Prime minister Narendra Modi’s Rs 20 lakh crore package is not just massive, it signals a sea-change in the way the country is to be governed.
Even the standards of the stimulus package in developed nations like the US, Prime Minister Narendra Modi’s Rs 20 lakh crore package – this includes the Rs 4-4.5 lakh crore of liquidity boost by the RBI – is not just massive, it signals a sea-change in the way the country is to be governed. There are, as yet, no details of the package, but Modi promised sweeping reforms to ensure, as he said, the 21st century belongs to India. We will be careful about corona, he said, we will wear masks, we will observe ‘do gaz ki doori’, but our lives can’t just be about corona.
His speech was, in characteristic Modi style, peppered with examples that fired the imagination. The 20th century, he said, began with the Y2K problem that had the world in panic, and it was India that solved the problem. Though India has not found a corona solution, he said, the world is looking at India for medicines – witness President Trump trying to armtwist Modi to get HCQ supplies – and from a country that never produced a single N-95 mask or PPE, he said, we are producing 2 lakh of each every day. His recalling the devastation of the Kutch earthquake – ‘it looked as if the entire earth had worn a grey blanket’ – would have reassured citizens since it was Modi that oversaw that reconstruction.
The final package, when it is announced by Finance Minister Nirmala Sitharaman today will likely be much smaller than what the PM announced – apart form the RBI’s stimulus, some part will probably be guaranteeing bank loans to producers – but a good way to judge its size is to juxtapose this with the expected collapse in the economy. The most pessimistic estimate is a 5% real contraction in growth; Modi’s package, then, seeks to overcome that and ensure there is a small positive growth in the year. As expert after expert has said, it is critical that the economy doesn’t stall/contract as reviving businesses – and livelihoods – after they have shut is very difficult.
The last few days have seen a rush of labour – and some land – ‘reforms’ by various state governments but, in reality, they haven’t amounted to much in the absence of comprehensive reform. In his address to the nation, the prime minister has promised that since one of the pillars he spoke of was labour. Apart from the emphasis on infrastructure that was expected, he has promised sweeping supply chain reforms in agriculture – once again, some states have announced piecemeal changes here over the past few days – and also possible tax cuts for the middle classes who have suffered salary cuts and job losses.
The single-biggest hope – not done well, it can also be the biggest disappointment – lies in Modi’s repeated emphasis on ‘local’. Building local brands, he said, was critical and spoke of how, in response to his call, the demand for khadi had shot up. All well-known global brands, he said, began as local brands.
In a world where isolationism is the new mantra, thinking local means higher import tariffs and other forms of protection; in other words, a high-cost economy. So, if India is to develop global brands, Modi’s message has to be sweeping reforms to lower costs in the country, whether by way of flexible labour laws, improved infrastructure, a more welcoming environment. Indeed, if industry doesn’t become more competitive, the loan guarantees that will be part of the package will become a dead weight as firms won’t be able to repay them; if firms like Vodafone Idea shut down, as they will without slashing government levies, ‘local’ can’t take off; having more ‘local’ oil or mineral production, similarly, requires slashing exorbitant government levies and fast-tracking environmental approvals.
Over the past several months, Modi has had a series of detailed discussions to come up with sectoral solutions, one of which was the recent package to attract global manufacturers of mobile phones to the country; the budget sought to bring Indian taxes on a par with the global best. This came after years of unfriendly policy towards industry, so it is best to see how things really unfurl on the ground.
Also, even if the cash component of the package is Rs 5-8 lakh crore – with RBI liquidity, loan guarantees, tax and license fee giveaways forming the rest – it will send bond-holders into a tizzy and also make rating agencies relook their India outlook; more so, since there will be a big shortfall in both central and state tax collections this year. In other words, Modi’s move is replete with risk.
The only way out is to convince investors/raters he has, in parallel, a credible plan to slash wasteful subsidies – two thirds of Indians get a 90% food subsidy – to privatize in a big way and to draw down debt.
Including LIC, the value of PSU shares with the government are around Rs 15 lakh crore; all of this can, for instance, be put into a big mutual fund-type structure, and a systematic disinvestment plan can be put in place to sell, say, Rs 10,000 crore of shares on the first of every month irrespective of what the market price is, and that money be used to retire debt.
Markets will weigh the details over the next few days but, for now, Modi has shown he has the guts to take big decisions.