Budget 2020: Don’t blame FM Sitharaman, ball in PM Modi’s court

Budget 2020-21: Yashwant Sinha was one of India’s best FMs, yet he was called ‘rollback’ Sinha as Vajpayee kept vacillating. Manmohan Singh was a great FM but only till Narasimha Rao allowed him.

Budget 2020 India: Despite both Modi and Sitharaman repeatedly exhorting banks to lend and promising that no genuine business decision will be questioned, bankers remain reluctant to lend.
Budget 2020 India: Despite both Modi and Sitharaman repeatedly exhorting banks to lend and promising that no genuine business decision will be questioned, bankers remain reluctant to lend.

Union Budget 2020 India: Given the desire to find quick solutions to complex problems, made knottier by decades of inaction, every time the IIP, or GDP or any other such indicator, shows a dip, the knives are out for FM Nirmala Sitharaman; and now that PM Narendra Modi is meeting dozens of people to see how to fix the economy, the capital’s rumour mills are abuzz that there could be a new FM soon after the budget. Former ICICI Bank chief KV Kamath is tipped to be a front-runner. A non-politician like Manmohan Singh, his familiarity with the financial world is a big positive since, right now, India’s biggest challenge lies in its banks and NBFCs.

It is possible that, should Modi actually replace Sitharaman—and with Kamath—the latter may just make a good FM, but only the naïve will believe the FM calls the shots or is alone responsible for fixing the investment climate; or, for that matter, for ruining it in the first place.Though Yashwant Sinha was one of the best FMs India has ever had, he was pilloried as ‘rollback’ Sinha since PM Vajpayee frequently made him roll back his proposals. And for all Manmohan Singh’s stature as India’s first reformer, it was really Narasimha Rao that allowed him to go ahead with the reforms; and the moment Rao decided to pull back, Singh pretty much stopped reforms. And if, as PM, Singh wasn’t able to push much of a reforms agenda, it was because he wasn’t allowed to by party president Sonia Gandhi.

To fix the broken financial system, should this be the top priority, the government needs a bad bank to take over the NPAs of banks and NBFCs. But it doesn’t require a Kamath to come up with the idea; Arvind Subramanian suggested this when he was chief economic advisor. But to fund the bad bank—through a bond—the government will have to cut back on other expenditure on subsidies etc; that requires Modi’s explicit approval.

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And, even assuming that a bad bank takes over the NPAs, getting the banks to lend once their balance sheets are clean isn’t a given. Despite both Modi and Sitharaman repeatedly exhorting banks to lend and promising that no genuine business decision will be questioned, bankers remain reluctant to lend. Indeed, they are parking Rs 3-4 lakh crore in RBI’s reverse-repo window at fairly low interest rates instead of either buying GSecs—they fear mark-to-market losses once the true fiscal deficit is revealed and interest rates rise—or simply lending.

Getting banks to be less fearful means that the time-honoured practice of prosecuting someone when a loan goes bad has to be scrapped. While changing the law to fix this was promised when the government came to power in 2014, there are enough instances of bank and corporate chiefs being investigated by the CBI even when there is no proof of corruption in the form of disproportionate assets or money trails. This can’t possibly be the FM’s responsibility, the ball can only lie in the prime minister’s court.

Or take an example brought up during one of the pre-budget meetings that the PM had. One hotelier spoke of how, after he had spent a few hundred crore rupees to build a hotel, he couldn’t get the necessary permissions to start operations for eight months; this set him back by around Rs 80 crore in terms of interest costs, staff salaries etc.

The principal secretary to the PM wrote to various secretaries in different ministries six months ago, asking them to, in the context of heightened US-China tensions, explore the possibility of getting some top manufacturers to relocate to India. Apple, for instance, has exports from China that retail at $200 bn and it employs (directly and indirectly) 47 lakh people in that country; India’s total exports are $300bn! And when Samsung shut its last China factory a few months ago, it shifted this to Vietnam where it produces half its mobile phones—Apple and Samsung together account for 60% of the $500 bn global export market for mobile phones. It is not up to the FM alone to woo Apple/Samsung, other ministries—like commerce and electronics—have to sign on and nothing can be done till the PM indicates that he is willing to bear the brunt of the suit-boot-ki-sarkaar tag as he gives Apple/Samsung the incentives they want to shift operations.

Or take the Rs 100 lakh crore infrastructure push announced a few weeks ago. If not too many are taking it seriously, it is not just because, compared to the actual infrastructure spending of Rs 36 lakh crore in FY13-17—the numbers for FY18-19 given by the government are estimates—the government is looking at almost trebling this over FY20-25. Indeed, while a fourth of the infra-spend is to be made in the power sector, thanks to the failed Uday scheme, state electricity boards remain loss-making and strapped for cash, and owe the private sector as much as Rs 46,000 crore! Who is going to invest till the power minister can fix this? A fifth of the investment is to be in the roads sector where, from 85% in 2013, the share of the private sector in road awards is zero today.

Telecom, traditionally a big investment area, has seen investments crash primarily due to hostile government policy. And while it is true the FM will be one of the decision-makers if, say, licence fees are to be scrapped, the actual proposal has to come from the telecom minister—who remains unconvinced about the need—and then okayed by the PM. Despite the ill-conceived SC judgment on AGR revenues which will play havoc with both telcos and non-telecom PSUs—GAIL’s revenues from its internet licence were Rs 35 crore since FY02, but has to pay Rs 1.72 lakh crore in AGR dues!—the ministry has still not challenged the SC ruling or come up with an alternate formulation for the courts to mull over. This is despite the fact that, if things aren’t fixed soon and Vodafone Idea shuts down, the government stands to lose a large part of the `2 lakh crore owed by the firm.

None of this is to say the FM is irrelevant to the reforms process; apart from the importance of getting tax and fiscal policy right and putting an end to tax-terror, the FM has traditionally been seen as the torch-bearer for reforms across the government. Having an experienced FM and one who is an instinctive reformer is a big plus, but if other ministers are pulling in a different direction and the investment environment is vitiated in most important sectors (see on the oil sector), the PM has to personally take charge and give his ministers strategic direction. That is what he is trying to do, whether this works or not remains to be seen.

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