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Modi’s elephant looks fitter but still can’t run PDF Print E-mail
Thursday, 16 August 2018 04:14
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Govt done very well on IBC, NCLT, GST and many of its social schemes successful, but getting the elephant to run is a long way off

 

India won't grow faster if industry doesn’t start investing. But the environment for that is still far conducive, no matter what the PM might say

 

Prime minister Narendra Modi did well to highlight just how much India has changed over the past few years. So, in his Independence Day speech he said, it would take decades for people to get toilets if the UPA’s pace of constructing toilets had continued, a decade more for full electrification at the UPA’s 2013 pace, and 100 years to give rural women LPG cylinders to replace firewood … Over the next few days, several fact-checkers will, no doubt, go over each assertion, but as even the roads construction data show, there has been a quantum jump in the creation of physical infrastructure since Modi came to power in 2014.

Similarly, even Modi’s critics will agree there has been a sea change in terms of a bankruptcy law that allows shutting down businesses that don’t repay loans. Whether Modi’s charge of ‘phone-banking’—banks were called to extend loans or to roll them over—is correct or not, till the BJP came to power, banks could not take action against defaulting industrialists. Indeed, the bankruptcy of banks was a big factor in India’s investments collapsing since, even if industry raised equity for new projects, banks simply could not lend.

 

And while even Modi is no longer defending demonetisation in the manner he did earlier, the government deserves full marks for implementing GST; and though there were several problems with its initial structure, many of these have been fixed. As a result of this, as well as the increased linking of bank accounts and PAN numbers with Aadhaar, there has been a sea change in India’s tax compliance. While Modi talked of the number of direct taxpayers rising from 3-4 crore in 2013 to 6.75 crore today and indirect taxpayers rising from 70 lakh to 116 lakh, this has resulted in India’s tax-to-GDP rising from 10.1% in FY14 to a likely 12.2% in FY19.

And while the UPA deserves credit for bringing in Nandan Nilekani and executing Aadhaar, it was Modi’s government that really utilised it properly to remove huge leakages of welfare benefits for the poor—as Modi put it, Rs 90,000 crore were saved by using Aadhaar to eliminate 6 crore ghost beneficiaries, whether for subsidised rations or LPG cylinders. And while this newspaper has been a big critic of the gaps in the government’s health insurance scheme, there can be little doubt the government has been innovative in looking at insurance-based solutions to solve many problems of the rural poor.

Yet, it would be hasty to conclude, as Modi did while quoting the IMF’s India chief, that the economy was like an elephant starting to run. It is certainly true that, had Modi not started fixing the banking sector — at even the pace he is, with no privatisation contemplated — and implemented the bankruptcy law, investments could never have risen in the country; so India’s falling investment-ratios under Modi were to be expected. But, if the Indian elephant is to truly run, investment levels have to pick up significantly; they cannot, however, since the investment environment is still not conducive enough despite India’s competitiveness rankings improving considerably..

The fact that India’s exports, and especially the labour-intensive ones, continue to do badly is proof that the government’s inability to do meaningful labour reform is hurting the country’s prospects. And while Indian industrialists have praised the raising of import duties, the fact that this needed to be done makes it clear local industry cannot compete in export markets such as readymade garments and textiles.

This need to look for individual fixes, such as increasing import duties in select industries, is largely the result of inadequate reforms in many areas. If the lack of labour reforms, by and large, is responsible for the need to hike textile import duties, it is the lack of reforms in the education sector that required the government to come out with a policy of Institutions of Excellence that gave universities the freedom to set their own curriculum, hire teachers and set fee structures—shouldn’t this be allowed to everyone?

Similarly, while Modi was right in criticizing the UPA for not being able to hike MSPs to 1.5 times the farmers’ costs as his government has done, the need for this arose due to the fact that the government—this includes the UPA, not just the NDA—has not been able to reform agriculture markets enough to ensure farmers get their fair share of the value. Indeed, government policy over the years prevented stable export markets from developing and, since the MSPs have resulted in prices of Indian rice and cotton rising above global levels, this can potentially jeopardise a large portion of India’s $27 bn of cotton-based and rice exports—a solution that creates its own problems!

This newspaper has, over the years, chronicled several problems individual firms like Cairn or Monsanto have faced due to unfriendly government policy, but the best example of the government not trusting the market enough to stop micro-managing industrial policy is the GST’s anti-profiteering provision. There is so much competition in most sectors that firms are trying to discount each other all the time, but the government believes they will take a chance at losing customers instead of passing on tax benefits! And the saga of the telecom industry and firms like Cairn Energy who have been hit by the UPA’s retrospective tax laws shows that, despite what the PM said some weeks ago, he is afraid to change policy even where it is required. And while the PM praised tax payers, they continue to be harassed—which is why, between 2012-13 and 2017-18, tax arrears rose 2.3 times, from Rs 4,86,180 crore to Rs 11,22,752 crore, while direct taxes rose a much slower 1.8 times.

Under prime minister Modi, there is little doubt the NDA has done a lot to repair the damage of the past, and its ability to jumpstart government investment has played an important role in stabilising GDP growth, but if policies are not changed to make India a more investment-friendly destination, this elephant is not going to be able to run too far.

 

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