2 years of Modi: Govt learning from every misstep, but still anti-market

By: |
Updated: May 26, 2016 8:58:55 AM

Bihar’s mistakes not repeated in Assam. Telecom and gas choked but govt now fixing all issues—learning from each misstep but still anti-market

Narendra Modi, BJP government, NDA government, Aadhar card, student issuesWhile chipping away at various bottlenecks, especially the Sonia Gandhi landmines like the land Act, the government needed to lend all support to those still willing to invest, like telcos and oilcos.

Nothing better symbolises the BJP’s approach to governance, warts and all, than the on-going controversy over the pricing/royalty of Bt cotton seeds. In an avowed anti-market move, the government fixed seed prices/royalty. But the furore over this being extended to all GM seeds saw the government promising to withdraw the order and have a wider discussion. While that still suggests a problem in the way such decisions are taken, there are enough examples to show that while there is no guarantee the government will get it right the first time, chances are it won’t repeat the mistake.

Given the state of the global economy, large unutilised capacity in the country and stressed bank/corporate balance sheets, even if Modi had done everything critics wanted, growth still couldn’t have looked up beyond a point —Sajjid Chinoy’s calculations in the adjoining columns show the sub-par monsoon shaved 50bps from growth in each of the last two years and weak exports another 150bps in FY16, outweighing the positive 100bps impact of lower oil prices.

While chipping away at various bottlenecks, especially the Sonia Gandhi landmines like the land Act, the government needed to lend all support to those still willing to invest, like telcos and oilcos. Yet, precious time was frittered in fighting non-issues like call-drops in the case of the telcos or, in the case of gas, arguing the UPA’s plan to hike gas prices was a scam.

What followed was an embarrassing court defeat for the telecom regulator whose actions were cheered by the government and, in the oil sector, exploration ground to a halt with India’s top private explorer starting to examine options in Mexico. Burned by this, the government started working on getting more spectrum to address the telecom sector’s biggest problem and, in the case of gas, came up with a price formula even more attractive than the UPA’s.

Just to keep investors on edge, though, the government remains committed to the net neutrality issue— though with less enthusiasm than earlier—oblivious to its impact on the rollout of the internet for a billion unconnected Indians.

Though it was the UPA’s homeopathic increases in diesel prices that paved the way for the NDA’s big price decontrol reform, this has not been followed up with a similar hike in either LPG or kerosene. The NDA did, though, weed out 3 crore duplicate customers from the LPG records and launched an effective #GiveItUp campaign that got another 1.5 crore persons out of the subsidy scheme. While the plan is to get another 2-2.5 crore more out of the LPG net and weed out the 40% fake consumers in kerosene, this will take time and won’t deliver the same results as a market-driven solution. Even if 2 crore customers do get taken out, at 10 cylinders a year and a subsidy of R200, that’s an annual saving of R4,000 crore. Raising LPG cylinder prices by a mere R5 per month for 15 crore paying customers will yield better results, more so when the plan is to hike the consumer base by at least 5 crore in 5 years, and oil prices will also rise—at some point, the government has to realise market-solutions are the best.

Excessive hype, as in the electricity sector, also drowns out the good work. There is little doubt the big change in SEB finances has come by arm-twisting—forcing PSU banks to accept a 5-6 percentage point cut in lending rates is justified on grounds their loans are now secure! But on a positive side, a lot of money is being spent on strengthening the transmission and distribution system that is critical to reduce losses—also, programmes such as the LED bulb ones are genuine successes.

On the government’s second birthday, it’s a mixed bag, but more positive than negative. Sonia Gandhi’s land Act is being replaced in various states including Congress-ruled ones, the system of cash transfers is steadily being put in place, social security has got a leg up and using much of the oil bonanza to build more roads and railways—that’s a lot of construction jobs for the poor—is sensible economics. Little has been done in agriculture or the critical reform of FCI and fertiliser subsidies as Ashok Gulati points out and, apart from global headwinds, the rise in WPI means the ‘deflator’ bonanza of the last year is over and will limit GDP growth.

Getting the bankruptcy law through is a big positive, though it remains to be seen if it delivers—action on fixing bank balance sheets will take time, especially since privatisation is a non-option thanks to Parliament. Talk of strategic sales of PSUs remains just that even as PSUs continue to bleed the exchequer, little headway has been made in labour reforms and the heavy weather being made of the civil aviation policy shows vested interests remain strong with all manner of non-market solutions being discussed instead of just cutting to the chase.

But if the BJP is learning from past mistakes, even if the progress is zig-zag, that augurs well for the future. Markets are seldom perfect but they do a far better job of aligning resources than governments trying to fix things through executive order—Modi seems to realise this in some cases, but not in others.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.