Though the 500 point rally in the sensex after the BJP’s sweep in Uttar Pradesh means the stock markets expect the freshly-empowered government to unleash a new set of reforms, another set of analysts are worried about a fresh bout of populism from a prime minister who is, of late, is talking more of helping the poor – even demonetisation was packaged as a pro-poor measure – than he is of economic growth.
Indeed, after the UP victory, sections of the ruling party talked of how the government’s ability to provide free LPG connections to the 50 lakh rural poor, to electrify more villages (1,464 in last two years vs 26 in 2010-14 under BSP and SP) and provide a 20% hike in power supplies in the state is what convinced voters of how they would get a better deal under a BJP dispensation.
The metric of free LPG, of course, best symbolizes the choice before prime minister Narendra Modi. No one doubts the success of his #GiveItUp programme and the dramatic impact on women’s health when LPG replaces firewood for cooking, but at Rs 2,000 crore for the year, the government’s budget to provide free LPG across the country is vastly constrained. While encouraging private sector players is clearly the answer to providing LPG connections to everyone in rural areas – just see how limited India’s phone penetration was when MTNL/BSNL were the only players – no private players will come in as long as the government gives free LPG as it is right now under the Ujjwala scheme.
This tussle between reform and populism is Modi’s challenge. The fact the government is talking of merging ONGC with HPCL while it should be selling off an HPCL or a BPCL to create genuine competition in the market suggests reforms on the backburner right now – right now, with no land available in cities, private competitors like Reliance and Essar can only set up petrol pumps on highways.
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Whether the new BJP government in Uttar Pradesh waives off farm loans to small and marginal farmers, as it promised during the elections, will be another test of populism-vs-reforms. At Rs 85,000 crore, the exposure of PSU banks to agriculture in UP – a fourth of all loans are to the farm sector – is very large. Apart from the fact that the state exchequer can’t possibly bear the burden of waiving off even a fraction of this – the share given to small/marginal farmers – this will set off copycat demands in other states and encourage farmers to stop repaying loans and wait for a change in government every five years.
What makes the populism-vs-reforms tradeoff all the more stark is that while it is clear Modi needs to increase investment levels in the economy for growth to pick up, this cannot happen till the bad loan problems of banks are fixed – any large-scale farm-loan waiver will only worsen the situation for banks.
While the government has tried to boost government – including PSUs – capex, this cannot possibly do the trick. Between FY15 and FY16, while government capex rose from 7.1% of GDP to 7.4%, this wasn’t enough to stop overall capex falling from 31.2% in FY14 to 29.2% in FY16 – FY17 capex is estimated to fall further to 26.9% though a public-private sector split is not available.
The growth vs dole tradeoff, of course, was most stark during the 2014 elections which Modi swept. At that point, the UPA’s Food Security Act promised 5 kg of vastly subsidized grain to two-thirds of the population – that worked out to Rs 375-500 per family. If people still voted for Modi, it was because, if growth and jobs picked up, this was the kind of money families could earn in just one to two days.
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While the government’s efforts have, so far, largely been fixed on repairing the plumbing – plugging leakages in social sector expenditure, spending more on irrigation and crop insurance, for instance – it will require more to really kick off fresh investments. Rahul Gandhi’s jibe of suit-boot-ki-sarkaar, for instance, is reportedly the reason for why the government has not taken too many pro-growth initiatives. For two years, it refused to free prices of natural gas, and this resulted in an investment famine in the oil/gas sector. In telecom, its inability to correct artificially boosted spectrum prices has ensured the sector is down on its knees.
And the bad bank, so critical to clean up the balance sheets of banks and corporates has languished so far for the same reason of being construed as pro-business – with the bulk of investment during the go-go years of the late 2000s coming from firms that are highly leveraged today, this is the biggest block to investment growth.
Even in the farm sector, so critical for jobs creation, the government has been unable to really free the sector and its reliance on government-led procurement to stimulate growth has backfired. In Uttar Pradesh, farmer-dues on sugarcane have already reached Rs 6,200 crore due to faulty state-advised-prices (SAP) that keep the price of sugarcane artificially high – the dues are Rs 2,500 crore when calculated on the basis of the central government’s fair-and-remunerative-price (FRP). During the election campaign, Modi mocked Akhilesh Yadav for the huge dues but if the BJP government is to continue the same policies, the sugar industry/farmers will take another hit. Populism vs reforms.