Budget 2022: Is the BJP Govt’s Economic Reforms Momentum Dying?

In its second term, the NDA government has focused on its political agenda and economic reforms have petered out.

The NDA Government carried out a slew of important structural reforms in its first term (2014-2019).

India’s highly complex and disintegrated indirect taxation system was replaced with the Goods and Services Tax (GST), which replaced numerous Union and state taxes and cesses with a single national GST taxation system. The enactment of the Insolvency & Bankruptcy Code (IBC) to defenestrate corrupt and inefficient promoters and provide a business-like and efficient resolution mechanism for non-performing assets of banks was the other significant reform.

In its second term, the NDA government has focussed more on its political agenda. However, three economic reforms – privatisation of central public sector enterprises (CPSEs), including banks and insurance companies, liberalisation of domestic agriculture produce trade and markets, and the introduction of competition in electricity distribution and supply – did constitute planks of a formidable economic reform agenda.

Unfortunately, all three initiatives have either unravelled or lost momentum.

Privatisation Reforms Have Petered Out

As part of its stimulus package, on 18 May 2020, the government announced that it would formulate a new CPSEs reforms policy. The principal pivot of the policy was to retain a maximum of four CPSEs in the ‘strategic sectors’ and privatise every other CPSE.

The CPSE policy was laid out in the Budget speech of 2021. The new policy covered all CPSEs, including financial sector enterprises, public sector banks (PSBs) and insurance companies.

The government, however, identified the strategic sectors quite widely, which included atomic energy, space and defence, transport and telecommunications, power, petroleum, coal and other minerals, and banking, insurance and financial services.

Strategic sectors included practically all the big and profitable CPSEs. In strategic sectors, the policy stated that only a bare minimum presence of CPSEs would be retained, with the rest either privatised or merged or subsidiarised with other CPSEs, or closed. In non-strategic sectors, all existing CPSEs would be privatised, and those which could not be privatised shall be closed.

The Finance Minister made a bold announcement in the Budget that two PSBs and one general insurance company would be privatised in the year 2021-22.

To signal that the government meant business, the Finance Minister claimed that a Bill for bringing about necessary legislative amendments for privatising PSBs would be introduced in the 2021 Budget Session itself.

A Sorry Track Record Before 2021-22 Budget

At the time of the Budget presentation, the government also had a significant carry-over agenda.

The privatisation of a number of CPSEs was announced in the previous year, which included BPCL, Air India, SCI, Container Corporation, IDBI Bank, BEML, Pawan Hans and Neelanchal Ispat Nigam Limited. In her Budget speech, the Finance Minister stated that all these transactions would also be completed in 2021-22.

The track record of the government before the 2021-22 Budget was not very inspiring.

Only four strategic disinvestment transactions had been carried out in six years – HPCL sold to ONGC, REC sold to PFC and THDC and NEEPCO sold to NTPC. None of these transactions was genuine privatisation as the buyers were other CPSEs. The buyers did not even get management control of purchased companies.

Yet, Budget 2021-22 generated widespread belief that the government would walk the talk. Alas, it disappointed.

It did not introduce amendments to the bank nationalisation laws for initiating the privatisation of two PSBs in 2021-22. The government did not even identify two PSBs to be privatised. The process initiated for appointing transaction and legal advisors for selling government stake in IDBI Bank was also virtually stopped.

No privatisation transaction, except Air India, took place in 2021-22. The big privatisation reform agenda seems to have completely petered out.

Agriculture Marketing Reforms Abandoned

The government got the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020, enacted and notified in September 2020. This law introduced agriculture products marketing reforms by striking at the root of the agriculture produce marketing committees’ (APMC) monopoly over wholesale agricultural produce trading.

In terms of marketing reforms, this law was truly revolutionary.

The Act granted complete freedom to farmers to sell their produce at AMPCs or anywhere outside. It also enfranchised any businessman to set up a physical trading station outside the APMC market yard or establish an electronic trading system anywhere in the country.

The law effectively abolished the system of mandi fees by exempting the businesses set up outside APMCs from the payment of mandi fees .

Together, these two measures allowed farmers and traders to undertake interstate and intrastate transactions without any restrictions.

As there was a distinct comparative advantage to set up shop outside the APMCs, both in terms of trading freedom and non-payment of mandi fees, it was expected that trading of agriculture produce would soon shift outside APMC market yards.

There were two other laws as part of the farm bills package.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020, sought to institutionalise a Central government-controlled and regulated contract farming regime in the country.

The amendment in the Essential Supplies Act was intended to circumscribe the government’s authority to place restrictions on storage, pricing and export of agricultural produce.

The states stood to suffer loss of significant mandi tax revenues. The agriculture trade would have also shifted outside the APMCs controlled by them. However, barring some opposition-ruled states, which also passed meaningless resolutions in their assemblies, the states did not wince much.

The Will of the Govt

Unfortunately, for the government, the farmers of Punjab and two adjoining states decided to protest by blocking roads to Delhi, which created considerable visible opposition to the three farm laws. First, the Supreme Court suspended the implementation of the three laws. Later, the government also announced suspension for a period of 18 months.

The government also invited farmers for talks. Nothing worked. Farmers continued to block the roads and agitate for more than a year.

Finally, the government gave in. In November 2021, the Prime Minister announced that the three farm laws would be repealed. These laws were duly repealed by Parliament in December 2021.

The repeal of these farm laws not only meant that the agriculture produce marketing would remain shackled in the country, but the climb-down also signalled that the will of the government to bring economic reforms was dissipating.

Unsuccessful Electricity Sector Measures

The distribution segment in the electricity sector remains moribund. Every year, losses of more than Rs 2 lakh crore on the sale of electricity creates all kinds of problems and distortions. State governments cough up large subsidies. Still, the distribution companies do not pay their suppliers fully. There are more than Rs 1.25 lakh crore overdue outstanding payments currently. Many private electricity generation companies have become non-performing assets of banks.

The introduction of genuine competition in the distribution segment, if not their privatisation, is the minimum necessary reform to instil some order in the very important electricity sector.

The government announced in Budget 2021 that it would introduce two major reforms.

First, the electricity supply sector would be opened up and every interested person would be allowed to set up electricity supply business subject to meeting the eligibility criteria and registering with the State Electricity Regulatory Commissions (SERCs) for the area(s).

Second, the government would initiate the reform of massive subsidies in the system and move over to the direct benefit transfer (DBT) system to channelise subsidies to farmers.

The announcements were followed up with preparation and circulation of the Electricity (Amendment) Bill, 2021. The government announced that this Bill would be introduced in the Monsoon session of the Parliament.

Unfortunately, electricity sector reforms have also become a collateral casualty of the climb-down on the three farm laws. The government promised farmers’ representatives that the Electricity (Amendment) Bill would not have a provision for the abolition of electricity subsidies and the proposal of electricity subsidy transfer by DBT would also be dropped.

Without these provisions, the Electricity (Amendment) Bill will become meaningless.

As there is not a single piece of significant economic reform on the agenda of the government currently, the conclusion is inescapable. The reform momentum is as good as lost.

(The author is an economy, finance and fiscal policy strategist. He has been Secretary, Economic Affairs and Finance Secretary to the Government of India. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)