The Budget will be the acid test of whether the Modi government is just UPA-3 with better luck
Labour reforms are taking place, and a start made on fixing MSP. Oil opportunity is being frittered away though the telecom one may not be. Lack of land reforms is a big setback, no progress in fixing NPAs, and Modi has to stop BJP states from holding GST to ransom
After Swaminathan Aiyar talked of Narendra Modi’s promise of acchhe din being more about acchhe sitare thanks to the complete collapse in global oil and commodity prices, and the Economic Times headlined the minutes of a CII meeting where many industrialists vented their frustration, Modi’s performance has once again become a hot topic of debate. Related to the question of whether Modi has delivered is the question of India’s appetite for reform—is there a genuine opposition to certain types of reform, or is this something Modi is imagining like all politicians before him.
But first, it is important to place in context Modi’s historic win and the opportunity this affords him. There is little doubt no party since Rajiv Gandhi in 1984 has crossed the half-way mark on its own; but the flip side is that with no majority in the Rajya Sabha, the reforms process is horribly hobbled. Why else would a government so keen on fixing the land acquisition time bomb left behind by Congress party chief Sonia Gandhi not be able to do anything—no matter what the BJP might do, unless this is fixed, all investments will come to a halt. It is in this context that the BJP going after Mamata Banerjee has to be looked at—it might help the BJP come to power in West Bengal in 2016, but has this been at the cost of getting vital land reforms through? Given how land reforms seemed a cinch some months ago, with all states backing the need for a change, this certainly seems to be the case.
The big change that Modi has brought about, few realise, is to bring back the BJP to the path of right-wing economics. Till a few years ago, even an Arun Jaitley was in favour of giving mining contracts only to actual users—a coal mine only to a power plant, an iron ore mine only to a steel plant—but today the party is well on its way to grant commercial miners oil mines; over a few years, India may well replicate the private sector success in oil in the coal sector as well. And while it still needs to be tested, there seems to have been some pretty deft handling of the unions in the Coal India case … when the BJP came to power, no one would have imagined commercial mining of coal, today that looks like it may soon become a reality.
After Atal Bihari Vajpayee, perhaps India’s most instinctive reformer—unlike Narasimha Rao, he did not need an IMF gun to his head to reform—the BJP went back into its shell and has been against privatisation. In this case, Modi seems to have backed this regressive move—just look at how well Vajpayee’s PSUs have done post-privatisation—based on his Gujarat experience; though some suggest Modi is open to privatising loss-making PSUs, the thing to watch is whether he will do this with an MTNL or an Air India. If he does, the impact will be electrifying. While most politicians will talk of India’s poor appetite for privatisation, the fact is there were no violent street protests when Vajpayee sold the 15-20 mid-sized PSUs he did.
Adopting Aadhaar, and the cash-based transfers that go with it is a big positive—once again, the BJP was opposed to this earlier—but it remains to be seen how this will play out. To that extent, the Budget will tell us how serious Jaitley and Modi are about reforms—a big cut in subsidies thanks to aggressive use of Aadhaar-based transfers will tell us the government is, else we’ll be back to UPA-3 tinkering.
Modi has made progress in limiting the hikes in the minimum support price, but this is something UPA-2 also did after P Chidambaram regained centre-stage in the finance ministry. Modi has done well to break up the mandi monopoly in Delhi—why hasn’t this happened in Mumbai?—and has been quite harsh with BJP states like Madhya Pradesh and Chhattisgarh which were misusing the liberal MSP policies and, by all accounts, is serious about implementing the recommendations of a committee on agriculture. But the real test lies in his implementing an incomes policy during the Budget to replace the current MSP-driven waste. Also, talking and delivering are two different things—so far, after promising to sell off 15 million tonnes of FCI’s rice and wheat, just around 2 million tonnes have been sold, and in the meanwhile a big export opportunity that could have netted India $3-4 billion of wheat exports has been lost.
Rapidly clearing Phase 1 of defence deals—R1.5 lakh crore so far—has been a great start, but it is clear local firms have managed to influence the government’s policies. There is no earthly reason why the FDI cap should have been put at 49%—all this does is to ensure local entrepreneurs who may not be terribly efficient will be able to get a premium from foreign suppliers for being their Indian partners. Nameplate capitalism is what FE calls this.
While the telecom ministry continues to drag its feet on getting more 3G spectrum, and also went ahead with a retrograde challenge of the TDSAT’s intra-circle 3G order that exposed government policy for what it was, there seems to be some retrieval of ground here—chances are there will be enough 3G spectrum in the February auction to ensure bids don’t go to suicidal levels.
The oil sector, by contrast, has been a disaster. Vital extensions are not being given to allow oilcos to extract the oil they have found and the lower gas prices remain a mystery since this precludes more investment in the deep seas—most ironical, while the government was planning to give a deepwater premium for fields, bad drafting (on purpose?) has ensured this does not accrue to fields that have been discovered but which have not started producing. The opportunity to free up LPG has also not been taken—the diesel one just finalised a process started by UPA-2.
There has been no visible sign of progress yet on education, and while Raghuram Rajan has done some tightening on NPAs, he has yet to really walk the talk by restricting bank lending norms—while banks can lend up to 40% of their net owned funds to a single corporate group, Rajan has spoken of the need to cut this down to 25%. In this context, Modi taking the SBI chief along with him to Australia where an MoU was signed between SBI and the Adani Group was probably a bad idea—the government needs to be showing equidistance from corporate India, not signalling its closeness to any one industrialist.
Labour reforms via Rajasthan have worked out well and within the next 6-9 months, most progressive states will have changed their laws—again, who would have thought India would ever reform labour laws some months ago? Given how political capital seems to have been lost, perhaps land reforms will also take place the Rajasthan way.
While the government has done well to talk of introducing the GST Bill in Parliament’s current session since there is considerable legislative work that needs to be done across each state after this, Modi needs to really demonstrate his hold over his party on this one. With BJP states like Maharashtra and Gujarat collecting around 40% of their VAT receipts from petroleum and not wanting this in the GST framework—if it was, these states would have to refund large amounts of VAT credit to industry—along with octroi/entry taxes, this has emerged as the biggest stumbling block to making India a unified market. The more exemptions there are in GST, the less the chances of India becoming one unified market. Interestingly, Modi’s make-in-India cannot succeed without a comprehensive GST in place.
The next few months will demonstrate whether the Modi government can push the reforms envelope further, or whether it is simply UPA-3 with amazing luck. Meanwhile, though the BJP is right in highlighting the hypocrisy associated with the debate over conversion—why was the earlier conversion justified?—India can ill-afford the government getting embroiled in this. As Modi said during his campaign days, can we forget about Hindus, Muslims and Christians for at least a decade?