The economic reforms adopted during the ten-day monsoon session ending on September 23 firmly establish Prime Minister Narendra Modis’ credentials as a reformist prime minister. His record now rivals those of Prime Ministers Narasimha Rao and Atal Bihari Vajpayee and greatly surpasses that of Prime Minister Manmohan Singh during his ten-year tenure.
What Modi has done starts to sound particularly impressive when you consider that the reforms he enacted have been much more politically controversial than those adopted by previous governments. The need for some of its major reforms had been recognized for nearly two decades, but all previous governments sidestepped them on the pretext that there was no consensus for them.
Start with the Insolvency and Bankruptcy Code. As early as 2000, Judge VB Eradi’s Committee documented the freezing pace at which companies facing bankruptcy proceedings could be liquidated in India. He noted that as of December 31, 1999, 48% of cases took more than ten years and 15% of cases over 25 years. In his 2008 book India: The Emerging Giant, the current author advocated a bankruptcy law modeled on the United States Bankruptcy Code. But it was not until 2016 that the Modi government enacted such a law.
Labor law reforms have an even longer history. They were discussed as early as 1991 when Rao implemented the first set of reforms. But they didn’t get traction back then. Later, Finance Minister Yashwant Sinha promised them in his bold 2001-02 budget but was unable to deliver on them.
The UPA, which came to power in 2004, ruled out these reforms. Indeed, he went so far as to drop even a small provision for a more flexible labor law regime in special economic zones (SEZs) that the outgoing Vajpayee government had made in its 2004 SEZ bill. During its ten-year rule, the UPA introduced no labor law reform. The ice was finally broken by the state of Rajasthan in 2014.
But real, far-reaching reforms have only come now, with the Modi government replacing 29 disparate and sometimes contradictory labor laws with four considerably more coherent labor codes that make labor markets much more flexible and employment-friendly. The new labor law regime gives employers the right to fire workers in companies with 300 workers or less (above the previous threshold of 100 workers). More importantly, it gives states complete freedom to raise that threshold.
The governments of Gujarat and Uttar Pradesh, which recently wanted to suspend labor laws for three years, can now be genuinely bold and raise the threshold to 10,000 workers to encourage big companies and create well-paying jobs. The new labor codes also reduce the number of raj inspectors, reduce the compliance burden, empower women to work nights, and remove registration requirements for companies with less than 40 workers if they do not use electricity and 20 workers if they use electricity.
The third set of reforms concerns the marketing of agricultural products, contract farming, and the controls on transport, storage, pricing and distribution under the 1955 Essential Products Act (ECA). The Vajpayee government initiated marketing and contract farming reforms in 2003 through a model law. be adopted by states, but they have only half-heartedly implemented it. The problem has remained largely unresolved. When it comes to ECA, economists have been calling for its repeal or limitation of its use for decades. The Modi government finally implemented these reforms.
The fourth area of reform that is difficult to navigate has been medical education. The UPA had made several attempts to replace the highly corrupt Medical Council of India (MCI) with another regulatory body, but had failed. The current government succeeded in putting in place entirely new legislation under which the National Medical Commission ultimately replaced the MCI. The government further passed parallel laws governing Indian homeopathy education and medical systems and laid the groundwork for a new regulatory architecture in medical education.
Fifth, the Modi government liberalized foreign direct investment in sectors such as defense, civil aviation, railways, coal, mining and e-commerce that previous governments had struggled to open. He also opened the automatic way to the point of being able to dissolve the foreign investment promotion council.
Finally, we have two really mega reforms: the GST and lowering the corporate income tax to 17% for new manufacturing companies and 25% for other businesses.
Plugging leaks in social programs through direct benefit transfers; introduction of commercial coal mining; construction of roads, bridges, tunnels, ports and airports at an accelerated pace; a robust digital infrastructure based on an innovative unified payment interface platform; the digitization of many government services to improve the comfort of life; toilets for all in rural India; electrification of all rural households; and the rapid expansion of rural roads and rural housing are additional noteworthy achievements.
The government’s record is not without flaws and I have criticized its adherence to import substitution and its inaction on privatization. But criticism without appreciating positive accomplishments misleads rather than informs readers.
DISCLAIMER: The opinions expressed above are those of the author.
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