The Government’s Economic Priorities

In conversation with Sanjeev Sanyal, Principal Economic Advisor, Ministry of Finance, Government of India

In its 4+ years in power, the NDA government has had more hits than misses. It has put in place several game-changers such as the GST, the Insolvency and Bankruptcy Code (IBC), the ‘financialisation’ of the economy and the use of DBT for payments. Macroeconomic management has been good with GDP growth perking up even as US, Chinese and world growth have been downgraded. Despite political temptations, the fiscal deficit has been kept in check and the investment cycle is now turning. In the short term, there are worries around the current account deficit, a plunging Rupee and a liquidity crisis. However, the government is committed to ring-fence the IL&FS crisis and keep the credit markets liquid. The RBI, meanwhile, has kept its ammunition ‘dry’ and will be able to deploy its huge dollars reserves to shore up the Rupee if necessary. More crucially, the big picture remains bright. With general elections drawing near, IMA invited Sanjeev Sanyal, Principal Economic Advisor in the Ministry of Finance, to share his views on the principles that guide the NDA’s reforms agenda, and what to expect if the government returns to power next year.

Towards a rules-based order...

From patronage and rent-seeking to entrepreneurship, social mobility and a rules-based order

At heart, what Prime Minister Narendra Modi and his team are trying to do is shift India from a patronage-based, rent-seeking economy towards one built around entrepreneurship, social mobility and rules. Previously, wealth generation was about capturing resources whether licenses, land banks or coal mining or telecom rights and taking advantage of PSU banks. This was not only unfair and politically unsustainable, but also inefficient.

People are the product of the environment they live in...

People respond to the environment where they live and work and modify their behaviour accordingly. For instance, Indians will wait patiently in line or stick to their lanes while driving abroad, but will do exactly the opposite at home. In an inefficient environment, businesses and individuals resort to ‘jugaad’, or ‘making do’. Not paying taxes was something they took pride in and firms would often default on loans, knowing they could get away with it. In the social sphere, open defecation was common and Indian cities remain far dirtier than might be expected, given rising income and wealth levels. That is not to say that Indians are habitual rule-breakers; just that they have become accustomed to conforming with what is considered social acceptable.

...but fundamental cultural change, which is what Mr Modi hopes to drive, can change the environment itself

Technological, geopolitical or economic shocks can come from anywhere and there is no longer a fixed ‘equilibrium’ that policymakers or businessmen can work towards. Navigating this new order requires clear rules and norms in place, ones that apply to everyone. This, however, needs change at a very fundamental, cultural level – which is precisely what the NDA is attempting to drive, in multiple areas, social as well as economic.


A massive toilet-construction drive is changing urban India’s sanitation culture

Most of the improvements in global health since the Industrial Revolution are due to better sanitation, and not, as many think, from more hospitals or doctors. In 2014, only 36% of urban Indian homes had toilets, and open defecation was rampant. To correct this, the NDA decided to build toilets en masse. Resultantly, more than 90% of urban Indians now have access to toilets and 93% of these are getting used. This will bring enormous health benefits in the coming years.


Banks have long been ‘captured’ by the elite, and the NPA problem resulted from this... taking the easy route was not an option

The economy demanded an entirely different sort of ‘sanitation drive’. India abolished the License Raj in the 1990s, but banks – including some private ones – remained beholden to a small set of elites. Resultantly, banking crises were alarmingly frequent. By end-2016, it was obvious that the system was broken and needed an overhaul. The Centre considered the simpler, less painful option of recapitalising the banks while setting up a ‘bad bank’ that would warehouse the NPAs. However, the experience of other emerging markets shows that these loans would simply have festered or else would be bought back by the original defaulters at a huge discount. The Philippines, for example, never recovered from the 1997-98 Asian Financial Crisis. China, which has managed to keep its debt-related problems under control for decades, is an exception to this general rule.

The IBC will help free up the banking system to grow, but sustainably

Thus, instead of just mopping up the existing losses, the government opted for the IBC and forced banks to write down their bad loans. Fortunately, just 50 cases account for most of India’s aggregate NPAs, with 12 cases making up for 25% of the total. This made it easier to tackle the problem. Admittedly, there has been a fair amount of pain but the IBC regime will eventually enable the banking sector to start expanding again. 30 years from now, banks will be far bigger and cleaner than would otherwise have been possible.

A new monetary policy framework

Interest rate-setting now has a single, explicit aim: keep inflation in check...

...and can no longer be used to prop up the Rupee

In a similar vein, the NDA has created a new, rules-based framework for monetary policy. An independent Monetary Policy Committee (MPC) has been established, with several members who are independent even of the RBI. Their task is straightforward: keep inflation in the 2-6% range, preferably around 4%. For an economy accustomed to decades of 8-10% rates, anchoring inflation at much lower levels required painful adjustment. Moreover, since the RBI could no longer use interest rates to drive the Rupee, exchange rates are no longer relevant to rate-setting except where they have a second-round impact on inflation. The payoff has been significant: a 500-600 bps structural – as opposed to cyclical – drop in inflation. In the long term, this will permanently reduce the cost of capital. In turn, this will spur investment and capacity creation, thereby further dampening inflation.

A new tax culture

GST and demonetisation signal that the rules of the game have changed on tax compliance

When everyone drives in the right lanes, traffic moves faster. Similarly, if everyone pays tax, rates can come down. To help move India towards a new, lower-tax environment, the NDA has pursued policies that should be seen as creating once-in-a-lifetime culture change. With demonetisation, the Prime Minister in one shot signalled that the ‘rules of the game’ had forever changed, and the GST builds further on this.

...and learning by doing

Instead of wasting precious months and years planning and forecasting, the NDA’s approach is to move forward on reforms, and fix things as issues crop up

A key element of the NDA’s reforms approach is to quickly put in place broad frameworks and later make adjustments by learning. In an uncertain environment, where feedback loops are often immediate, this is better than trying to predict every problem in advance. Any policy will have unintended consequences but the only way to bring major change is to ‘just do it’. With the GST, many urged the Centre to hold back on implementation claiming that the system was ‘not ready’ to handle it. The reality is that while there were teething problems, they were not along the lines that experts had predicted. No one anticipated, for instance, that a particular error-correction button on the website would malfunction or that refunds to exporters would be such an issue. Yet, once the dust had settled, what India had achieved was the most fundamental transformation of its tax structure. In time, all the issues with the GST will get tackled and the system will only get better.

What to expect post 2019

On the cards: radical reforms in a host of areas

A second term for the NDA will bring even more sweeping – some might say painful – change than has the first. Internally, the government is clear that major reforms are necessary in a vast swathe of areas, from the functioning of the judiciary and the bureaucracy to contract enforcement, urban land use (specifically, towards taller, denser cities with strong public transport) and education (in terms of curriculum as well as the functioning/ location of universities). What is required in many places is major surgery not first aid. The disinvestment process will also get revived, including the sale of Air India. Certain subjects – particularly land and labour – are in the domain of the states, but wherever possible, the Centre will keep pushing the envelope, often in radical ways.

The contents of this paper are based on discussions of The India CEO Forum in New Delhi with Sanjeev Sanyal, Principal Economic Advisor, Ministry of Finance, in October 2018. The views expressed may not be those of IMA India. Please visit to view current papers and our full archive of content in the IMA members’ Knowledge Centre. IMA Forum members have personalised website access codes.