A Holiday Surprise for India’s Economy

Narendra Modi has finally begun delivering on long-unfulfilled promises to clear out regulations and clean up the Indian bureaucracy. But will investment follow?


What a difference a week makes in India. As I argued last week, Prime Minister Narendra Modi’s plan to boost labor-intensive manufacturing, expand youth employment, and capitalize on low-wage costs — an economic agenda dubbed as the “Make in India” campaign — is off to an encouraging start. Still: at the end of 2014, all we’d seen out of New Delhi were, as yet, largely unfulfilled promises.

But on the heels of an unproductive parliamentary session dominated by disruptions from the opposition, Modi’s government suddenly sprang into action during the December recess, quickly passing a slew of ordinances to push its business-friendly, growth-oriented economic agenda. Like laws passed by parliament, ordinances take effect immediately and remain so for six months, after which they are either reissued or passed into law by parliament. While not ideal, these measures — essentially executive orders — allow the government to get on with the business of governing in the face of the recalcitrant opposition parties that control India’s upper house of parliament (whose members are elected by the state assemblies).

A number of these ordinances advance the government’s economic ambitions. One measure to reform India’s convoluted commercial laws should lead to speedier arbitration in commercial disputes. Another raises the foreign direct investment cap in the insurance sector from 26 percent to 49 percent, thereby encouraging greater investment. Another ordinance, expected to receive presidential approval soon, would open up the mining sector to private players, in an attempt to improve the productivity and efficiency of a sector whose growth will be crucial to the manufacturing boom Modi envisions.

Modi’s government also sought to correct the mistakes of the recent past by amending a controversial land bill pushed through by the previous left-of-center Congress-led government in 2013. Industry leaders and economists criticized that law for stymieing industry and infrastructure by making it prohibitively expensive and cumbersome for businesses to acquire land. Modi’s ordinance eases land acquisition by exempting key public and private sectors — including defense, rural infrastructure, and heavy industry — from a costly and byzantine social and environmental regulatory process that, under the previous law, required 80 percent of those people involved to agree. In effect, the amended act levels the playing field between those seeking to acquire land and those who stand to lose it, whereas the original act was heavily tilted in favor of the latter.

Modi also went after one of the sacred cows of India’s socialist past: its system of Soviet-style five-year central plans. On New Year’s Day, Modi acted on a promise he made during a major speech on Indian independence day, abolishing the planning commission and replacing it with the National Institution for Transforming India (NITI) Aayog (NITI means “policy” in Hindi and Aayog translates as “commission”). Freed from the resource-allocation role played by the defunct planning commission, NITI Aayog will essentially function as a high-level think tank that will advise on policy. As with the old Planning Commission, the prime minister will serve as the chairperson of the new agency.

Significantly, Arvind Panagariya, a professor at Columbia University in New York and vocal champion for economic reform, will serve as the vice-chair of NITI Aayog. He has long argued that economic growth must precede generous social welfare schemes like those favored by the previous government. In addition to Panagariya, the panel’s two other full-time members are economist Bibek Debroy and scientist V. K. Saraswat. Debroy shares Panagariya’s reformist bent, while Saraswat’s appointment reflects the new agency’s wide mandate, which include national security in addition to the economy.

To put all this into perspective: in a single week, Modi managed to do what the Congress-led government failed to accomplish in a turgid five-year second term devoted to one massive redistributive welfare scheme after another — none of which laid the groundwork for sustained high rates of economic growth.

While it’s early yet, all indications suggest that NITI Aayog will assume a pro-reform and pro-growth orientation. Judging from my conversations with Panagariya, I am confident that he will urge Modi to forge ahead with unfinished economic reforms, and make the case that this is the only way for Make in India to succeed. He’ll certainly have the expertise necessary to get the job done.

Despite the Modi government’s slow start, the events of last week show the prime minister is prepared to used his large mandate to push through his agenda, even if that means exercising it through executive power. While Modi’s ordinances are a good start, India’s rigid labor laws and creaky infrastructure still need urgent attention. Plus: its economic growth still depends on how the states implement the amended laws, and how bureaucrats on the ground put them into practice.

But at the very least, Modi has sent a message that India is once again open for business.


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