Is Modi Turning Policy Clock Back to Pre-1991 State Control Era?

Recent policy declarations seem to be inspired by the China-Russia model of state control, writes Abheek Barman.

On Friday, February 5, the Narendra Modi government announced that it was hiking duties on imported steel by fixing floor prices. These now range from $341 to $752 per tonne, depending on the grade of steel.

Domestic steel makers like JSW, Jindal Steel and Power Ltd and Tata Steel said a brief, “Hallelujah.” And immediately began lobbying New Delhi for another 25% hike in floor prices (or duties) on steel in the February 28 Budget.

Tweaking the Levies

The next day, the finance ministry said it would start charging import duties on 76 life-saving drugs. These include medicines to stanch bleeding in haemophilia patients, cancer drugs and anti-retroviral treatment for HIV+ people. These drugs were earlier exempt from customs duty.

The medicines will now cost more. Experts believe haemophiliacs will be the ones to be hit hardest, because local substitutes are either poor or non-existent. Over the medium term, increased costs will have adverse effects on public health.

A day later on Sunday, February 7, Prime Minister Narendra Modi was in Paradip, Odisha, inaugurating a new 15 million-tonne per annum refinery of state-owned oil major Indian Oil Corporation (IOC). With this, IOC’s refining capacity overtakes private sector major Reliance Industries Ltd (RIL).

Return of Licence Raj?

This three-day hyperactivity has analysts and policy wonks scratching their heads. During his successful election campaign of 2013-14, Narendra Modi promised, “maximum governance, minimum government.” Many assumed this meant greater ease of doing business, freer markets, more competition and bigger trade and investment flows.

Less than two years after coming to power, New Delhi is snuffing out these expectations: the role of government has expanded; patronage of state-owned companies has grown; trade and investment flows have dropped off a cliff. Protectionism, in the shape of higher effective duties on steel and medicines, has reared its ugly head.

Are we jumping to conclusions too fast?

Turns out, the bigger picture is scarier than what took place between February 5 to 8.

During the third week of January, 2016, Oil Minister Dharmendra Pradhan said the government was toying with the idea of forming a consortium of four state-owned oil companies. These would set up a giant 60 million tonne per year refinery on the west coast. If it ever comes up, the government will control more than double the refining capacity of private players.

State-Led Cartelisation

Oil prices are down 78 per cent from highs hit barely three years ago. Indian consumers have not benefitted: the government has sucked up this oil price-drop bonanza through higher excise revenue and fatter margins for refining companies.

Late last year, state-owned steel company Sail was asked to team up with Vizag Steel and National Mineral Development Corporation (NMDC) and blow up Rs 18,000 crore to build a steel factory in Khammam, Telangana.

NMDC is India’s largest producer of iron ore. Since early 2013, global iron ore prices have crashed 72 per cent, from $150.5 per tonne to $42 per tonne.  Steel prices are down more than 65 per cent in the same period.

Most governments embark on expansion and industrialisation during good times. During a boom, they also try and curb protectionist moves.

Fear of Red Tape

In India, we have policy schizophrenia: in the midst of a global recession, the government wants state-owned metal and oil producers to pour good money after bad. Simultaneously, New Delhi is erecting barriers to trade that will help local producers, but would apply brakes on recovery and growth.

Bizarrely, the government also wants to play angel investor for startups. These are inherently risky businesses which should be allowed to attract risk capital freely and space to grow. Here the dead hand of the state, wrapped in yards of red tape, has descended.

The programme will be run by the Department of Industrial Policy – not the smartest or quickest organisation in the world – and have a corpus of Rs 10,000 crore to invest. Such schemes are notoriously prone to succumb to babudom and vested interests. There’s no reason to assume it’ll be any different this time.

Fondness for the Big State

We’ve also embarked on nationalisation, a dreaded word last heard in the early 1970s. In the last week of January, New Delhi took over seven tea gardens in north Bengal which were controlled by the GP Goenka-led Duncans Group. The state-run Tea Board is supposed to run these gardens. We are assured that this was best for 15,000 workers in the estates.

Trouble is, these gardens are now under the jurisdiction of the Bureau of Industrial and Financial Reconstruction (BIFR), a Planning-era relic, denuded of staff. BIFR will be scrapped if – or when – a new bankruptcy code is made into law. Tea nationalisation is mired in an administrative and legal cesspool.

Some claim this regime’s fondness for the Big State comes from Modi’s admiration of China and Russia, where the state wields absolute economic control. Others point to Modi’s championship of Gujarat-based energy company, Gujarat State Petroleum Corporation Limited (GSPC), as chief minister during 2002-14.

But the GSPC saga ended in disaster: in 2005, chief minister Modi said GSPC had discovered 20 trillion cubic feet (tcf) gas, the largest find ever. He encouraged GSPC to venture overseas, funded by debt raised against the $50 billion-worth of gas it was supposedly sitting on.

GSPC spent over $2 billion in exploration, before India’s energy regulator said it could only vouch for 2 tcf of gas, a tenth of what was promised. The gas vanished; GSPC went bust.

Given the example of GSPC – and countless other failed state-owned ventures – can India’s economic policy afford to lurch the China-Russia way?

(The writer is a Delhi-based senior journalist.)