Modi@2: No Sign of Promised Big Bang Reforms

For all the hype and hooplah, the Modi government has achieved little on economic reforms, writes Jairaj Devadiga.

(As the NDA government completes two years in power, The Quint brings for its readers ‘Modi@2’, a special series evaluating the performance of the current regime.)

Two years ago, Narendra Modi was elected to power for his promises of development and economic growth. He promised us free markets, deregulation and cutting down red tape. As his government completes two years, I am underwhelmed by what it has accomplished.

Finance Minister Arun Jaitley talks much about 7-8 percent real GDP growth rate, which he says is an achievement of Modi sarkar. Let us examine his claim closely. Near the end of UPA-II, in 2013, the growth rate was 4.7 percent. Modi and his party were quick to denounce the Manmohan Singh government for its poor performance. On assuming power, the Modi government implemented a new method of calculating real GDP (which is adjusted for change in prices). It shifted the base year from FY-2004 to FY-2012.

In layman’s terms, the government simply took away the effects of eight years of rising prices. If we were to take the base year as FY-2014, the growth rate today would be more than 10 percent, since price rise is much less in one year (from FY-2014 to FY-2015) as opposed to 11 years (FY-2004 to FY-2015).

This means that the 4.7 percent growth Manmohan Singh was lambasted for magically becomes 7 percent under the new method of calculation. This is almost the same as the current growth rate. Which means Modi and Jaitley achieved exactly nothing, apart from some statistical jugglery to mislead voters.

Leaving such statistical sleight of hand aside, one must focus on the policies pursued by the government. What did Modi do on that front?

On Privatisation

Modi had once famously said, “The government has no business being in business”. Going by that we reasonably expected his government to release its hold on PSUs by privatising them. Yet here we are in 2016, the government is still operating numerous PSUs. Over 150 of the PSUs have accumulated losses of Rs 1.1 lakh crore as of 2014-15, according to a CAG report. Who bears the cost of these losses? The taxpayer, of course.

And government operated banks are the worst. The public sector banks are where the NPA problem mostly lies. Private banks give loans based on profitability and risk assessment. Public sector banks give loans based on political considerations.

It is no wonder then that a significant portion of the bad debts is accounted for by unprofitable PSUs which are unable to repay their debts. The Vijay Mallyas could get huge loans from government-run banks due to their political clout, at a time no private bank was willing. The government sanctioned fresh capital of Rs 70,000 crore to these banks last year, and is willing to give as much more as required. There is no justification for such waste of taxpayers’ money.

Modi has been very slow on disinvestment and privatisation. His government is selling only minority stakes when it should be turning over full control to the private sector and wind up companies which have no buyers.

On Trade

If there is one thing we economists agree on, it is free trade. The idea is that if people are free to buy from wherever they want, the competition between sellers will lead to an improvement in quality and a reduction in price. These past two years did not see much of a change on that front.

The government still protects the agricultural sector via import duties on foreign produce.  Similarly, manufacturers are also protected, which lets them get away with creating low quality products. It also increases prices for consumers.

It doesn’t end here. Earlier this year, the government decided to tax its own defence ministry for importing military equipment. How silly can they get? Apart from treating national security as a joke, this nonsense has economic repercussions as well.

On Regulation

Although the Modi sarkar has tried to streamline the process of starting a business in India, there is much left to be desired. Of 189 countries, India ranks 130 in ease of doing business, according to the World Bank’s report. It is still a pain to deal with construction permits, enforce contracts and pay taxes among other things. Access to credit has deteriorated over the past year, thanks to the public sector banks’ NPA problem. There were also problems in dealing with insolvency, but the recent bankruptcy law should help with that.

Modi can talk about Make in India and go on foreign tours to invite people to invest, but until the cumbersome regulations at home are not dealt with, there won’t be enough jobs created for the 13 million people who reach working age every year.

Economy’s Report Card

• May 4, 2016: CAG report reveals, 157 PSUs have losses to the tune of Rs 1.1 lakh crore in 2014-15.
  
• Feb 9, 2016: An Indian Express report reveals 29 state-owned banks wrote off bad debts, amounting to Rs 1.14 lakh between 2013 and 2015.
  
• Loss for 20 PSU banks stood at Rs 16, 272 crore for the fourth quarter that ended in March 2016.
  
• India improved its position by 12 places in ease of doing business report 2016; India ranks 130 among 189 countries.
  
• GST Bill still hangs in air with the lack of a majority in the Upper House acting as an impediment.
  

Stalled Legislation

The Goods and Services Tax (GST) is probably the most talked about piece of legislation. The government has tried for the past two years to get the bill passed, but fortunately it never succeeded. I say fortunately because the GST, as proposed, is a regressive tax.

Lower income people have to spend a larger share of their income on the necessities of life as opposed to high income people who save most of it. Also, luxury goods will be taxed at the same rate as necessities. If there is a tax on goods and services, the poor will pay a larger share of their income as tax than the rich people.

The other motivation for having a GST was a single tax rate and a common market across the country. But the proposed bill has a dual GST, one levied by the Centre and the other levied by the states, which defeats the purpose of a unified market.

Too Little Too Late

Modi has good intentions and has taken several steps in the right direction, such as Swachh Bharat and building toilets for every household. It will improve the health, and hence productivity, of the population, resulting in long term gains for the economy. However, the crucial free market reforms have been too little and too late.

If the government had brought market reforms in the beginning, the bad effects would have been over and the good effects would have been visible before the 2019 election. If the government starts now, the benefits won’t materialise until after the 2019 election. This will be politically unprofitable for Modi, and so, I am afraid, the tyranny of status quo will remain.

(The writer is an economist who looks for simple solutions to the complicated problems that ail our society)

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