Modi's New Reformist Agenda

- Minhaz Merchant

PRIME MINISTER Narendra Modi’s second term promises to be significantly different from his first. In May 2014, he inherited an economy with high inflation, a bloated fiscal deficit, and low GDP growth. Corruption was endemic. A banking crisis, then hidden from plain sight, loomed.

Five years later, the economy presents a mixed picture. Inflation is low, the fisc is under control but GDP growth has slowed alarmingly to 6.8 percent for 2018-19. Corruption cases relating to the UPA decade linger. Bank balance sheets are awash in red ink. Not only were NPAs camouflaged during the steroid-driven UPA years, but persistently high-interest rates during the Modi government have deflated the economy.

With banks forced by the Reserve Bank of India (RBI) in 2015 to recognize NPAs under tough new guidelines, lending to corporates stalled. A knock on effect was the collapse of private investment. The task that thus confronts Finance Minister Nirmala Sitharaman is onerous. She has to, first, urge the RBI to cut interest rates. Companies need to lower their borrowing costs so that they can start investing again. Ms Sitharaman’s second urgent task is to boost consumption. This means putting more money in consumers’ pockets to revive spending which has sagged since demonetization and the initial compliance-heavy introduction of the Goods and Services Tax (GST). Her first Union Budget, due on July 5, will set the tone for her tenure.