Steps Directed Towards Economic Reform

The Modi government’s economic policies focused on liberalising the economy. The foreign direct investment

policies were liberalised to allow more foreign investment in several industries, including in defence and the railways. Well aware that the job situation was not good and that India’s demographic dividend could rapidly turn from an asset to a liability, the Modi government initiated the Make in India scheme in September 2014. It was a flagship programme to boost the domestic manufacturing industry and attract foreign investment in the Indian economy. Along with it many other programmes were also put in place, such as Start Up India, Stand Up India, Skill India, and so on. The success of these programmes was not up to expectations, but they

did make some progress.

Parliament amended the Arbitration and Conciliation Act 1996 to expedite the arbitration of commercial disputes. The amended law tackled issues of conflicts of interest and brought disclosures by arbitrators into the ambit of the law. Time limit was set on the arbitration procedure.

The Insolvency and Bankruptcy Code was a new law enacted in 2016 to consolidate the existing laws related to insolvency in India and to simplify the process of insolvency resolution so as to enable easy exit in cases of insolvency of individuals and companies. This law replaced several overlapping provisions contained in various laws, such as the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the Sarfaesi Act), and the Companies Act, 2013, among others. With the new law in place, banks and other creditors could hope to recover their loans from the bankrupt companies in a time-bound and efficient way, entrepreneurship could be promoted, availability of credit could be maximised, and a balance of the interests of all the stakeholders maintained.

Unaccounted money has been a bane of Indian economy. The Benami Transactions (Prohibition) Amendment Act

of 2016 tightened the law in the use of unaccounted, tax- evaded money for what is known as ‘benami’ transactions through the purchase of property. Under the amended law, authorities were empowered to provisionally attach and eventually confiscate benami properties. Jail terms of between one and seven years and a fine are prescribed for offenders.

The Real Estate (Regulation and Development) Act of 2016 was another policy initiative of the NDA government. As per the law, a regulator–the Real Estate Regulatory Authority (RERA)–was to be established in every state to oversee the sector and “protect the interest of consumers in the real estate sector” through an adjudicating mechanism and appellate tribunal. It was made mandatory for every real estate project to be registered with its state’s RERA. Unfortunately, this law required to be enforced by state governments.

The Fugitive Economic Offenders Act (FEOA) which came into force in April 2018, was required to tackle the large fraud cases reported by banks. Under the law, if an economic offender flees the country to avoid due process, he/she can be declared a ‘fugitive economic offender’ and their properties can be confiscated and auctioned to recover at least part of the debt.

The government adopted the Hydrocarbon Exploration and Licensing Policy (HELP) in 2016 with the major guiding principles of enhancing domestic oil and gas production; bringing substantial investment; generating sizable employment; enhancing transparency; and reducing administrative discretion. The policy envisaged providing a uniform licence for exploration and production of all forms of hydrocarbon, such as oil, gas, coal bed methane, etc., instead of the earlier system of issuing separate licences for each kind of hydrocarbon; an open acreage policy, i.e., giving the option to a hydrocarbon company to select the exploration blocks throughout the year without waiting for the formal bid round from the government; easy-to-administer revenue

sharing model; and the freedom to market and price the crude oil and natural gas produced (subject to a ceiling price). This policy was in keeping with government’s stated intention of ‘Minimum Government Maximum Governance’.

On November 8, 2016, a controversial and the most criticised step of the Modi government was taken when the prime minister in a sudden address to the nation announced that the Rs 500 and Rs 1,000 currency notes would cease to be legal tender with effect from that midnight. The step of demonetisation was taken suddenly so as to catch on the backfoot the corrupt who held on to unaccounted money, and to curb the fake notes and terror financing from across the border. The impact of the project was mixed at best. Sudden withdrawal of notes led to problems on the ground besides the hardship borne by ordinary people as they sought to exchange the old notes for new. Real estate was adversely affected, growth slowed due to reduced demand, supply chains were disrupted, and uncertainty increased, at least in the short term. There was a decline in cash-sensitive stock market sectoral indices like realty, fast-moving consumer goods and automobiles, small and medium enterprises, and the informal, cash-driven economy suffered greatly. The agricultural sector was also adversely affected because transactions in this sector are heavily dependent on cash.

Critics pointed out that, in essence, demonetisation had not met the government’s goal of wiping out black money from the Indian economy. But the move succeeded in that it brought most of the cash into the formal system. At least some of it could have been unaccounted, which could now be tracked. Among the positive impacts of demonetisation one can point to the increase in AUM (assets under management) of mutual fund industry. The government managed to widen its tax base, leading to an increase in the tax revenue. People began to increase bank balances instead of hoarding cash (even if legitimate) in different corners of the house. People also began to turn to the digital payment

systems. At another level, demonetisation proved that Indians can adapt to changes, and it made people financially aware about the different spending options. Even the local traders selling from their carts quickly and smoothly switched over to e-commerce payment systems.

The Modi government tried to bring in black money through several schemes, none of which were amnesty schemes. One was the Income Declaration Scheme (IDS) in 2016. The other option was the Pradhan Mantri Garib Kalyan Yojana (PMGKY) launched in December 2016 after demonetisation, which provided an opportunity to declare unaccounted wealth and black money in a confidential manner and avoid prosecution after paying a fine of 50 per cent on the undisclosed income. Reportedly, a total 64,275 people disclosed Rs 65,250 crore under the IDS while assets worth Rs 5,000 crore were declared under the PMGKY. In 2015, the government had enacted the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act under which the government provided a one-time window for compliance.

It is doubtful if demonetisation had an adverse effect on the BJP politically. In elections to state assemblies held in 2017, the BJP and its allies won the required majorities to form the government in six out of seven state legislative assemblies, and among these was the most populous state of Uttar Pradesh.

The biggest reform push of the Modi government came in the form of the Goods and Services Tax (GST). It overhauled the Centre-state financial relations in a major way. The move towards GST began long ago, but was expressed by the then union finance minister under the UPA in his budget speech for 2006-07. At the time, the proposal was opposed by many political parties, including the BJP. The government then could not push it through. The NDA government achieved something noteworthy in getting the states to cooperate in the effort to introduce GST, considered

to be biggest tax reform since independence. It was in 2016 that the Constitution (One Hundred and First Amendment) Act could be enacted after duly being ratified by the required number of states, after which the GST could be launched. It changed the system of how the Centre and states taxed goods and services and shared the revenue. After the GST was in place, imposition of taxes on goods and services was not to be through legislation but was placed in the domain of the GST Council that consisted of the central and state finance ministers. GST replaced a number of central and state taxes, and eased the flow of goods across state borders. It, however, left five petroleum products and alcohol for human consumption out of its ambit. There were glitches in implementation, and frequent changes as directed by the GST Council. It was criticised for the inept implementation as well as for the huge compliance burden for small enterprises in its initial launch. But such a major step was bound to have certain problems.

Efforts were also made to tackle the non-productive assets of public sector banks.