The first 100 days of the Modi 2.0 government have been marked by lows and highs. Sadly, the lows are longer lasting, while the highs are transient, even in the short term.
The biggest low was the Budget for FY 2019-20 in July, which was presented, in the absence of the late Arun Jaitley, with less than a firm political steer.
Unusually for a Union Budget, it had glaring deficiencies which makes it imperative that the government create a “shadow budget” to control expenditure — the department of expenditure of must have done so already — which is realistic, has lower revenues and increased expenditure than budgeted and a higher fiscal deficit. The Non-Banking Financial Companies (NBFC) crisis is still unfolding. It will continue to further negatively impact the bottomlines of banks and publicly-owned financial and insurance companies.
The downside of tabling the emerging stress in Parliament is limited. The truth is out already that India is slowing down along with the rest of the world. The upside is that expenditure can then be directed to give the biggest bang for the buck. Also, the government will be able to borrow more without having to raid the treasuries of public agencies and enterprises.
Data matters because it is a performance metric. The data on the economy — five per cent growth last quarter — a stepped decrease from eight per cent in the same quarter last year — with the expectation of a further slide this quarter or, at best, a slow, long trough through the rest of the year, is not good news. But it is news already. It’s best to recognise it, debate it and put in place a plan to reverse it.
The high point during the past 100 days was the integration of Jammu and Kashmir, on the pattern that exists for all other states. This was a political high, with potentially good social consequences for women, Scheduled Castes and the Shia Muslim and Buddhist citizens of Ladakh, who are now a distinct and separate Union territory.
The manner of the integration was unorthodox. But the political consensus around this being the best way forward exists — despite the usual noise. The proposal was approved by a two-thirds majority in both Houses of Parliament, even though the National Democratic Alliance does not have the numbers in the Rajya Sabha.
Whether the results are positive or worsen the already-inflamed sense of alienation in the Valley will depend crucially upon the deepening of governance reforms, down till the local government level, to allow fresh political voices — much like Narendra Modi himself — to emerge.
The government outreach has been compelling. International opinion seems reassured that the government’s intentions in Kashmir remain development-centric and not to snatch away the Kashmiri identity. Undoubtedly Kashmir is suffering yet again. But the solution never lay with the tired, dissipated political leadership that it has.
On the economy, there is very little good news. What there is emanates from the Reserve Bank of India, which is fighting in the trenches to reverse the slowdown. Since the new governor Shaktikanta Das, who has the Prime Minister’s confidence, took over in mid-December 2018, the RBI has slashed the repo rate (that at which the RBI lends to banks) from 6.5 per cent to 5.4 per cent. The lowest level for the repo rate in the past three decades was 4.75 per cent from April 21, 2009 to March 19, 2010 in the go-go days of credit expansion, after the Western financial crisis. If inflation remains low at its current levels of around three to 3.5 per cent, the RBI will likely seek to reach the historical low. Doing so will be a mood lightener.
More worrying is the interventionist role that the RBI is being pushed to play. Nudging banks to pass on rate reductions to consumers is fine. But why are public sector banks not doing so themselves in competition with private banks? The share of private banks in lending is at 40 per cent, and is increasing.
A highly interventionist regulatory culture has never worked in India. Also, why are the government nominees on the boards of public banks so powerless to work in the public interest that the RBI has to step in to do their job? Do we have the right people on these boards, or are they just sinecures?
The RBI would well desist from being seen to micro-manage the banks. Otherwise, it becomes a part of the game and will have to bear the financial consequences of poor or politicised decisions by the banks, as in the past.
A big worry is the rapid expansion in the scale of “government-directed” operations of public sector entities. The leverage levels in the National Highways Authority of India are already under public scrutiny. NBBC, a public sector company, is increasingly playing the role of “white knight” by taking over incomplete real estate projects on which private developers have reneged.
Rapid growth in infrastructure projects directly or indirectly owned by the government is a worry, which goes beyond the risk of significantly increasing quasi-sovereign borrowings. Public sector banks are a classic problem of runaway public sector growth using the strength of the government’s Budget, well beyond the capacity of the government to manage its assets well.
Sadly, far from decreasing its banking assets through private partnerships or outright sale, the government is papering over the problem by merging them to create public sector banking giants with better but hollowed out, aggregate balance sheets. In doing so, we are following the oil sector “reform” model from Modi 1.0. Have any financial or economic advantages emerged from merging HPCL with ONGC? Such financial juggling reeks of desperation, not a plan for revival or growth.
A cyclical downturn can be countered. Slashing the exorbitant GST rates for price-sensitive goods and services is a no-brainer. Every two percentage point fall in the GDP, as today, wipes out '200 billion in annual tax receipts for the states and the Union government.
But there is no interlocutor, with the necessary political clout, available to lead this hairy discussion in the GST Council and close the deal quickly. Home minister Amit Shah, with his hard negotiation skills and political sagacity, would be ideal. Unfortunately, he is otherwise engaged.
When the going gets tough, the best must get going. In today’s politically ravaged scenario, Modi 2.0 is the best that we have got. But will it please get going?
