Structural reforms are costing him political capital –
and the economy some amount of growth. Growth is down and in trouble because
cronyism will no longer help rescue firms in loan default to recover quickly;
there is no great advantage in remaining small or in the unorganised sector
after the advent of the goods and services tax (GST) and incentivisation for
formalisation of employment; the scope for speed money in transactions with
government is rapidly reducing; the digital push is forcing more and more small
businesses, even vegetable sellers and kirana
merchants, to accept non-cash payments or risk losing business; the real
estate sector, once the Gangotri of corruption and black money, is learning to
clean up its books, especially after the legislation of the Real Estate
Regulation Act (RERA); and corrupt businessmen, who once demanded the right to
hire and fire labour, are now finding that they themselves are being fired by
being pushed to the insolvency court, the National Company Law Tribunal. Some
of his schemes may have flopped or misfired, others may have met with
resounding success and yet others may be a work-in-progress in the second half
of 2019, but there is little doubt that the trajectory is set.
If someone were to ask Mr. Narendra Modi, at the end of his second term as Prime Minister in 2024, what is your Government’s lasting achievement, there could be many answers. It could be about poverty reduction, cutting down corruption and black money, taking the Indian economy to the $5 trillion level, improving ease of doing business rankings, or many such things. However, if one were to ask the same question at the end of first term and at the start of his second, one can reasonably assert this: no one has done more to clean up the system than Modi in India’s post-Independence history. The one running theme in almost all of Modi’s major actions and schemes has been structural reforms inside the system.
Narendra Modi has genuinely been for India, the Reformer
in chief. Probably biggest one since Independence. Structural changes add costs
to doing business in the short run, especially for those who were surviving by
feeding off the udders of a corrupt state. Now that those udders are drying up,
individuals and businesses have to adjust to the new realities. Growth will
revive once the mindset change occurs, and people see transparency and honesty
as better ways to do business. The Government’s structural clean-up strategy
can be broken up into three broad categories: physical clean-up of our natural
surroundings, financial clean-up of the banking and related ecosystems, and
transparent policies that prevent the build-up of more opportunities for
corruption and illegal wealth generation in future.
Physical Structural Clean-Ups
The most
obvious and costliest attempt at structural change of the physical environment
relates to the Swachh Bharat campaign. It started out as a general clean-up
exercise involving all public places, with political leaders showing up on TV
channels with brooms in hand, but the scheme’s parameters were quickly focused
on building toilets and making India open defecation-free (ODF). According to
the Swachh Bharat Mission portal, by the third week of July 2019, some 624
districts (out of 725) and 5.73 lakh villages had declared themselves open
defecation-free, thanks to the building of close to 10 crore household toilets,
not to speak of public conveniences. The next big deal in terms of cleaning up
the physical environment relates to a policy decision to incentivise cleaner
cooking fuels. Under the Ujjwala scheme, around 10 crore poor households
have been given gas connections and this has enabled an extension in cooking
gas connections from 55 per cent of households in 2014 to over 90 per cent as
in mid-2019.
The third physical change is in the Ganga, the holiest
and yet one of the dirtiest rivers in India. While plans to clean up India’s
most sacred river have been afoot since 1985, and the United Progressive
Alliance (UPA) government in 2011 launched the National Mission for Clean
Ganga, the river just got worse and worse. Till 2014, barely Rs 4,000 crore had
been spent. After NDA government restructured the project as Namami Gange,
the focus on stopping effluent inflows into the river, supplemented by
riverfront development and surface cleaning of the Ganga, is beginning to bear
some visible results. The ghats are being
spruced up, and even though the river is not yet fit for bathing, the 254
projects worth Rs 24,000 crore sanctioned for cleaning it up will start to bear
results a couple of years down the line. The clear gain is the political
commitment to clean up the river, and the build-up of public awareness on the
issue.
The focus on a clean-up of the physical environment
includes two other elements, one being the increasing emphasis on solar power,
and the other being the proposed move to gradually eliminate internal
combustion-driven automobiles, which use petrol and diesel, and replace them
with electric vehicles (EVs) by 2030. In solar, for the first time ever,
capacity additions outpaced other forms of power-generation in 2017. The
cumulative solar power capacity reached 20 GW that year. As far as automobiles
are concerned, in the initial phase, three-wheelers are to become fully
electric by 2023, and two-wheelers below 150 cc are to go fully electric by
2025. The automobile industry is kicking up a hell of a fuss over these stiff
deadlines, but the direction is clearly right. India’s urban air, now one of
the biggest causes of concern, will start getting cleaner after 2025. India’s
energy sources will get cleaner in the years ahead, but whether this will make
our air substantially cleaner or merely prevent it from getting worse depends
on how well the policy framework needed for cleaning up India’s air and water
works is backed by adequate funding.
Financial Structural Clean-Ups
The Modi
government’s financial clean-up act involves a handful of approaches. One is to
focus inwards, at government subsidy pay-outs to citizens to prevent leakages.
The second is to bring more and more people and businesses into the tax net by
extending the goods and services tax (GST). Third, the attempt is to put
fly-by-night shell companies to pasture. Fourth, the government is cleaning up
bank balance-sheets by both recapitalising them and by pushing defaulter
companies towards the bankruptcy courts, thus enabling recovery of some of the
money lent, faster. Fifth, it is going after economic fugitives who flee the
country after failing to pay up banks. And sixth, it has closed some of the tax
loopholes that allowed round-tripping of funds and gave unintended tax breaks
to investors bringing in money from abroad. Double-taxation agreements with
Mauritius, Cyprus and Singapore have already been reworked to enable this.
Clearly,
the most successful clean-up has been the extension of the direct benefits
transfer (DBT) scheme to more and more subsidies. At last count, the government
was running nearly 439 subsidy schemes, and direct payments to beneficiary bank
accounts are believed to have saved around 90 thousand crore every year,
according to former FM Arun Jaitley. For example, at the ground level, a simple
ruse like neem-coating of urea has reduced the diversion of this
highly-subsidised nitrogenous fertiliser to negligible amounts, and farmers no
longer find it a problem procuring the amounts they genuinely need.
The launch of GST in July 2017 may not have been the
smoothest of affairs, nor is the current tax structure optimal, with multiple
tax rates and exemptions that effectively allow some categories of taxpayers to
escape the net. But with over one crore registrations, and tax collections now
crossing Rs 1 lakh crore a month with some consistency, improved monitoring of
compliance will make it tougher to evade the tax net. As big GST payers get
input tax credits only if their suppliers are also GST payers, over time the
pressure to comply will become self-fulfilling. A related move involves
eliminating shell companies that are often used to evade tax. They are being
systematically weeded out. Last year, some 2.25 lakh shell companies which had
not filed tax returns for two years running were put under the scanner,
preparatory to deregistration and exit.
Some of the costs incurred in cleaning up have been
huge. Over the last two years, the Modi government has pumped in massive
amounts of capital into public sector banks. As at the end of March 2019, the
government had recapitalised them to the tune of nearly Rs 2 lakh crore, and
this year’s budget offers another dollop of Rs 70,000 crore – making it the
biggest balance-sheet clean-up drive in India’s 50-year-old public sector
banking history.
The
write-off of bad loans does not, however, mean relief for borrowers, who are
being taken to the cleaners by banks and other lenders. The Insolvency and
Bankruptcy Code (IBC) has been used like a blunt instrument to force corporate
defaulters to either pay up or lose their companies to new owners. Ever since
the IBC came into force in end-2016, some 1,858 cases of loan default were
admitted for resolution by March 2019. The most important gain is time for
recovery. Before the IBC came into being, the average time taken to resolve
bankruptcy cases was six years; after IBC this came down to 317 days. Before
the IBC came into being, the Insolvency and Bankruptcy Board of India (IBBI),
the body tasked with nurturing the new bankruptcy ecosystem, reckoned that
banks and lenders recovered roughly 22 per cent of their dues; after IBC this
recovery has gone up to 43 per cent. In 2018-19, banks recovered nearly Rs
70,000 crore from defaulting companies that ended up at the NCLT. This year, if
the Essar Steel, Bhushan Power and some more resolutions find fruition, similar
amounts could easily be recovered. The Fugitive Economic Offenders Bill, passed
in 2018, allows the government to take over the properties of absconders in
India. Under this law, Vijay Mallya has already been declared an economic
fugitive, and Nirav Modi and Mehul Choksi are fighting hard in Indian courts
through their lawyers to avoid having their assets taken over in India.
This must rank as one of the biggest clean-up successes
of NDA government under Mr. Modi, for lenders can exert pressure on borrowers
only if politicians do not pressure them to help out crony businessmen.
Internal
Structural Clean-Ups
The
third prong of the Modi strategy – to gradually eliminate opportunities for
corruption by increasing transparency in government procurements and allotment
of scarce natural resources through auctions – is now slowly becoming the norm.
Coal mines and spectrum have been auctioned in recent years only through an
auction process, and increasingly government purchases are being made online
through a cashless, paperless and contact-less process. The last is most
important, for corruption happens only when sellers have to contact the
government department for payments on supplies made.
According
to an Economic Times report
on GeM (the Government e-Marketplace), the government’s e-procurement platform
now has 2.5 lakh vendors and 37,000 buyers from different government
departments and public sector undertakings, offering over 10 lakh products and
12,798 services. Over the last three years since 2016, transactions worth Rs
32,000 crore went through GeM, and the target for 2019-20 is Rs 1 lakh crore. We are
talking of an Amazon or Alibaba being built quietly, and no one has even
noticed its potential to revolutionise e-procurement and reduce corruption and
speed money payments to buyers. Between auctions to sell scarce national
resources like spectrum and coal mines, and GeM, we are talking about a
complete clean-up of the essential process of government interactions with
sellers.
But what does one do with the vice-like grip of the
bureaucracy, which is often a key source of corruption and non-transparent
functioning? Given Mr. Modi’s dependence on the bureaucracy to deliver on his
social and economic goals, how can any clean-up work if the people managing the
show have questionable antecedents or poor efficiency levels? Government has
been moving steadily here as well. In the last five years, the government has
quietly eased out more than 300 bureaucrats – an annual rate of over 60 – using
his power to prematurely retire them. After scanning the service records of
more than 36,000 Group A and 82,000 Group B officers, 312 of them were retired
prematurely. Simultaneously, in the last financial year, the government began
lateral inductions to the bureaucracy, with nine experts being given five-year
contracts at the level of joint secretary. This year, some 40 more could be
inducted at levels of joint secretary and below.
Government under Mr. Modi is clearly moving slowly but surely
to bring about structural reforms in the house even as he focuses on cleaning
up the rest of the country. In everything we must not forget that structural
reforms are ruthless, costs are borne upfront meanwhile rewards come much
later. Government of India, under Mr. Modi, is ready to show the spine much similar
to how Mr. Narsimha Rao did. Of course, that was under obligation and this is
very much by choice!
