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Beware the babu, and the politician PDF Print E-mail
Monday, 18 May 2020 00:00
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The stimulus/reforms package has disappointed most, but the real issue is how far Modi is willing to make a break with the past to give a better deal to firms. A 5-day package is not the way to judge it, but offers some pointers

 

The firms the govt wants to attract from China won’t be lured by lower taxes or incentives, they will look at how investors fare here. And there are huge issues there, from Airtel-Vodafone to Cairn, from Walmart to Monsanto, T Rowe Price etc

 

Most have, with some justification, panned the government’s Rs 21-lakh-crore stimulus package given that the actual budgetary outgo is probably a tenth of the amount; the rest is liquidity created by RBI, loans that banks and other government-owned financial institutions are supposed to give, etc. Most, after all, were expecting the government to hand out dollops of cash as has been done in countries like the US.

Given how large swathes of business will have to shut down—especially in tourism, hospitality, etc—the disappointment is understandable, but keep in mind that decades of profligacy have meant the government has very little room for manoeuvre. The combined central and state fiscal deficit is already high, and will rise by another 3-4% of GDP due to the economy contracting this year as taxes collapse and the disinvestment programme goes for a toss; it could contract in FY22 as well. The combined central and state debt is already 70% of GDP and can go up to just short of 80% this year with the government borrowing at 6%+, while even nominal GDP is likely to contract 5-6%; if it doesn’t revive in FY22, a downgrade is near certain. This, of course, is what many say will happen even now since the effective stimulus hasn’t been large enough; to be fair, it is difficult to dismiss this argument outright either. There are no easy solutions, one way or another.

The broader point, though, is that a 5-day exercise, marathon though it was, by finance minister Nirmala Sitharaman isn’t the best way to judge whether the government’s stimulus—or reforms—are enough. The Rs 3 lakh crore bank loans to MSMEs that the government has guaranteed is seen as the most concrete stimulus being offered. But, as some have argued, the loans are unlikely to be as large as believed. Even though there is a 12-month moratorium on the loans, prudent bankers will need to start provisioning for the loans since a large proportion of these will go bad. Logically, banks shouldn’t have to do any provisioning since the government has promised to pay up if the loans go bad.

But it has to be a real optimist who feels the government will pay Rs 2 lakh crore to banks—assuming that much will go bad—in one shot at the end of 12 months. Given the government’s history of recapitalising banks, the banks will naturally be reluctant to lend; so, if prime minister Modi wants the loans to go through, he needs to push banks to do this. More important, he needs to budget for another Rs 3-4 lakh crore of bank recapitalisation early next year since the impact of the economic collapse on bank balance sheets is going to be huge.

The Rs 90,000 crore the FM has promised bankrupt—and recalcitrant—state electricity boards (SEBs) was a real disappointment since it suggested business-as-usual has already won over reforms. It is true the power minister has said REC and PFC can withdraw their loans if the SEBs don’t cut their losses, but if they are bankrupt already, how does he think they will repay? The FM has linked part of the increase in the borrowing limits for states to their electricity reforms—like raising tariffs, cutting ATC losses, etc—but how much the government will hold back the increased loan-limits or get PFC-REC to recall their loans remains to be seen. After all, this is the same government that gave the SEBs the UDAY package that yielded little by way of reform.

To be fair, the UPA’s feted bureaucrat-economists did much the same, which is why the power sector is in the mess it is today; the same is true of the banking sector which matters a lot more. Ideally, if Modi is serious about reforming the sector, he should let RBI deduct the money the SEBs owe electricity generators—over Rs 1 lakh crore right now—from the state governments’ account with RBI, where the central government deposits the states’ share of taxes. The UPA had created a framework for this, but only for the dues of PSUs like NTPC; amazingly, though, despite having the ability to ask RBI to pay their dues, PSUs like NTPC have allowed SEB dues to build up.

That, of course, is also a major reason why prime minister Modi needs to free up PSUs; it is impossible to believe a truly free NTPC would have allowed the dues to pile up when it had a viable alternative available. This brings us to the convoluted PSU plan that the finance minister spoke of; while some clarity will be available when the policy is announced, there is a much simpler solution that Modi needs to implement, and more so now, since it is clear there is no way he will be able to privatise PSUs for quite some time.

Modi needs to get Parliament to amend Article 12 of the Constitution, to remove PSUs from the ambit of what is called ‘instrumentality of state’; this is the clause that says PSUs have to tender everything, go by government rules on procurement, reservation, etc. If PSUs are to compete with the private sector, this clause simply has to go as it is this that, primarily, hobbles PSUs even when there is no political directive to them in terms of what they should do. It is due to this clause that BSNL’s 4G tender has been delayed by the government. When is the last time an RJio or Bharti Airtel tender was put on hold because a vendor complained—as one did in the case of BSNL—that it was being discriminated against? It is precisely such delays that, in the 1990s, resulted in BSNL losing its edge, and it is this that will ensure the just-cleared Rs 70,000 crore revival plan for BSNL-MTNL comes to nought.

There has been a lot of talk recently, by the prime minister and his colleagues, of India wooing enterprises that want to move out of China. While some success seems to have been achieved going by the plans of mobile phone manufacturers like Apple, keep in mind that the first thing would-be investors do is to look at how current investors are doing. But, as this column has repeatedly pointed out, from Vodafone to Cairn to T Rowe Price to Monsanto to Amazon to Walmart, and so many more, government policy has been very unfriendly, even hostile; if this is not fixed, it is difficult to see how India can make anything of the post-pandemic world. While bureaucrats are usually blamed for scuttling most things, a lot really depends on what the political class wants.

Why else was the PV Narasimha Rao government able to make sweeping changes in 1991? Or how did a Vajpayee coalition-government manage implement a far-reaching telecom package—Vajpayee is the father of India’s telecom revolution, not the UPA that came out with a flawed model in 1994—when the politically powerful Modi government has been floundering over this for the last six years?

It is early days yet but, by way of example, it appears the Modi government is unlikely to slash exorbitant telecom levies that are responsible for killing the sector. While the earlier argument was that this will hurt government revenues—even with higher levies, the absolute amount the government gets has been falling each year—the latest argument is that other industries like aviation and tourism will then want similar packages!

The problem with not taking corrective action in so many areas for so long is that, when something is done, it is seen as a favour; ‘how much more does industry want us to give it?’, is the typical response. Viewing it this way allows the government to take a call on which industry is to be ‘helped’ instead of humbly admitting that all that is being done is to correct a historical wrong; this, of course, is what allowed finance minister Nirmala Sitharaman to pass off a decision to clear government/PSU dues to industry—estimated at Rs 5 lakh crore by NITI Aayog last year—as part of the post-Covid stimulus!

 
 
 

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