Is Modi Govt Most Statist, Interventionist Since Liberalisation?

Video Editor: Mohd Ibrahim
Video Producer: Sonal Gupta
Cameraperson: Abhishek Ranjan

My conversation with over 100 top-notch foreign investors in India.

Modi’s “Original Sin”

I: Ladies and gentlemen, PM Modi was Napoleon’s proverbial “lucky general”, the first to enjoy a single-party majority after India freed its economy in 1991. His fortune was compounded when Brent crude collapsed from $108 per barrel in 2014 to $30 per barrel in 2016. His government got a windfall gain of nearly $ 100 billion over three years.

Just imagine if it had gifted this largesse to consumers by cutting fuel prices at the pump? What a tax stimulus it would have been for private demand and corporate investment.

Or if Modi had used the $100 billion war-chest to create a TARP-like facility for stressed banks and infrastructure companies? With one stroke that would have solved our “twin balance sheet problem”, unlocking the fetters on growth.

TARP, to refresh your memory, was the “Troubled Asset Relief Programme” launched by President George Bush and Federal Reserve Chief Ben Bernanke to handle the sub-prime crisis in America in 2008.

Instead, Modi doubled, even trebled, the taxes on oil to soak up the bonanza; and made the problem worse by spending it on grand welfare programmes that are notoriously inefficient and leaky. Today, this “original sin” has trapped Modi in a pincer, as the dollar has strengthened, and Brent crude leapt has back to $80 per barrel.

If he cuts those sky-high taxes, his fiscal arithmetic gets whacked. If he rolls back welfare schemes, his political narrative and constituency get shredded. As it is, nationalists are castigating him for weakening the rupee, a mistaken proxy for India’s pride.

Oppressing Minority Shareholders & Capturing the Regulator

Investors: Fine, we agree that he messed up India’s oil economy. But how can you call him a statist on just one bad call?

I: Okay then, here’s another egregious instance of oppressing minority shareholders and capturing the regulator.  Early this year, the Modi government was woefully short of its disinvestment target. It needed emergency cash. So, it thought up this awful fix for its failure. The public sector oil exploration behemoth, ONGC, was coerced to pay nearly $6 billion to buy the government’s shares in HPCL. Under the law, ONGC was required to make an open offer for 26 percent additional shares, providing an exit to HPCL’s shareholders who wanted out of this transaction.

But the Modi government trotted out a 40-year-old law, the Nationalisation Act, to claim that the“public sector character” of HPCL had not changed, even though control had passed from the Ministry of Petroleum to ONGC. SEBI (Securities and ExchangeBoard of India) queued up and waived the open offer!

Evidence: Modi Swears By Heavy Hand of Government Control

Investors: Alright, those are two bad instances. This government has really done much better on several other scores. How can you ignore that?

I: Aha, you want more evidence, right?  Here you go:

• “Angel tax” imposed even before a penny of profit is realised on investments; a small waiver is possible provided you can convince a committee of government secretaries about your “innovativeness”
• Companies forced to borrow 25% of their debt from the bond markets
• Not one bidder for Air India because of ridiculous conditions: no layoffs, no re-branding, no merger with the new parent
• Coal mines opened to private ownership, but the decision rolled back before any investment was made
• Pharmaceutical and stent prices capped; decades’ old medicines like Saridon banned
• Monsanto effectively driven out of the country after their royalties were capped
• Private traders in Maharashtra to be criminally prosecuted if they buy grain under minimum support prices, free markets be damned

But is there any policy at all that I find a bit of a game changer? Yes, to be fair, the Insolvency and Bankruptcy Code, or IBC, is a bold move to use a free market auction mechanism to sell stressed industrial assets. Unfortunately, other than this exception (which actually proves the rule), the government has been deeply suspicious and mistrustful of market forces.

In fact, I would call it the most statist, interventionist, and market-unfriendly regime in post-liberalisation India, that is, in the last quarter-century.

The Economist has described Prime Minister Modi as a “tinkerer”. I marginally disagree. In my view, it’s a government of voluble, aggressive incremental-ists.