Rational Expectations: Stirrings of reform, but just about that

By: |
November 16, 2020 6:15 AM

The last few months have seen reforms restarting, but till these are followed up with a lot more, it won’t really move the needle

The fact that overall investment—measured as a share of GDP, as it should, FDI is also falling—continues to fall, from 31.9% of GDP in Q1FY15 when Modi came to power to 22.3% in Q1FY21 suggests investors remain mostly unconvinced.The fact that overall investment—measured as a share of GDP, as it should, FDI is also falling—continues to fall, from 31.9% of GDP in Q1FY15 when Modi came to power to 22.3% in Q1FY21 suggests investors remain mostly unconvinced.

Though all indicators are the government has not spent enough to counter the contractionary impact of Covid-19 (bit.ly/35oFnXa)—as compared to an average of 2.5% for even Baa-rated peers, India has spent 1.8% of GDP—the real issue is whether PM Narendra Modi has used the opportunity to unleash reforms as encouraging investments is a sure-shot way of boosting the economy. Certainly, the last few months have seen more reforms than those seen in a long time.

In September, the Centre passed three agriculture Bills that included scrapping the monopoly of APMC-mandis, giving farmers the right to move produce across states and making contract farming easier; there was also an attempt to make the Essential Commodities Act (ECA) less stringent. Several reforms to the Centre’s myriad labour laws—several states are also trying to do this—followed this; the most important one was the introduction of fixed-term contracts. Along with the sharp cut in corporate taxes last year, this promised a new deal for those wanting to, for instance, relocate from China.

As part of the post-Covid stimulus, the finance minister said a list of strategic sectors would be made where a maximum of four PSUs would be retained; all non-strategic PSUs would be sold. And, in an unusual break from past policies where the attempt was to cosset small firms, a Production Linked Incentive (PLI) was announced for mobile phone manufacture to attract global biggies like Samsung and Apple to set up/consolidate operations in India; last week, a similar scheme was announced for 10 other sectors.

After years of blowing hot and cold, commercial coal mines have just been auctioned and, folllowing the experiment with freight trains, private-sector passenger trains will also start. Indeed, the fact that the BJP won so handsomely in Bihar is testimony to not just Modi’s undented appeal but also to his policies of direct benefit transfers, providing cooking gas to the poor, housing assistance, toilets, subsidised insurance, Jan Dhan bank accounts, etc; for the country’s poor, these are the reforms that really matter.

Whether this will move the needle as far as investors are concerned, of course, is the question. A definitive answer is difficult since, as the government keeps pointing out, absolute FDI inflows are rising. The fact that overall investment—measured as a share of GDP, as it should, FDI is also falling—continues to fall, from 31.9% of GDP in Q1FY15 when Modi came to power to 22.3% in Q1FY21 suggests investors remain mostly unconvinced.

This is becauses, though they took so long in coming, the last set of reforms are just a first step, and need considerable following up to deliver the desired results. Allowing farmers to sell via non-APMC mandis is good, but the alternative mandis must be funded and provided land; farmers in states like Punjab and Haryana must be weaned away from wheat and rice, and efforts must be made to get those in other states to grow these crops. Farmers need good-quality seeds but a Monsanto—which brought India’s cotton revolution—has virtually been hounded out of the country. Agriculture also needs a lot more public sector capex, yet the government fritters away its money in useless subsidies. And despite all the promises made to not restrict farm exports or to cut back on the use of the ECA, once onion prices started rising, the government imposed stocking limits!

The strategic sector PSU policy was announced in May, but the list is still not out; in the past, in fact, PSUs have been asked to buy other PSUs, been forced to give more dividends, even to buy back their shares. And if the oil sector is considered ‘strategic’, will nine of its 13 PSUs be sold or will they just be merged? It is true Covid-19 played havoc with privatisation plans of BPCL and LIC’s listing, but the failed Air India sale was largely due to the government’s refusal to make the offer attractive enough two years ago. And even after the sick BSNL got a Rs 78,000-crore bailout, the government continues to play havoc with its plans to set up a 4G network; aren’t PSUs supposed to have more autonomy?

At the end of the day, reforms must take place 24×7. If they are episodic—as PSU privatisation is—a Covid-19-like event can derail them fast; surely the government could sell a fixed number of shares of various PSUs on the first of every month, never mind their price? No serious attempt has been made to free PSUs either by amending the Constitution to say they are not ‘instrumentalities of state’. The decision-making process—and this is absolutely critical—continues to be hobbled by the fear of a CBI knock on your door despite so many amendments to the Prevention of Corruption Act (PCA); each time we have been told the latest iteration will fix things! Thus, decisions that can quickly spur investments, such as slashing telecom and petroleum levies, have been delayed for years.

Even routine housekeeping, like freeing the working class from high-cost EPFO and ESI (the latter has accumulated over Rs 90,000 crore of reserves by over-charging low-income workers for years), continues to hang fire. As in the case of the PCA, gas and oil prices have been ‘freed’ several times but, amazingly, these don’t apply to most existing production; if producers can’t make money now, how are they to invest in future exploration? Around the time the PM was wooing foreign investors a few weeks ago, the Supreme Court cleared the Centre’s request to stay the $1.2-billion award to be paid by its Antrix Corporation to Devas Multimedia; and the Centre has not ruled out appealing the Vodafone award though doing so will signal its desire to bury the retrospective tax.

And despite all the talk, little has been done to clear the lakhs of crore rupees of central government dues. Indeed, on September 9, the finance ministry issued a detailed rebuttal to an FE story “Forget the stimulus, just clear your dues”. FE had written about Rs 117,000 crore of SEB dues, to which the ministry said Rs 90,000 crore of liquidity infusion had been “proactively conceptualized” and Rs 45,000 crore of this would be released “within a fortnight”; on Thursday, the FM announced that while Rs 118,000 crore had been sanctioned, Rs 31,100 crore had been disbursed; if suppliers can’t even get their dues from the government on time, how are they going to trust its larger promises? On the flipside, the Rs 65,000-crore of extra fertiliser-spend the FM announced on Thursday was to clear old dues of the fertilizer industry; the firms are happy to get their money, but it underscores the serious delays in clearing dues.

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