Opinion | Modi 3.0 Should Be Committed To Bold Reforms

The National Democratic Alliance (NDA) has formed the government again, marking the first coalition at the union level in a decade. Unlike the coalition politics of pre-2014, infamous for policy paralysis, corruption, and inflation, this administration promises a different trajectory.

Before 2014, coalition governments in India were synonymous with inefficiency and scandal. The United Progressive Alliance (UPA) era (2004-2014) saw numerous high-profile scams, such as the 2G spectrum and coal allocation scandals, which eroded public trust and led to significant economic mismanagement. Policy paralysis was rampant, with crucial reforms stalling due to the constant need for political appeasement within the coalition framework. In contrast, since 2014, the NDA has demonstrated decisive governance, focusing on economic reforms and transparency. Initiatives like Make in India, Digital India, and the Goods and Services Tax (GST) have revitalised the economy, improved investor confidence and streamlined regulatory frameworks.

As the Bharatiya Janata Party (BJP) leads this new coalition government, India must sustain its growth momentum through continued reforms. The government should be committed to bold reforms and process improvements, ensuring that the inefficiencies of past coalition politics are not repeated. A few areas where the new government should focus on are as follows. 

Capital Expenditure

First, the new government must prioritise capital expenditure, as it has proven to be a more effective driver of economic growth than revenue expenditure. Previous budgets have highlighted the significant multiplier effect of capital expenditure (estimated at 2.45) compared to revenue expenditure (0.99).

Investment in infrastructure, such as railways, national highways, ports, and waterways, should be at the forefront of this strategy. These sectors not only stimulate economic activity but also ensure long-term developmental gains. The focus should be on projects that the Union government can implement directly, avoiding centrally sponsored schemes that often face delays due to coordination issues with state governments.

A clear, long-term fiscal management path is crucial. The government should articulate an explicit counter-cyclical fiscal policy that balances expansionary measures in downturns with contractionary measures in booms. This approach minimises distortions and promotes stability in tax rates. While expansionary policies are more politically palatable, contractionary measures are equally essential to manage economic cycles effectively. The emphasis should be on capital expenditure to navigate economic fluctuations, given that revenue expenditure tends to be inflexible. Ensuring transparency and consistency in these policies will build confidence and predictability in the fiscal environment.

Managing Demand

However, the recent analysis by EAC-PM members Sajjid Chinoy and Neelkanth Mishra has flagged that demand, especially rural demand, is a concern. Public investment alone cannot sustain economic growth indefinitely; the private sector must step up. While real estate investment has surged, corporate capital expenditure lags due to insufficient demand visibility. This is evident in stagnant capacity utilisation rates, single-digit nominal sales growth, and weak core inflation. 

Countercyclical fiscal and monetary policies are constrained, making it crucial for the union government to boost demand through private consumption and exports. Consumption, growing at just 4.2% over five years, has been hampered by a dichotomous labour market and declining real per-capita consumption. A consumption revival, alongside broadening export contributions, is key.

Employment growth, lagging behind demographic changes, needs focus, with many recent jobs in agriculture and a shift toward capital-intensive manufacturing. To make labour more attractive, comprehensive policies are required, from improving education, health, and skills to supporting labour-intensive industries. This should be complemented with the implementation of the four new labour codes. 

Apart from this, there will be a need to shift the focus from deficit indicators to debt indicators as they provide a more comprehensive measure of fiscal health. The debt-to-GDP ratio offers a clearer picture of fiscal sustainability, reflecting the cumulative impact of fiscal policies. This approach accounts for factors such as the difference between interest rates and growth rates and the primary budget balance.

Prioritising debt management over deficit targets will help create a stable fiscal environment, reducing volatility caused by fluctuating GDP estimates. A well-defined debt management strategy will enhance fiscal resilience and sustainability.

Tax Reforms

Further, direct and indirect tax reforms are pivotal for increasing revenue. The government should focus on broadening the tax base, reducing exemptions, and improving compliance to enhance tax buoyancy. Direct tax reforms, including a comprehensive overhaul of corporate income tax (CIT) and personal income tax (PIT), are long overdue. Simplifying the tax structure and eliminating exemptions will reduce compliance costs and litigation. For GST, expanding the tax base to include more goods and services and rationalising tax rates will improve efficiency and revenue collection. The GST Council should convene regularly to address these reforms and ensure the system evolves to meet economic needs.

Also, expenditure reform is essential to manage fiscal pressures. While some expenditures, such as interest payments, mandated transfers, wages, and pensions, are relatively fixed, there is significant scope to rationalise subsidies and various schemes. The government should prioritise and streamline public expenditure, rationalise major schemes and focus on central sector initiatives. Reforming food, fertilizer, and petroleum subsidies and centrally sponsored schemes will align fiscal policies with economic realities, ensuring efficient and transparent resource allocation. 

By focusing on these areas, the new NDA government can achieve sustainable economic growth and fiscal stability, ensuring that India continues to progress towards its economic milestones. 

(Bibek Debroy is Chairman, Economic Advisory Council to the Prime Minister. Aditya Sinha is Officer on Special Duty, Research, Economic Advisory Council to the Prime Minister) 

Disclaimer: These are the personal opinions of the author