The greater privatisation of India's economy under Modi Sarkar: A tale of many ideas
The BJP's thumping victory also marked a crucial change in India's political system that had grown noticeably weaker with time.
Narendra Modi, the Prime Minister, was a product of the mass exasperation against the misdeeds of the previous government. The regular revelation of corruption scandals, the frustrating policy paralysis, the incessant price hikes and the widespread unemployment in a virtually stalled economy had made the average voter restless for change. So, when a figure emerged making expansive assurances to revive the moribund Indian economy by eliminating corruption, creating millions of jobs and extricating millions out of the depths of poverty, the choice was hardly a complex conundrum for the voters.
Modi also had the backing of his economic record as the chief minister of Gujarat for an unbroken stint of thirteen years since 2001. He had an integral role to play in developing a business-friendly image for his state. For a large part of his tenure, the state grew close to 10 per cent on an annual basis, making it one of the fastest-growing states in the country. Gujarat also boasted of a greater intensity of jobs and industry than the rest of the country.
Even though the Gujarat model had its fair share of critics, Indians voted for him in large numbers in 2014 with the hope that he could replicate his achievements, in Gujarat, for the entire nation as well. India’s dream run in the years preceding the 2008 economic crisis had given rise to hopes of the country becoming an economic superpower and there seemed simply no place for the inefficiencies that had become the unfortunate hallmark of the UPA rule. So, Modi, who campaigned on an appealing vision of economic growth, good governance and reforms, seemed like the inevitable choice. The landslide victory for Modi was a reflection of how the burgeoning aspirations of Indians had made them more open to extending the baton of governance to those beyond the established elite. He was looked upon as a self-made politician from a humble background in a nation that was too accustomed to the prevalence of dynasty politics.
The BJP’s thumping victory also marked a crucial change in India’s political system that had grown noticeably weaker with time. Since the advent of regional parties, the authority of Congress and BJP had been undermined, resulting in shaky coalition governments in New Delhi. The decision-making process at the Centre had, thus, become linked to the varied, and often conflicting, interests of coalition partners. The scale of the electoral victory for the BJP in 2014 restored the power centre back in the national capital. It gave the BJP government a mandate to follow through on its policies without restraint.
While in office, one of the first acts that Modi initiated was to dismantle the long-standing relic of economic planning, the Planning Commission, and also eliminate the distinction between planned and non-planned expenditure in the country’s annual budgets.
These changes signalled the completion of India’s ideological shift in economic thinking, away from the state-led planning of the Nehruvian era towards a market-oriented approach of development. A major drawback of the Planning Commission had been that it created rigid national schemes, which required states to implement them by setting aside a significant share of funds. This left the states grossly disempowered. With the dismantling of the institution, the states were now left with more discretion over how to use their funds. The government also accepted a proposal of the Finance Commission to give state governments 42 per cent of Central tax receipts, up from 32 per cent.
The devolution of powers to the states allows for more resources and authority to rest with entities that are better attuned to local challenges than the Central government. This was a necessary step in a large country like India where individual states are comparable in size to other countries around the world. As Modi once commented, “(A) one-size-fits-all approach does not work in India.”
In a similar spirit of allowing market forces to define outcomes, the government also managed to deregulate diesel and petroleum prices, which formed a substantial part of the subsidy bill. As a result, India joined the club of select countries like USA and Australia where fuel prices are revised on a daily basis. Deregulation was also partially achieved in case of natural gas, but has yet to be taken up for fertilizer and kerosene. The use of the latter two commodities by people at the bottom of the pyramid makes it more difficult to tick them off the subsidy bill.
Advancing further on the reform process, the private sector was given further leeway in sectors where the state was proving incompetent. A cap on foreign investment in the defence sector was lifted from 26 per cent to 49 per cent. Similarly, furthering Vajpayee’s initiative to allow private entry into the insurance sector, the cap for foreign investment in it was raised to 49 per cent as well. A similar push towards greater liberalisation of India’s FDI policy was made in crucial sectors like e-commerce and pharmaceuticals. As a result, a record average of $52 billion in annual FDI inflow has materialised till 2018.
These moves were a concerted attempt to signal to the world that India was becoming more welcoming of private capital. But a more direct attempt at developing a business-friendly image on a global stage was in Modi’s ambitious promise of advancing India to the 50th place on the World Bank’s Ease of Doing Business rankings, by the end of his five-year term, from a lowly 142 when he joined office.
To his credit, India has broken into the top 100 for the first time, owing to the government’s consistent efforts at ushering in reforms in various aspects of business operations. The World Bank noted in its 2018 Doing Business report that India had adopted 37 reforms since 2003 and nearly half of them had been introduced in the last four years. Even though the Doing Business rankings might not be the sole determinant for attracting investment, it will reinforce in India as it reflects the government’s commitment to undertaking reforms.
A few of the key reforms that the World Bank alludes to have been game-changing in their expected long-term impact on the economy: The first arose from a strenuous legacy of rising non-performing assets (NPA) with public sector banks that the BJP government had inherited. During India’s high growth phase before the crisis, and for a brief period following it when the government was pumping in money to stimulate the economy, investor sentiments were high.
So, a flurry of investments were undertaken based on some overoptimistic assumptions, with banks failing to carry out appropriate checks on the creditworthiness of its borrowers.
Vijay Mallya was created in this era of imprudent lending. During the boom years, Indian banks recklessly lent out exorbitant sums of money to his now-grounded Kingfisher Airlines. There have also been allegations of some political involvement at the time to allow his airline to stay afloat. But when the growth phase abruptly came to an end, the corporates found it increasingly difficult to pay back these sums of money. As a result, balance sheets of both banks and corporates plummeted in quality, resulting in the so-called “twin balance-sheet” problem. Mallya, for instance, still owes about '90 billion to more than a dozen Indian bankers for his airlines.
When the UPA left office, the share of bad loans with banks stood at 4.11 per cent. But since the RBI tightened NPA regulations under the then governor, Raghuram Rajan, in 2015, the share of declared NPAs by banks escalated quickly and eventually went past 10 per cent by the end of 2017. As over 70 per cent of these NPAs have arisen out of loans extended to the corporate sector, the credit growth to industries had virtually come to a standstill since the problem was highlighted by the RBI.
A long-term solution was needed to fix the problem of bad loans inherent in India’s state-run banks. It is often suggested to adopt the path of higher privatisation of banks to infuse efficiency and eliminate political interference. But global markets show that privatisation of banks is not always the optimal choice. The economic crisis of 2008, which was triggered by the economic mismanagement of private banks in America, is a case in point.
Instead, a better remedy for the Indian case was found in directly targeting the problem of growing number of insolvent companies and individuals in the country. According to World Bank statistics, it takes an average of 4.3 years in India to resolve insolvency, and lenders eventually recovered just over 26 cents to the dollar. These numbers were among the poorest in emerging economies.
The Insolvency and Bankruptcy Code, 2016, was passed in Parliament to address the issue. The Code allows either the creditor or the borrower to approach the National Company Law Tribunal (NCLT) to initiate insolvency proceedings. It further lays down provisions for debt resolution within a span of 3–5 months. The success of the move will depend on how well the NCLT is able to manage the wave of cases filed with it. By the end of 2017, over 4,300 petitions had been filed within 18 months of operation.