Keep in mind the concept of opportunity cost—can the private sector do that job cheaper, and better?
Given the enormity of the task of repairing the economy, Prime Minister Narendra Modi can’t be blamed if he doesn’t quite know where to begin. Should it be the plethora of tax cases—R2.2 lakh crore of transfer pricing cases in just the last six years—against leading MNCs investing in India or should it be fixing the leaky delivery system that eats up 2.5% of India’s GDP and 15-20% of government expenditure each year? Since state government clearances account for roughly half the delay in stuck projects—another 25% are stuck because they have no gas/coal—how do you get them to act?
Or should he focus on the macro? After all, if government savings have collapsed from 5% in FY08 —that’s when overall investments were the highest at 38% of GDP—to 1.2% in FY13, nothing can be fixed till government finances are ok. If India Inc continues to be as leveraged as it is, and banks as stressed out as they are, as the accompanying graphic shows, no meaningful capex can be seen till this is taken care of. That means allowing banks to force reluctant promoters to sell their companies, it means reducing government stake in banks so that they can finally raise the capital they need in order to raise lending levels to the 18-19% levels, and more, that the economy needs.
Not surprisingly, therefore, that when Modi was asked about his 100-day agenda, he was dismissive and said that governance was not a T-20 match, it was a long process.
In the short run, Modi’s biggest challenge of course, will be to get the bureaucracy to start functioning cohesively. Whether it is the fear of the CBI, the CAG or the CVC—or it may just have been political indecision—the bureaucracy has been the biggest hurdle to investment. While the TDSAT rapped the telecom bureaucracy for its ‘misleading’ and ‘seriously flawed’ arguments on 3G roaming last month, Justices Khehar and Radhakrishnan were constrained to say, in the Sahara case earlier this month, “the State and its agencies litigate endlessly up to the highest Court, just because of the lack of responsibility, to take decisions... we have started to entertain the impression, that all administrative and executive decision making, are being left to Courts, just for that reason”. In which case, Modi’s appointments—both bureaucratic and political—to key ministries will be critical, as well as the role of the cabinet secretary and the principal secretary to the PM, in ensuring work gets done quickly.
While Modi goes around his task of building a bullet-train quadrilateral akin to Vajpayee’s Golden Quadrilateral or his 100 new cities, serious thought will have to be paid as to whether the current PPP model is working well enough or whether, as many argue, it puts too much of the burden of risk on private sector players who are clearly not able to shoulder it. The fact that so many power projects, particularly the ultra mega ones, are in trouble—the CERC’s attempts to bail them out are stuck in courts, and will likely remain there for a year at least—suggests private firms simply cannot take on the risks the public sector can take on with its endless government support.
It is, for instance, going to be impossible for private firms to construct bullet trains or new cities, for instance, if bureaucratic or environmental and other delays—think land acquisition—create the kind of problems they do at the moment. Such projects can be rescued by one-time bailouts of the CERC-type, but the problem with this is that it gets labelled as cronyism—and often enough, it actually is. As PPP gets bigger, so will the problem, so a solution needs to be thought of which is equitable to everyone. India’s largest firm, Reliance Industries, is unable to deal with the fallout of its capex in the KG Basin rising several times, but the state-owned ONGC which has seen equally large cost over-runs doesn’t face the same level of scrutiny; indeed, there has hardly been any ruckus over the fact that ONGC has not even extracted a single kilo of gas from its gas field though it got it around the same time Reliance got its fields.
Another good example of this unfair behaviour is what is happening with the electricity distribution companies (discoms) in the capital. With power costs spiralling, the regulator has not been allowing these firms to charge customers the full rate; their dues are now R27,000 crore, as a result of which suppliers like NTPC are threatening to cut off supplies. But much the same is happening in other states as well, why aren’t power supplies getting cut off there? Because, when the dues started piling up, the government simply offered a bailout programme to give the state electricity boards time to get their act together. Why not offer the same financial package to the Delhi discoms, so they can get cheaper funds till such time the regulator is able to raise tariffs enough to pay their dues?
This is the larger philosophical jump the Modi government needs to make. Since the private sector is offering almost everything the public sector is—more people use Bharti Airtel phones than they do BSNL ones, more people fly Indigo than they do Air India …—they are entitled to exactly what PSUs are. Why reserve coal mines for PSUs when private power firms can do the same job, why give bailouts to PSUs and not to private firms…
Eventually, it is all a matter of opportunity costs—if the private sector can do it better, why should the public sector be cosseted? Babus need to understand that, they need to pay heed to the concept of opportunity costs… if clearances are delayed, firms shut down. Ultimately, the Modi government will succeed if it acts like a bania.