U.S.-India Insight: Scoring the Modi Government's Reform Program
April 22, 2019Nearly five years ago, CSIS crafted a list of 30 significant economic reforms that the Modi government should consider taking up. This project was an apolitical, methodical way to determine the pace and scope of the Modi reform program. Five years later, the Modi government’s track record seems solid. His government has enacted 9 of the 30 reforms, and another 15 reforms have been partially completed. However, most of his government’s positive steps came relatively early in its term.
With any new government, expectations run high. Every analyst feels the need to opine on the steps a government must take to trigger growth. Often, these recommendations suffer from a few recurring problems. They can be quite narrow- reflecting a few sectors or topics on which the author has some knowledge. They can be politically tinged. Or they can be overly broad, lacking direction on specific actions. In preparing the Modi Reform Scorecard, our team analyzed the “reform wish lists” of top trade bodies, economists, and rating agencies. Then we organized a group of experts to meet and debate the wider list of potential reforms that were considered for inclusion in the list of 30.
Some of the Modi government’s early reforms received too little credit. One example was finally ending the reserved small-scale industries list that precluded growth in many key sectors or relaxing foreign investment rules around construction projects. Other reforms are often noted as the major achievements of the Modi government such as the initiation of the long-pending Goods and Services Tax (GST), the passage of the new Bankruptcy and Insolvency Code, and the opening the railway sector to the private sector.
We only gave partial credit in some areas often counted as having been modernized. For example, the long-awaited Insurance Act Amendments were approved by Parliament, but still cap foreign investment at 49 percent while adding onerous “management and control” restrictions that were not present in the earlier act—or ending the use of retrospective taxation. While the new Finance Ministry committee reviewing attempts at retrospective taxation have blocked new cases, amending the Income Tax Code to clarify that tax treaties supersede domestic law in normal course would have been a stronger way to handle this issue.
Of the nine reforms completed by the Modi government in its five-year term, six took place during the government’s first year in office. So, the pace of reform was clearly must faster in the early years. In fact, not a single reform has moved to “completed” since the Goods and Services Tax came into force in July 2017. The focus on early economic reforms makes sense from a political angle. Most economic reforms take years to bear fruit, as companies make new investments to take advantage of emerging opportunities. And significant economic reforms often cause short-term pain—which is best left as far behind an election as possible. While this front-loaded approach to reform is disappointing to businesses, it makes political sense.
As trade associations and economic experts begin releasing their new “wish lists” for the next Indian government, we are busy preparing a new list of 30 significant reforms by which we will measure the next government. Over time, we will get a better sense of which prime ministers were more successful in taking steps to unlock India’s high-potential economy.