The challenge is to retain the momentum, to not slide back periodically; investors look at more than just the Budget
The short point is that if the economy is to do well, the government needs to enthuse investors and, for that, it needs to do a lot more than it has been doing.
Last week, this column used the Punjab farmer agitation as a metaphor for how India reacts to reforms and, more important, how the government handles protests; to borrow from Shekhar Gupta’s headline (bit.ly/35lBhPn), will this be Narendra Modi’s Margaret Thatcher or Anna Hazare moment (the latter refers to Manmohan Singh losing all political capital by caving in to Anna Hazare’s demands).
Last month’s violence at Apple supplier Wistron’s plant in Karnataka, as it happens, is equally instructive in terms of how investors view India. It is clear the massive jump in Wistron’s work force, but all on the rolls of contractors, was the main reason for the worker disaffection, just as it was when an HR executive was burnt during violence at Maruti Suzuki in 2012. But why was Wistron using a contractor system, where worker complaints—like salary delays—are normally higher when, last September, the Centre changed the labour laws so as to allow firms to hire fixed-term workers on their own rolls?
Simple: the change in the law, or rather the belief that it was permanent, had not sunk in; several state governments, keep in mind, curbed worker-rights dramatically post-Covid, but many of them backtracked soon afterwards. Two steps forward and one back isn’t a winning strategy especially when countries like Vietnam—and even China—are consistently raising their game; and, often enough, it can be two steps backward as well, or even more. Punjab’s farmers want the MSP to be legislatively guaranteed when, in fact, it needs to be phased out!
That is why reforms cannot be just a statement in the Budget. The government needs to be continuously pushing reform, it cannot be moving backwards, and certainly not too often. The three farm laws Punjab’s farmers are agitating against are just the start in terms of what needs to be done; to grow the sector, the government needs to invest a lot more while, today, it spends four times as much on subsidies as compared to investment in canals etc.
Apart from the huge investments made in areas like housing or the creation of toilets, allowing private-sector cargo trains or opening-up of commercial coal mining are all big steps—apart from, of course, GST and IBC—but are these good enough? The fact that the investment rate, which was around 33% of GDP before Modi became prime minister is now around 28% suggests investors don’t feel the measures are sufficient; indeed, the gap between India’s and China’s investment rates have never been higher since 2000, and that is why the EU has just signed an investment pact with China. The world respects only economic power, never mind all the anger that was being displayed post-Covid and all the talk of sanctions on China.
Given the response of mobile phone manufacturers like Apple and Samsung, it is clear the government’s PLI scheme is a winner—the reduction in corporate tax rates, other than more friendly labour laws, also helped—and 10 more such schemes are on the anvil.
But, almost as if to counter this, the government went and challenged the Vodafone arbitration award—Cairn will follow—signalling to investors that there are certain court rulings it will simply not honour, never mind if they are from global arbitration courts; indeed, there is almost no global award that the government has not challenged.
Tax-terror has been something the government has promised to root out but, even apart from the bad faith exhibited in the Vodafone-Cairn case, the fact is that disputed direct tax claims have risen two times in five years (from Rs 4.1 lakh crore in FY14 to Rs 8 lakh crore in FY19) while actual direct tax collections have risen 1.8 times (from Rs 6.3 lakh crore to Rs 11.4 lakh crore). In FY19, around 60% of the disputed direct taxes were of 1-2-year vintage. Clearly, the tax board is not examining—and quashing—poor quality orders.
And while the government is trying to woo industry by simplifying rules and improving various ease of doing business parameters, there are enough examples of sluggish decision-making. Forget the big decisions on scrapping the licence fee and spectrum usage charges or clearing up the AGR mess, even something as simple as rejecting a bad Trai recommendation of a Rs 3,050-crore penalty on Bharti Airtel and Vodafone Idea has been hanging for nearly five years; the telecom minister doesn’t think the penalty is justified—that’s why he hasn’t asked for the fine to be collected—nor do the top bureaucrats concerned, but no one wants to take the decision to simply reject the recommendation.
Indeed, when the Cabinet cleared the spectrum auction two weeks ago, it kept the reserve price for the auction of the 700MHz band at what Trai had recommended in 2018. Trai’s recommendations have always been sky-high and that is the reason why most spectrum auctions have failed in the past, and for why the industry is in the mess it is in today. Indeed, after Trai’s recommendation in 2018, the industry’s financials have considerably worsened, and yet the Cabinet meekly rubber-stamped Trai.
There are several other examples of industry issues that are not getting resolved; and, even at a time when the government desperately needs the money, the disinvestment process remains a mess. Forget about botched privatisation like that of Air India or IDBI Bank, while public and private firms raised `1.4 lakh crore from equity markets in Apr-Nov 2020, the disinvestment plan raised under `13,000 crore! While bureaucrats keep pushing back equity sales for fear they will be accused of not getting the best price, they don’t realise is that every day of holding a PSU share loses money; since Modi first came to power, while the BSE market cap rose 2.2 times, that of PSUs fell 9%.
The short point is that if the economy is to do well, the government needs to enthuse investors and, for that, it needs to do a lot more than it has been doing. It has to come up with new reforms every day, every week, every month, every year … it can’t afford to slacken off since the competition is only getting tougher. Even after falling from its peak, China’s investment levels are still 43% of its GDP; that’s why it continues to grow the way it does.