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Is Arun Shourie right? PDF Print E-mail
Tuesday, 05 May 2015 00:00
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There is little doubt the Modi government hasn’t moved in several critical areas, but what is important is that regaining the momentum is not too difficult should the government have the desire to change the narrative

 

Has former disinvestment minister Arun Shourie got it right while criticising the Narendra Modi government as directionless or is it, as some are suggesting, just a case of sour grapes since he has not been included in the government? Since Shourie is not the first public figure to criticise Modi, the question also boils down to whether HDFC chairman Deepak Parekh—whom Shourie cited in his Headlines Today interview—is right or whether, as Ratan Tata and Uday Kotak have said, India Inc needs to be a lot more patient?

Certainly both Tata and Kotak are right in the sense that with capital investments declining in the manner they were—from 38% of GDP in FY08, investment levels were down to 28.6% in FY14—and both India Inc and bank balance sheets being in the kind of mess they are in, getting India back on track is at least a 2-3 year project, more so given the tremendous amount of spare capacity in the system today. Which is why Modi’s best bet in the short-term was to focus on reducing the incremental capital output ratio—to get more growth per unit of the same investment—and this is what he was trying to do by focusing on getting more coal and other mines on stream through auctions, by trying to streamline some doing-business indicators, and by providing flexibility to states like Rajasthan who wished to change their labour laws.

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And though it hasn’t resulted in non-Congress governments helping him pass critical Bills, Modi is following a policy of cooperative federalism, from accepting the 14th Finance Commission’s recommendations of greater devolution of tax funds for states to working on making central schemes less restrictive.

And call it luck if you will, but there has been a huge improvement in India’s macros in the form of the petroleum subsidies, the current account deficit and inflation. Though growth has not picked up anywhere near what the pundits have been forecasting and it will not for a while given the IIP and core numbers, lower inflation has been a big relief and has paved the way for a series of rate cuts. While the farm lobby will not approve—there is no point talking of farmers given less than a tenth benefit from this—Modi has kept the hike in minimum support prices to a minimum, which is helpful in terms of inflation-control. So where’s the problem?

Telecom, as FE has been pointing out for the past year, has been a very bad miss since, while all telcos had lined up big investment plans even while the economy was growing at sub-5%, the telecom ministry did not put in more spectrum into the kitty despite the defence ministry agreeing to release this, as a result of which auction bids sky-rocketed. Shockingly, the telecom minister also backed the bureaucracy’s anti-3G-roaming plan despite it being torn to shreds by the TDSAT and, in keeping with the ministry’s shoot-first-think-later approach, the minister made ill-advised moves on net neutrality—possibly since, under Modi, the BJP’s media strategy has really been only a social media one.

Instead of thinking about who would roll out the internet if telcos lost their profitable voice business to the Skypes and WhatsApps, the government made it apparent it was in favour of what the Twitterati defined as ‘net neutrality’—a term that has no single definition globally—and against licensing the Skypes and WhatsApps even before the telecom regulator had made its recommendations on the matter. What was a commercial issue between Skype/WhatsApp and telcos was made out to be an issue of principle. And now, apart from having no solution to how to build out the internet for 85% of the population that has no access to the net today, the government will have to eat humble pie on the national security issue this throws up—how are Skype/WhatsApp calls to be monitored?

While the telecom ministry would do well to carefully think through its position on ‘net neutrality’ and licensing Skype/ WhatsApp—Trai’s suggestion, in its discussion paper, of letting telcos work this out subject to a minimum quality of internet speed for everyone is a smart one—it can still remedy the situation. Quickly coming out with guidelines, liberal ones, on sharing and trading of spectrum—Trai has just come out with recommendations on virtual network operators also—will help restore investor confidence to some extent.

In the case of the energy sector, similarly, many mistakes have been made, and not just in the petroleum sector that everyone is focused on. In the case of the coal sector, and this is where perception comes in, the reformists such as this newspaper expected commercial mining to be allowed, and though the legislation allowed for it, there are no signs of this happening soon—hardly surprising then that people feel the government has slowed down. To make things worse, when captive coal mines were auctioned, the process did not allow for power tariffs to go up, a natural consequence of high bids for the coal blocks.

Sadly, while the UPA was finally getting down to becoming more realistic after years of the NAC dictating policies, the ‘pro-corporate’ BJP went the other way. While Modi had publicly spoken of the need to get pricing right on several occasions, various ministers—and there’s no point singling out just Dharmendra Pradhan—went on to argue ‘market-pricing’ for gas was a scam aimed at just enriching Mukesh Ambani. While enthusiastic BJP ministers justified dumping the Rangarajan formula on the wholly unfounded grounds that it was distorted, gas exploration has ground to a halt as a result. If things were as black and white as the BJP would have the country believe, why is it that the government-controlled ONGC went the Reliance way in not exploring for gas in the country’s deep waters? If, as a report in The Economic Times points out, the PMO is meeting top petroleum company officials to sort things out, there may be progress here. Of course, the BJP will be hard-pressed to explain its earlier opposition to the price hike in what Pradhan called a welfare state!

While energy pricing is critical, that can only be for the future whereas a large part of the problem that needs to be fixed relates to the past—this doesn’t apply to just tax matters it would appear! There is no oil company, ONGC included, that does not have serious problems with the petroleum bureaucracy and there is little sign of movement here since it is oil bureaucrats who decide where a company has to drill oil, what tests have to be carried out, and how much money has to be spent on this. Moving to a revenue-sharing arrangement, as is being talked of now, can smoothen the future, but what happens to the past cases?

As in the case of the tax sector, one solution was to allow arbitration which, in any case, has been built into the contracts that all oil companies have signed with the government. For some reason—the only explanation is hubris—the government is not allowing most arbitration cases to go on and is stalling them on one ground or the other by alleging bias of arbitrators or by simply saying the matter cannot be subject to arbitration since it is an issue of ‘policy’.

Finance minister Arun Jaitley remains personally committed to reducing the arbitrary nature of taxation, but it was obvious things weren’t going to be easy when the government failed to remove retrospective taxation from the statute last year. Progress was made by not appealing the Vodafone/Shell judgments, but there has been little progress in solving existing disputes—there are R4 lakh crore of disputes—and there is little doubt allowing the Cairn/FPI issue to reach the level they have has hit India’s image. Cairn could have been brought to the special committee set up to look at such cases last year, and in the FPI case, it is odd that after not sending notices since 2012—that’s when the Castleton ruling came—the taxman should suddenly get proactive. And it doesn’t help that, while the Castleton verdict went in favour of the taxman, there were others that held MAT could not be levied on firms that didn’t have a permanent establishment in India.

Many accused Modi of not having a plan when he decided to abolish the Planning Commission, but some part of the enthusiasm for reforms stemmed from the expert group report on streamlining FCI and its recommendations on cash transfers—it helped that this was in sync with the PM’s Jan-Dhan Yojana and use of Aadhaar to cut waste in subsidies. In the case of the Railways, apart from Suresh Prabhu’s budget being the only one to not start new trains, it helped that several committees such as the one headed by Niti Aayog Member Bibek Debroy recommended structural changes. It remains to be seen how Prabhu deals with the suggestions.

In other cases, especially for a ‘soojh boojh ki sarkar’, some of the plans being pursued seem at odds with the stated objective. If labour reforms were delegated to the states, surely the same could have been done for land acquisition that is clearly a state subject and, at best, a concurrent one—that way, even as the central legislation remained blocked in Parliament, some action could have been shown at the level of the states. And in the case of the GST Bill, the 1% tax and the plethora of exemptions will make India even more uncompetitive (‘Finmin vs Make-in-India’).

To that extent, a Shourie and a Deepak Parekh are right. Where a Ratan Tata and an Uday Kotak are right, fortunately for Modi, is that it will take just a few policy decisions to change the mood. Issuing some commercial mining licences—the very high royalty rates, though, make the likelihood poor—privatising of a few mid- to large-PSUs and tendering some railway stations for private development, greater use of cash-transfers … the question is whether the Prime Minister will be able to change the narrative, or whether he is so bent on polishing his government’s pro-poor image, he has forgotten the need for growth. The fact that the government reaction to Shourie’s statement was relatively muted suggests there may be some churning within.

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