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Several articles have been written recently on the challenges facing the Indian economy. Unfortunately, these articles draw sweeping conclusions from a narrow set of facts, and quite simply miss the fundamental structural reforms that are transforming the economy. Moreover, one or two quarters of GDP growth and other macro data are quite inadequate to evaluate the long-term impact of the structural reforms underway.
These structural reforms are not just desirable, they are necessary to create a ‘New India’ and provide good jobs for our billion-strong workforce. The new economy that is being created will be much more transparent, globally cost-competitive, and innovation driven. Importantly, the new economy will also be much more equitable thereby enabling all Indians to lead better lives.
GST, demonetisation and digital payments are game-changing efforts to formalise India’s economy. Transactions that were taking place outside of the tax net and in the informal sector are now being brought into the formal sector. In the long term, formalisation will mean (a) tax collections go up and more resources are available to the state; (b) friction in the economy is reduced and GDP goes up; and (c) citizens are able to establish credit more effectively as transaction records are digitised.
Policy making across ministries has become thoroughly rules-based. Natural resources and licences are being allocated entirely through transparent auctions, eg for coal, spectrum and UDAN routes. The Bankruptcy Code will enable speedy resolution of stressed assets providing relief to NPAs in the banking sector.
A streamlined, rules based FDI regime is inspiring confidence: FDI has accelerated from $36 billion in FY2014 to $60 billion in FY2017. Dismantling of Foreign Investment Promotion Board (FIPB) will make the economy even more open.
The Jan Dhan-Aadhaar-Mobile (JAM) trinity is powering Direct Benefit Transfer (DBT) and dramatically reducing leakages. Rs 1.75 lakh crore of benefits have been transferred directly to beneficiaries over the last three years. JAM is weeding out many ghost and fake beneficiaries and cutting out middlemen.
A massive infrastructure build-out is lowering costs across the board in the economy: a build-out clearly visible in railways, rural electrification, national highways, rural roads, housing and air connectivity. The National Investment and Infrastructure Fund has been established to provide long-term equity risk capital for the development of world-class commercial infrastructure projects in conjunction with other long-term global investors. A lower cost economy powers increased production and sustains growth.
India is well on course to achieve 100% village electrification by 2018 with the number of villages remaining to be electrified having decreased to only 4,941 villages by 2017 from 18,452 in 2014. Rural roads are now being constructed at a record rate of 133km per day, almost double the rate of 69km per day in 2014. The number of affordable houses approved for construction increased from 13.8 crore in 2004-14 to over 17.7 crore in just three years of NDA government.
There has been dramatic increase in air connectivity: 16 crore passengers flew in FY2017 compared to 10 crore passengers in FY2014. A significant contributor has been the affordable cost of long-distance air travel in the country estimated to be only Rs 5 per km, lower than auto-rickshaw fares.
To sustain growth, India must become an innovation hub and one of the entrepreneurial engines of the global economy. Research has shown that it is entirely new industries (like IT/BPO, telecom and insurance in the early 2000s) that power job creation and faster economic growth. Fundamental reforms have been initiated to prioritise innovation, micro-entrepreneurship and startups.
The Atal Innovation Mission is creating an entrepreneurship culture by building tinkering labs in over 1,000 schools, enabling new incubation centres and scaling established ones. A grant-in-aid of Rs 10 crore is being given to each Atal Innovation Centre to foster innovation. The Mudra programme and the India Aspiration Fund will catalyse thousands of crores of investment into startups and micro, small and medium enterprises (MSMEs) thus creating employment for crores.
India is at the forefront of developing and setting standards for many new technologies such as in renewable energy, electrical vehicles and financial services. In aviation, we are creating a world-class drone policy to develop an entire ecosystem. StartUp India’s success is visible on IIT campuses, which now have more than 400 new startups from student hostel room addresses.
The necessary combination of the Bankruptcy Code and an Alternative Assets industry is now finally in place. Thus capital can be efficiently reallocated from unviable industries to new, fast-growing industries and the forces of creative destruction necessary for sustained economic growth are now working much better.
In sum, the structural reforms unleashed by the Modi government since 2014 constitute the third generation of reforms since the first generation of reforms initiated in 1991 and the second generation in the 1999-2004 NDA government. Unlike the first and second generation of reforms, this third generation of reforms balances a better life for all Indians with the requirements of an advanced, sophisticated 21st century economy.
Virtually every Indian will now have a basic safety net guaranteeing food, electricity, some employment, housing, a bank account, toilets, gas-based cooking, insurance coverage, micro-loans, and an all-weather road. In parallel small and large enterprises will be able to flourish in a transparent, rule-based environment that provides necessary facilities and financing. We are creating a robust new economy that will power long-term growth and job creation for ‘New India’.
This blog was originally published in Times of India