Modi should prioritise policy predictability over reforms

IN its first budget since storming back to power in May, Indian Prime Minister Narendra Modi's government unveiled a vision to nearly double the size of the economy to US$5 trillion by 2024. Much of this is predicated on nearly US$1.4 trillion of infrastructure investments that the government hopes to attract. Many sections of the Indian business elite believe that the path to India's economic renaissance is by introducing sweeping land and labour reforms. They contend that a strong mandate for Mr Modi's Bharatiya Janata Party (BJP) offers a unique opportunity to usher in bolder reforms that will jumpstart the country's slowing economy into the next phase of high growth.

There is some logic to this view. Not since India first opened itself up to free market reforms in 1991 have the stars been so politically aligned for another reform push, especially with the BJP in power - not just nationally but also in 17 of India's 29 states. Many of these expectations are grounded in the assumption that coalition governments - which were the norm in India from 1991-2014 - have been inimical to reforms. Yet, there is limited evidence to suggest that majority governments in India have fared better on this count. If anything, average gross domestic product (GDP) growth rates under coalition governments have been higher than under single party-led governments.

Days after the BJP's win, an Indian government think-tank announced that it was preparing an agenda for unleashing "big bang" reforms. This included the easing of onerous land and labour issues, widely viewed as the silver bullet for fast-tracking economic growth. Among them is a plan to create land banks from unutilised land held by state-owned enterprises, which would then be leased to foreign investors - a move that would circumvent the more politically-fraught plan to dilute a 2013 land acquisition law by doing away with key provisions meant to protect farmers' rights. This should, at least in theory, speed up infrastructure projects. Also in the works are plans to combine 44 federal labour laws into four overarching codes to improve regulatory clarity. While not quite the dilution of hire-and-fire policies sought by businesses, such a consolidation of labour codes could potentially ease compliance risks by reducing the number of reporting requirements which currently exist under each law.

These moves are a clear signal of the Modi administration's intent to bring reforms, and are key to unlocking India's long-term manufacturing and infrastructure potential. But while balancing the market's expectations for substantive reforms, the government should ensure that it resists the temptation to change policies simply for the sake of it, and instead strive for a more predictable regulatory environment. This might open up the government to criticism for being too timid, but such incrementalism is likely to be more sustainable as opposed to more drastic measures that upset the political applecart and create an erratic policy environment.

As power becomes ever more centralised to Mr Modi and his tight circle of advisers, the administration will need to make efforts to avoid reforms that generate a lot of soundbites but eventually end up doing more harm than good. Mr Modi's first term offers many cautionary tales of how excessive concentration of power in the office of the prime minister can sometimes result in arbitrary and erratic decision-making. A case in point is the government's highly disruptive 2016 demonetisation exercise that affected economic growth and caused severe hardship to people.

POLICY FLIP-FLOPS

No less disruptive has been the government's policy flip-flops on its electric vehicle (EV) policy. After first issuing a directive in 2017 requiring EV adoption for 100 per cent of the total vehicle fleet by 2030, the administration scaled back the threshold to a mere 30 per cent in recent months. Frequent flip-flops make it harder for foreign businesses to write their business plans, set pricing for their products or commit resources.

Secondly, for all the clamouring around land reforms, these will mean precious little if they are routinely accompanied by court action over compensation and environmental issues. A staggering US$43 billion worth of projects are currently stalled due to land acquisition woes and associated litigation. The government needs to urgently look at a 2014 proposal to set up 1,800 fast-track courts to reduce the pendency of cases, which has so far made limited headway.

Finally, notwithstanding the pace of reforms that the government pursues, the reality for foreign businesses is that increased political stability at the federal level owing to Mr Modi's landslide win is no insurance against what remains a highly decentralised political environment. This requires companies to engage with different political and institutional structures across states, even those governed by the BJP, not least since policy implementation will continue to be driven by very localised factors. As such, engagement with local stakeholders will need to be an essential prerequisite for foreign businesses. Foreign companies that do this will mitigate their risks of being exposed to community-led social and environmental unrest, helping to ensure that they remain sustainable players in India - as Mr Modi looks to drive a huge expansion of his country's economy.