THREE weeks from now, India’s Prime Minister Narendra Modi will mark his first year in office. He swept into office with a clear centre-right message — “minimum government, maximum governance” — and the biggest mandate of any leader since 1984; one might have expected him to establish a policy direction and priorities fairly quickly. Yet his administration still can’t seem to make up its mind what kind of government it wants to be.

On May 1, in the strongest criticism thus far from within the ruling coalition, former minister Arun Shourie blasted the government’s economic policy as “directionless”. Until recently considered a close ally of Modi’s, Shourie may have employed the wrong adjective. The government’s policies seem pulled in too many directions — both towards reform and against it.

The problem isn’t that the pace of reform is too slow. In a large, unwieldy polity such as India, there’s an argument for promoting good policy in measured, incremental steps that build upon one another without provoking widespread opposition. And in fact, Modi’s government has gotten several small things right. The budget released in February gave a big and welcome fillip to public investment, especially in infrastructure, to kickstart a stalled investment cycle.

The government has held steadfast in its determination to amend a restrictive land acquisition law. Last week, it made the first big move to revise India’s equally onerous labour laws by proposing to raise the limit at which employers need permission from the government to lay off workers from 100 to 300 employees. While much more needs to be done, that’s a major incentive for Indian firms to employ more formal workers rather than relying on informal and poorly-paid contract labour.

If the government had pushed such measures consistently, supporters would be willing to overlook the delays caused by gridlock in parliament. The problem is that Modi’s administration has simultaneously engaged in blatantly regressive moves, especially on taxation. The decision to apply the Minimum Alternate Tax to foreign institutional investors who had heretofore been exempt has seriously dented investor confidence. Slapping Cairn Energy with a tax bill based on an awful retrospective tax law passed by the previous government was equally damaging.

Individual taxpayers are not being spared either. In a move that harks back to the socialist era of the 1970s, the government has proposed scrutinising the foreign travel of ordinary Indians to prevent them from squirreling funds away in overseas accounts.

Last week, the government also caved to vested interests by withdrawing two welcome proposals that had been included in the February budget. One would have transferred responsibility for managing government debt from the central bank to an independent agency, as is the case elsewhere. The other would have asked the securities regulator (SEBI) instead of the Reserve Bank of India to regulate the bond market. Both measures would’ve helped clear up some of the problems India is having with the transmission of monetary policy.

The central bank has a serious conflict of interest as the setter of interest rates and the manager of government debt. At the same time, an underdeveloped bond market (particularly for the private sector) would have been served better by the efficient SEBI than a conflicted RBI. The central bank made no secret of its opposition to the budget proposals; the government loses credibility by caving in so easily. If, as officials now claim, they simply wanted to consult further with the RBI, they should’ve done so before releasing the budget.

Perhaps the biggest disappointment, though, has been the government’s total failure to privatise even one of India’s massively inefficient public-sector companies. One of Modi’s loudest applause lines during the campaign was that the government shouldn’t be in the business of business. Yet instead of divesting majority stakes in loss-making Air India, the stagnant telecom companies BSNL and MTNL or the hotel company ITDC, the government has continued to insist that it can manage these companies better — a familiar refrain.

Perhaps Modi, acclaimed for his stewardship as chief minister of Gujarat state for more than a decade, still thinks he can run the Indian economy on a project-by-project basis rather than developing a coherent governing philosophy. His penchant for launching big schemes is unabated. He’s just announced a grand highway project that will connect the east and west of India. He’s also put forward a plan to construct 100 “smart cities” with world-class physical and digital infrastructure.

The fact is, though, that all these projects are heavily dependent on attracting large investments, and investors look for policy certainty before committing any money. Before he floats any more grand projects, and before he gets too far into his second year in office, Modi had better lay out and stick to the principles by which he plans to govern.

—By arrangement with Bloomberg-The Washington Post

Published in Dawn, May 6th, 2015

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