Modi 2.0: Different economic strokes?

The 2019 election results illustrated the transformative political and social changes sweeping India. Will the new Narendra Modi government adapt its economic policies to fit the changed expectations or will it dish out more of the same?

The 2014 Budget was expectedly a laundry list of good intentions. Five years down the road, Team BJP has matured. It has tested out ideas — some good ones like the GST; the new bankruptcy architecture; Aadhaar; direct transfer of benefits and the Ayushman medical insurance programme, along with some bad ones like demonetisation; constraints on meat exports; spending money on statues and a ban on liquor sales, as in Bihar. Will the forthcoming Budget internalise these lessons?

The danger of securing 56 per cent of the seats in the Lok Sabha is that the massive mandate can be seen as vindication of all past policies — both the good and the bad. The fact is that this mandate is for just one person — Narendra Modi — in whom voters have reposed their trust. Prime Minister Modi — never one to hang about rusting — has picked up the cue. He came out strongly in favour of inclusive politics to bury the past viciousness, in his very first public speech, after the election results. What supportive actions can be taken to become inclusive?

First and foremost, inclusive development can never be top-down. The 15th Finance Commission is expected to give its recommendations by October on the devolution of tax revenues to the states and local bodies. The likelihood is that it will enhance the sharing of the divisible pool, which currently excludes customs duties and cess, from the existing 42 per cent. This means more free money for states and local governments but also less for the Union government.

These additional flows are needed to stabilise state finances which are stressed post the FY2016 assumption of state electricity utilities debt, under the Uday scheme. Sadly, the reforms and efficiency enhancements undergirding this one-time debt transfer have not worked well. State electricity utility debt is again set to increase to `2.6 trillion — as it was earlier. Better universal access cannot be at the cost of fiscal instability.

There is a lesson to be learnt here. First, clever accounting just kicks the can down the road. Second, quick wins might work politically but the underlying grunt work to remove the systemic flaws is the real game changer.

This principle should be applied to the crisis in the corporate and financial world. Pressure is building up to inject “liquidity” into the clogged system. But can banks find credit-worthy borrowers? For the past two years they were content to refinance the Non-Banking Financial Companies which took the business risk. Some have defaulted on debt repayment, while others are hugely over-leveraged with a serious asset-liability mismatch. Consumer credit has grown exponentially in anticipation of continued salary growth and rising stock market levels — a dodgy assumption in the face of uncertain job prospects and near certainty that growth shall remain constrained.

The Reserve Bank intends to improve the supervision and monitoring of banks and NBFCs. But this cannot substitute for the governance deficits within publicly owned banks. The RBI must also reconsider the constraints it imposes on bank assets via the prescribed cash reserve ratio (CRR at four per cent) and the statutory liquidity ratios (SLR at 19 per cent of net debt and time liabilities). Rationalising these compulsory deposits in public debt can free up bank capital for commercial lending; help in transmission of lowered interest rates to customers and expose government borrowing to market discipline.

The one-time capitalisation of publicly owned banks being favoured, sans any governance improvements, is a quick win, which risks the same fate as the Uday scheme. If these banks cannot be insulated from political pressure, then it is better to restrict public ownership to the flagship State Bank of India and start privatising the others. The privatisation of state-owned enterprises — reducing government equity to below 50 per cent — must be revived, including the oil companies, other than the flagship Indian Oil Corporation and ONGC.

Small government means consolidating meagre fiscal resources and management time in core sovereign tasks — building infrastructure; deregulating agriculture; boosting stagnant exports by reducing trade and transit transaction costs; keeping the Indian rupee competitive and widening the social protection net. Ruthless pruning of pancaked schemes — each with a set of embedded entitlements, the holders of which will have to be negotiated with and compensated — is necessary to keep fiscal allocations within prudential norms on the revenue and the capital account. The bottom line is that we need a period of austerity in the next five years.

Pan-India consensus building can be furthered by collective decision-making as was done by the GST Council. The federal decision-making aspect of the Planning Commission was never replaced with something more effective and workable. This gap needs to be plugged by setting up a Federal Commission as a forum of Union and state ministers to deliberate and decide policy frameworks for development issues — income transfer, social protection, debt waivers and develop a pan-India political consensus on economic matters, including cross-state pollution, environmental management, sharing of river waters and speeding up the implementation of resilient energy, telecom and transportation networks. To deepen the federal bonding, the secretariat to service the commission should consist of staff drawn from the Union and state governments.

Economists Rathin Roy and Ashok Gulati make the valid point that over-regulation has killed the oldest private enterprise in India — agriculture, by denuding it of all market signals on the demand and supply side. Unsurprisingly, our productivity is less than one half of China’s — a Communist country which, not so long ago, banned private agriculture.

Modi 2.0 must be about deregulating the economy and improving core regulatory skills to monitor and punish deviations without snuffing out the freedom to innovate, grow or diversify, which are at the heart of entrepreneurship. Those seeking to increase wealth and incomes without government assistance while adding to the tax kitty should be venerated, not harassed, for minor procedural deviations.

One hopes that Prime Minister Modi, in his search for global dominance, will lead with an optimised policy of clean fossil fuels and green energy. India is the international fall guy in the climate change debate — too big and growing much too fast for comfort, and yet poor with low human development levels. Remaining below the international radar, while building up the domestic economy to upper-middle income levels, is a good tactic to optimise local needs with international commitments.

Amit Shah is the Prime Minister’s go-to man in politics — and the poll results show the benefit of empowering a trusted and skilled professional. Who is his counterpart in economic matters? This gap needs to be plugged if we are to improve bang-for-the-buck in economic and social development.