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Main hurdles to economic growth – Food inflation, infrastructure deficit and lack of jobs
Main foreign policy challenge – Ramping up engagement with SAARC countries
Making India a unified market – Implementing the Goods and Services Tax
After a long and eventful general election, which was marked by a record turnout, the new cabinet led by Prime Minister Narendra Modi gets to work at a time when the country faces a number of pressing challenges. Food inflation remains persistently high hovering close to 10 percent, investment is faltering while the previous decade stands out as a decade of “jobless” growth. On the foreign policy front, Modi’s government takes charge at a time when India’s relations with its neighbors are considered to be marred by a trust deficit on all sides.
The election discourse of 2014, unlike any other time, was dominated by development and governance issues. Expectations from the newly elected ‘Modi Sarkaar’ are extremely high and the question on everyone’s minds is, will this government be able to make good on its election promises?
In discussion with journalists hosted by the Brookings India Center, Dr. Subir Gokarn, Director of Research and Dr. WPS Sidhu, Senior Fellow for Foreign Policy, shared their views on the challenges faced by the new government and what should be on top of its agenda.
Getting back on the growth track:
Among the biggest challenges is kick-starting economic growth. Dr. Gokarn argued that a mere change in leadership from what was perceived to be a weak and ineffective government to an ostensibly strong and assertive one is not enough to address the essential problem that India faces on the growth front. Getting back on the high growth track will require addressing the structural issues that get in the way of growth, such as food inflation, the infrastructure deficit and the lack of jobs.
Food inflation, currently at 9.66 per cent, has remained uncomfortably high since 2008. It is led primarily by proteins, fruits and vegetables. Dr. Gokarn observed that this persistent food inflation is a legacy of the green revolution. With the government supplanting the consumer as the primary buyer, too much emphasis has been placed on the production of staples like wheat and rice. But the last decade has seen consumers diversifying their diets. Demand for proteins, fruits, vegetables and poultry is rapidly outstripping their supply. Expressing disappointment over the choice of ministers for food and agriculture, Dr. Gokarn pointed out that procurement reforms are the need of the hour in order to tackle inflation.
The second bottleneck to growth is the widening infrastructure deficit. Public-private partnerships have not worked well as a method of financing infrastructure spending. Dr. Gokarn believes the new government should consider a complete change in the way infrastructure projects are financed. The slow rate of employment creation is another source of concern. In a country with a large proportion of working age individuals and soaring aspirations, this decade of jobless growth has been a major disappointment. Creating jobs is thus one of the main challenges for the new government. A key reason for labor not finding employment, according to Dr. Gokarn, is restrictive labor regulations which prevent manufacturing firms from increasing the scale of production. Accelerating the rate of job creation will require greater labor market flexibility and a revival of manufacturing.
The need to engage with neighbors and reform the foreign policy establishment:
On the foreign policy front, Dr. Sidhu observed that India’s relations with its neighbors will have a direct bearing on domestic development making it imperative for the new government to ramp up engagement with the SAARC nations and China. The initiative taken by Prime Minister Modi of inviting SAARC leaders to his swearing-in ceremony is a first step in this direction. But resolving long standing conflicts and making peace will take continued effort and is likely to be hindered by the lack of capacity of the foreign policy establishment; India has the fewest diplomats among the G-20 nations. In order to sustain amicable relations with neighboring countries and to deal with evolving international issues such as climate change and energy the new government should consider making the reform of the foreign policy establishment a priority. Other ministries could also be used to further foreign policy objectives, for example, the key to the Indo-US relationship lies in defence purchases.
Center-State relations and the GST:
An issue raised by journalists was how the new government would handle center-state relations. During the election campaign, Modi promised an end to the Center’s high handedness in its dealings with state governments. Dr. Gokarn pointed out that although giving states more autonomy is a good idea there is a need for greater market integration between states. He noted that “India is 28 to 29 different markets; we are not even close to a free goods mobility scenario”. The Goods and Services Tax (GST) would go a long way in facilitating integration of markets but has long been opposed by many state governments. One thing that might facilitate consensus among states over this, observed Dr. Sidhu, is that many ministers in the new cabinet have previously been part of state governments.
Domestic security emerged as another issue of interest. According to Dr. Sidhu, the previous government’s strategy of dealing with the Naxal threat was “all sticks and no carrots”. Dr. Sidhu said there is an urgent need for better engagement with the Center and the use of paramilitary forces to maintain peace.
*Intern Vidushi Kumar contributed to this report