This column, like so many others, was best written several months from now, when there was more tangible evidence of how two of prime minister Narendra Modi’s most import policy steps in recent times—GST and cleaning up of bank NPAs—were actually working. But such is the tyranny of anniversaries, all such pieces have to be written now.
While both epitomise Modi’s challenge, the possible options and the path he has chosen are the Modi story. The twin balance-sheet problem, no doubt, is the biggest impediment to India’s growth and is why investment levels are down to 26.9% of GDP as compared to 31.2% even just before Modi took over; at 7.1% for FY17, GDP growth is just marginally higher. That is why, many advocated a bad-bank to house these assets, quick recapitalisation of PSU banks and then a subsequent—but quick—write-down of debt to make both the banks and corporate balance-sheets whole again. This would necessarily have invited the Rahul Gandhi suit-boot-ki-sarkaar jibe, but if ever there was a politician who could have carried it off, it was Modi, given how he continues to capture state after state for the BJP and his personal aura seems to have not just stayed unalloyed, it has grown.
Instead, Modi chose to amend the RBI Act, and promised to amend the Prevention of Corruption Act that would allow PSU banks to take decisions on the extent of haircuts that needed to be taken on problem loans. Theoretically, it may just work, and the PM is relying upon his bureaucrats and PSU managers to see it through. Meanwhile, with the government in no hurry to recapitalise the banks—Credit Suisse had estimated they needed $27 billion of equity capital over three years—PSU banks will find their lending curtailed. While they can’t lend, thanks to the comfort their ownership structure conveys, they continue to attract deposits and so become weaker with each passing month—in the 12 months to December 2016, PSU banks accounted for just 8% of incremental lending but attracted 70% of incremental deposits. Also, with RBI putting curbs on banks that fail to meet certain prudential norms, PSU banks are being further hobbled. By 2019, more banking space would have been ceded to the private sector—stealth privatisation. Merging banks, as planned, won’t help either since the result will only be weaker banks.
Contrast this with a policy that involved issuing, say, `100,000 crore of recapitalisation bonds to banks, setting up of a bad bank to take over and deal with the dodgy loans. Bank balance-sheets would have been stronger, a few could then be privatised and the money got ploughed back into the bad bank. After a few years, you’d still have the same—lower—share of PSU banks, but those still left would be much stronger; in the current case, you don’t know even how long the clean-up will take.
In the case of GST, though achieving consensus on rates is a big reform step, the question is whether finance minister Arun Jaitley has done the right thing in accepting a low-ambition GST. Certainly, lower tax levels would have given a big fillip to demand but, Modi’s supporters are right in asking, since the states were resisting this, should Jaitley have walked away? Put that way, the answer is obvious. Even so, given Modi’s political capital, many believe he could have pushed for a better GST, with lower rates, without the cess or the anti-profiteering clause—price controls, sadly, seem to have become a matter of choice for the government in other areas as well.
Modi’s ability to come up with imaginative new schemes and to complete ones the UPA started has also been impressive. There is the Jan-Dhan Yojana, DBT, rapid ramping up of roads and railways at a time when private investment has slowed dramatically, new irrigation schemes, a new way to sell agriculture insurance, subsidised life/medical insurance and even plans for improved social security for the poor; subsidised housing loans can, over the next few years, play a big role in bringing investment levels back on track … the list is a long one. And though the jury is out on UDAY, there can be little doubt the plan to reduce energy intensity and to lower theft by increased investment in transmission and distribution lines is a sensible one.
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While evaluating Modi, though, it is important to keep in mind too much is made of the UPA’s policy paralysis since the revised GDP/IIP data bumps up the UPA performance—FY14 IIP grew 3.4% vs the earlier -0.1%—and the number of stuck projects remains high even now. Apart from not being able to fix the UPA’s bad laws—retrospective tax, land acquisition, right to food and right to education, among others—Modi has added some of his own. These, for instance, brought gas exploration to a halt for over two years and will do the same for R&D in GM technology; not tempering the state’s greed has brought telecom to its knees. Yet, despite the poor growth numbers, low investment and inadequate job creation, you only have to look at the record FII/FDI to know the investor mood is more optimistic today.
If there is disappointment, it is because of what Modi promised. After the talk of government having no business to be in business, privatisation is non-existent, top ministerial brains are wasted in reviving an Air India and PSUs are being asked to buy other PSU shares. In the case of agriculture, for instance, a Modi can try and make an FCI more efficient and maybe an Adityanath can help farmers by buying more wheat at the MSP, and once the soil-health cards take off, it is possible farmers will use less of the subsidised urea … but surely the better strategy was to move away from subsidised rations and fertilisers to free markets with direct cash transfers, from MSP-linked-procurement to per-acre-cash to farmers, from wasteful food-stocks to options and futures? The first is plumbing, the latter is architecture, and it can be multiplied across sectors.