Apart from rhetoric and intentions, has this government in six months begun to change the economy? Inflation is down, the balance of payments is much better, GDP growth seems to be improving, the rupee is stable, FII inflows have risen, and the stock market is booming. Only the last two are due to the BJP government; investors and markets are anticipating reform and money is pouring in. Possibly the FII inflows are largely Indian unaccounted money flowing back. The others are due to sharp fall in crude oil prices, and some actions of the previous government.
The Prime Minister has put his stamp on foreign policy and has reached out in a way that will improve FDI inflows and security. In Australia, the Prime Minister announced 100% FDI in railways, and no doubt this will extend to defence and other infrastructure. But it is still to happen. This government’s foreign policy emphasises India’s role in Asia, developing deep economic, trade and investment bonds, particularly with the moneyed nations such as Japan and China. India will invest in natural resources such as coal, oil and gas, of which India is in serious and growing need. However, his impress on the domestic economic scene (except for the good luck of declining crude prices) has been more rhetorical than factual. It would be churlish to expect major changes in six months of power.
Good economics requires good politics, especially when the central government has only a good majority in the Lok Sabha. Legislation requires the Rajya Sabha support as well. Even if it wins all the state Assembly elections in the next two years (West Bengal, Tamil Nadu, Uttar Pradesh and Bihar), the BJP will have to wait before it has majority in the Rajya Sabha. The BJP’s actions in the last Parliament, where it held up much legislation, will come back to haunt it.
But the BJP has played arrogant politics. Its legislative programme is now jeopardised, especially the goods and services tax, the raising of the cap on FDI in insurance to 49%, labour law reform, direct tax reform, indeed the forthcoming Budget. Alienating the prickly, crude and self-righteous Shiv Sena could have waited till the municipal elections in the political money machine of Mumbai; similarly with the AIADMK and the Trinamool Congress. The home minister and the BJP president should have mollified the two ladies till their respective state elections came near. But the minister has no political or articulation skills, and the president is busy plotting for elections.
But reforms that do not need legislation could have moved far faster. Instead, we see a quick rollout of the ‘cultural nationalism’ agenda—school books in Gujarat with Hindu mythology, compulsory Sanskrit in schools, the central government’s use of Hindi in all public interchanges, Z-class security for a yoga guru hitherto under no threat, a new ministry for yoga, ayurveda and homoeopathy, etc.
There is some progress on bureaucratic actions such as speedier information and faster response. So far, there has been no comprehensive statement of economic policies. Putting together various announcements, some policies to come are: goods and services tax as top priority; reduction in income-tax rates for the middle classes; getting FDI into infrastructure, defence, railways, etc; rationalising social schemes to make them less leaky and more purposive; and closing down of sick public enterprises. For some, the government needs Rajya Sabha support.
There have been some non-serious rhetorical policies such as eliminating black and unaccounted money (no actions to close deliberate loopholes in India), and getting back illegal funds held abroad by resident Indian citizens (no compulsion meanwhile to not remove the monies as they seem to have done). The loopholes not mentioned for closure are investments from Mauritius (suspected to be hawala from India) not subject to capital gains; participatory notes (enabling anonymous investments from overseas); huge social schemes (such as MGNREGA) suspected to leak as much as 50% of funds; poor quality monitoring of infrastructure expenditures (enabling vast sums to be siphoned off); continuing commissions on defence imports; land legislation (likely to be stuck in Rajya Sabha); and state-owned enterprises (inefficient and many very sick). Disinvestment and privatisation have been mentioned but there is no blueprint of a programme.
Similarly, the release of telecom spectrum is held up, with declining quality of mobile telephony and rising tariffs. Coal mine allocations have seen an ordinance and a policy statement.
But the government continues to believe that the hitherto backward, inefficient and supply contract violating Coal India in three years will significantly increase production. The government is to make preferential allotment instead of auction for state-owned enterprises. What will be done if the enterprise is privatised?
The auction prices and the R290 per tonne to be paid on past production (imposed by the Supreme Court) are capital costs which must be recouped by mine owners through tariffs or borne by them. But the announcement says that tariffs are to be capped. So, the government will interfere with market prices for cement and steel and regulated ones for power.
The power sector loses huge sums because of free and below cost supplies. There will now be additional costs. The BJP compelled the Delhi electricity regulator to roll back tariff increases approved after diligent investigation. The additional cost of power will then have to be borne by state governments in their purchase price or by the generating companies. That will deter fresh investments in renovation and modernisation of old plants and building new ones.
In Australia, the Prime Minister announced that 100% foreign investment in the railways would be allowed. Why could the coal auction not be opened to reputed coal mining companies from overseas with the condition that they would sell the coal only to specified end-users? This would have brought new technology and could have raised productivity. Everyone would have seen and benefited from the new expertise.
Then there is the issue of the winner in an auction getting a coal mine far away from his power, steel or cement or fertiliser factories. Could the coal mines not have been segregated so that only user plants in the vicinity could quote for them?
Also, is this government going to treat the Coal Nationalisation Act as a holy cow not to be slaughtered? Ideally, all coal mines should have been sold off and users restricted to the four essentials of coal, fertiliser, cement and steel. The offers should have gone to foreign and domestic operators. Commercial sales could have been allowed after the situation stabilised. Meanwhile, a small percentage could be allowed to be sold on the energy exchanges.
Finally, the appointment of an independent coal regulator to transparently regulate all matters to do with coal, production, technology, productivity, tariffs and meeting supply contract commitments has been in the offing for over two years, with no action. The idea of a single regulator for power and coal is also yet to happen.
So far, on the economic policy front, this government has indulged in rhetorical announcements and practically no action. It has pushed itself into a corner in passing new legislation.
The author is former director general, NCAER, and is the first chairman of the CERC