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. 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.
Since then the government has enacted a number of reforms, big and small, to accelerate the growth trajectory that had taken a backseat in the two years preceding the present government.
The average GDP growth rate has averaged 7% plus over the five years. India has seen the return of macroeconomic stability with the government staying its course on fiscal consolidation plan. The fiscal deficit stands at 3.4% in 2018-19, coming down from a high of almost 6% under the previous government. The total foreign direct investment (FDI) rose from $36 billion in 2013-14 to $61.96 billion in 2017-18, registering a new high and indicating world’s increasing confidence in India’s growth story.
The sustained growth momentum has been a result of major process and policy reforms that the government has undertaken in the past three years. While some have yielded immediate returns towards raising the average GDP growth the impact of others, especially those of structural nature; will be felt in the future too. India’s own experience testifies to considerable lead time between the introduction of structural reforms and their full impact on the economy.
Modi government has successfully placed the economy on a stable macroeconomic path. With threats of retrospective taxation and other arbitrary decisions receding into the background, investor confidence has returned. One indicator of increased confidence is the healthy growth in FDI.
The government took early steps to end the paralysis in decision-making process that it had inherited. For example, environmental clearances were speeded up – they now take around 180 days, as opposed to the earlier norm of 600 days. The Prime Minister’s focus on solutions rather than silos has improved coordination among different ministries has accelerated decision-making at the center and helped unblock a large number of stalled projects.
With India moving from 142nd to 77th position between 2014 and 2018 in the World Bank’s Ease of Doing Business rankings, the government’s special emphasis on cutting red tape in area such as starting a business, issuance of construction permits, getting credit, protecting minority investors, paying taxes, enforcing contracts and resolving insolvency is bearing results.
The present government enacted the Insolvency and Bankruptcy Code of 2016, is ensuring accountability as well as resuscitating banks, bringing them back to health, after the indiscriminate lending during the UPA era created massive NPAs. After the passage of IBC, within 2 years, banking sector was able to recover a record Rs. 3 lakh crore. Actions were initiated against 39 large defaulters who had NPAs worth Rs. 2.69 lakh crore.
On the indirect-tax front, the Goods and Services Tax (GST) arguably represents the most important and politically difficult reform in India to-date. However, with a large scale consensus building exercise, the government achieved the feat replacing numerous state and central tax by a single tax nationally.
The present government’s consistent assault on corruption, ranging from amendment of the Double Taxation Avoidance Agreements with Mauritius and Cyprus; amendment of the Benami Transactions Act; to implementation of the Income Declaration Scheme 2016; demonetization and post-demonetization investigation of individual and company bank accounts and tax returns, have had visible success. In recent times, the tax compliance has increased with steps like demonetisation. Filing of income tax return has seen a surge.
Modi government has been able to considerably widen and deepen reforms. While some of these reforms have yielded immediate results, the effect of many structural reforms such as the Insolvency and Bankruptcy Act and the Goods and Services Tax will be genuinely realized over the years.