscal was mainly supported by the contraction of gold import through measures by the RBI. The measures by themselves are not sustainable in the long term and fixing the structural challenges is important. The new government should focus on boosting exports for the manufacturing sector where India has a credible opportunity that is not fully leveraged. This can be further facilitated by building high quality ports with good connectivity, providing tax benefits to exporters, increasing efficiency and transparency in the Special Economic Zones and creating a clear land acquisition policy.

Steps towards reviving the private investment cycle

In FY14, new projects declared by private firms to the tune of R1,244 bn, was sharply down as compared to the past financial years. Based on Modi?s track record, investors are highly hopeful about new pro-investment government policies. In its manifesto, the BJP promised to cut ?red tape? and encourage foreign investment in sectors needed for job and asset creation. The new government should necessarily take steps that improve governance, instill confidence in government machinery and streamline functions across different ministries. These steps will facilitate manufacturing while kick starting infrastructure spending will boost private investments.

Steps towards reducing supply side bottle neck

Consistently high and sticky inflation is a major concern for India and is eroding the overall purchasing power. The measures taken by the RBI have to be supported by the Centre. The government should implement the changes in the APMC Act allowing farmers direct access to markets. Refining procurement procedures will reduce hoarding and black-marketing and help arrest the soaring food inflation. Changes in the MGNREGA scheme to link wages to asset creation and checking the MSP prices will help curb rural inflation.

Steps towards continuing the reform agenda

A lot of steps taken by the previous government have provided a base for reforms. The incoming government should implement and build on these as soon as possible. Passing the GST, implementing the Aadhaar system for public distribution and continuing speedy clearances of projects will further stabilise the economy and position it for a robust recovery.

But for all these efforts to take shape and for the new government to hit the ground running the most important aspect to keep in mind is ?political inclusion?. To objectively view the steps taken by the previous government and re-work, re-implement and correct where necessary and not simply Rewind and Restart for mere political ego corrections!

The author is CEO, Capital Markets, Edelweiss Broking Ltd

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First published on: 26-05-2014 at 21:28 IST
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