Narendra Modi government's 5-year plan: 2 years to repair, 3 for growth

NEW DELHI: The Narendra Modi government will take a series of steps to rebuild investor confidence while keeping fiscal consolidation firmly in sight as part of its plan to mend the economy in the next two years and then make an aggressive push for growth in the remaining three years of its term.

Insiders say the government will shun populism and quick fixes and instead focus on a concrete plan to fix the struggling economy it has inherited with two consecutive years of growth below 5% and no fiscal or monetary lever to stimulate economic expansion.

The broad programme will be outlined in the upcoming Presidential address to the joint session of Parliament and followed by detailed steps in the budget that's expected in the first week of July.

The finance ministry will work out the details of the budget under the overall direction of Prime Minister Narendra Modi and the government is prepared for a tough grind in the next two years to build a base for rapid expansion in the following three years.

"Fiscal deficit has to follow the downward trajectory... Addressing inflation is a priority, so growth has to be revived without compromising on the fisc," the person, privy to deliberations, told ET.

Quality fiscal consolidation will be the underlying theme and the target for next year's deficit will be narrower than the 4.5% of GDP achieved last year. However, the government does not want the burden of this to be excessive and is not likely to increase any taxes in the name of fiscal consolidation. On the other hand, there may be some small relief for taxpayers.

Additional spending will be met from the room created by the abolition of the diesel subsidy through monthly increases in the retail price and the restructuring of social sector schemes. A monthly price increase mechanism for cooking gas could also be introduced.

Detailed deliberations have begun in the government on how to deal with the schemes put in place by the Congress-led United Progressive Alliance government that did not focus on asset creation, including the Mahatma Gandhi National Rural Employment Guarantee Scheme.

"MGNREGS could be used to build toilets," the person said, offering an instance of merging two schemes to divert government spending to more productive use and creating utilities and public assets. "The mandate means that you can announce bold steps and also carry them out," the person said.

To ensure faster clearances and timely implementation, the Centre is likely to rope in state governments for large projects in the initial stages itself, since that's where the actual implementation takes place. The Project Management Group in the Cabinet secretariat could be reoriented toward this end.

  Revival of manufacturing has been identified as a key priority area and the government could look at creating new dedicated hubs as the special economic zones tend to have turned more into tax shelters for IT. There is a feeling that UPA focused too much on the Delhi-Mumbai Industrial Corridor to revive manufacturing whereas a wider national outreach is needed and the reforms planned by the Modi government need to make factories cost competitive.

The first budget of the new government, which will be keenly watched by global analysts and investors, would also clearly spell an end to retrospective taxation that played a large role in undermining business sentiment.

Meanwhile, the induction of a number of new ministers in key economic ministries is expected to lead to the generation of new ideas and fresh thinking besides infusing the energy needed for implementation while reducing the turf battles that bedeviled the UPA government. "Economy is facing acute challenges of high inflation and poor government finances... Focus clearly needs to be on consolidation for the next two years and then take it forward... All efforts would be driven to turn the business sentiment with concrete measures," said a top government functionary.