Economy
3 Years of Modi Sarkar: Laying the Ground?
In the polarised times that we live in, an assessment of three years of the Narendra Modi government is best reflected by two extreme hashtags --#TeenSaalBemisal and #3FailedYears. What you see depends on where you stand on the ideology front, with little room for nuance.
 
For those in the Bemisal camp, the Sensex is at an all-time high and the many statutes and ordinances signal a return of big reforms, although they are still to deliver actual results. Much to the chagrin of the government’s chief economic advisor, the rating agencies are not convinced. Fitch refused to upgrade India’s rating from BBB-, the lowest investment grade rating. It cited India’s weak fiscal position and poor performance on the World Bank’s ‘Ease of Doing Business’ front on which India ranked a low 130 in June 2016. Mr Modi had a target to get India into the top 50. It fared worse on several other counts.
 
On the other hand, Modi Sarkar appears to have done well on the public approval front. A survey conducted by Local Circles, a citizen engagement platform, which covered 200 cities and towns, said that 61% of respondents thought the government had met public expectations and 17% said it exceeded them (1 percentage point less than last year). Significantly though, this is not an improvement over last year. In fact, the percentage of people disappointed with the government rose to 39% (up 3 percentage points). Also, a massive 69% felt that elected representatives were not engaging with their constituents or addressing local issues. This could affect the Bharitiya Janata Party (BJP) if there is any dip in the prime minister’s (PM’s) personal popularity.
 
The most positive thing one could say about Mr Modi’s third year is that his government has done the groundwork required for reform. Most infrastructure ministries seem to be hard at work (roads, railways and power), never mind that they don’t engage with the people; this tends to make their actions seem rather authoritarian. More importantly, there is no major case of corruption against the PM or any of his senior ministers. 
 
The government has also been lucky. Crude oil price has been low for two years and, by not passing on the benefits of low global oil prices to the people, it is in a position to fund expenditure. A good monsoon and a bumper harvest has lowered inflation (5%) substantially, allowing interest rates to drop, and the economy has continued to grow at 7%, despite a huge drop in credit off-take (RBI data shows that credit growth halved in 2015-16 to 5.08% compared to the previous year’s) and economic disruption caused by demonetisation.
 
Among the positives, DBTS (direct benefits transfer scheme) is perceived as a success. And it has certainly worked for cooking  gas cylinders, which is a relatively easy achievement. There isn’t enough information on whether it is working for other benefits such as food subsidy, insurance and pension, for poor people in remote villages.
 
The government has also done well to crack down on things like the price of stents (for heart patients) and is pushing doctors to prescribe generics. The passing of the Real Estate Regulation Act (RERA) is a big step. The powerful builder lobby had scuttled the creation of a housing regulator for well over a decade. RERA, finally, holds out the hope of transparency, better regulation and formal protection to home-buyers, even if it takes some time to deliver results. 
 
On the flip side, demonetisation of currency remains both a mystery and a miracle. That a large, populous and poor country like India bore the enormous hardship with stoic acceptance and supported the government’s claim of cleaning up black money will probably be the subject of socio-economic research. The pain, disruption and losses suffered were real, while the much touted benefits, such as reduction in corruption, end to Naxal and cross-border terrorism have proved false. We don’t even know how many notes came back to the Reserve Bank of India (RBI). 
 
Many hyped up schemes such as Digital India, Make in India, Start Up India, Stand Up India and Swachh Bharat have been more talk and less action. Even Mudra loans are no longer discussed. In several key areas, we have a bunch of yojanas (schemes), statutes and ordinances that need to deliver results very quickly. The two biggest issues confronting the government in the coming year are the massive bad loans of banks and the rollout of the Goods and Services Tax. Let us look at what is at stake here. 
 
Bad Loans: The total stressed assets of public sector banks (PSBs) were at Rs6.5 lakh crore in December 2016. According to Care Ratings, since March 2016, the NPAs (non-performing assets) of these banks have continued to rise by Rs50,000 crore in the next four quarters till March 2017. The government’s biggest weakness in the past three years has been a refusal to address this issue. 
 
The initial response was gimmicky actions such as holding ‘Gyan Sangams’ and setting up a Bank Board Bureau (BBB) which was not allowed to function. Appointing the right people to top jobs at banks was crucial, but many banks remained headless. PSBs have also been kept busy with government schemes like opening Jan Dhan accounts and then handling the massive demonetisation exercise, with no time for their core banking activity of lending and loan recovery. This only exacerbated the bad loans issue.
 

I believe that banks have been tacitly allowed to make up for their costs by picking depositors’ pockets through the levy of a series of unconscionable charges. It is exactly in line with the government increasing taxes on petrol and diesel, to offset every fall in global oil prices. But now, depositors have smartened up and are furious. The Insolvency and Bankruptcy Act (IBA) and an ordinance amending the Banking Regulation Act to tackle bad loans are the government’s newest solutions to the bad loan problem. But this cannot work in isolation.  
 
NPAs will go down only when banks are allowed to make big write-offs and reschedule loans. This will happen under the direction of RBI, or committees appointed by it; but write-offs to big corporate defaulters are bound to be controversial with the public. Worse, smaller banks will take another big hit on profits and will need a huge bailout from the exchequer, at taxpayers’ expense, to meet capital adequacy requirement. Fitch said Indian banks need around $90 billion (equivalent) fresh capital by 2019 to meet Basel III standards and government-owned banks account for around 80% of that.
 
Long-term solutions, such as bank mergers or privatisation, will meet with huge employee resistance and cause disruption and strikes. The government has to work on appointing dynamic bank chairmen, give them full autonomy and make them accountable for their actions. Unfortunately, the Modi government seems unable to take this easier route.
 
Goods and Services Tax (GST): The other big disruption that the nation has to brace for is the introduction of GST in July, just before the festive season kicks off. It is touted as the most significant tax reform since independence. But the multiple rates of GST, multiple registration requirements (in various states) and repeated online filings (39 online filings per year even by tiny businesses, says senior advocate Arvind Datar) have led to serious worries about the pain that is going to be unleashed in the roll-out process. The government has refused to start with a pilot project for select goods or to postpone the launch, even though it is still in the process of reorganising its various tax departments (sales tax and excise) into a single infrastructure. If the Modi government successfully navigates the bad loans and the GST rollout, then the economy will hit high growth rates, especially since the government has stepped up public infrastructure spending. 

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COMMENTS

akskot

3 weeks ago

tHOugh agree with the broad sentiment of the article....Insolvency/bankruptcy act...Benami Act...will add to the cleaning process ...the momentum should be increased and punishment process should be ruthless and immediate..and also the black money lying in Panama ...unless that is brought back like advocated by Jethmalani....the real significant & substantial black money will always stay out of the system and INDIA...so that should be speeded up.....before 2019 elections and we have a deal making USA president in Donald trump...who can help us in returning the black money lying abroad...if India....does a deal--(create jobs in USA or whatever seems good to him)..but this is essential...otherwise it remain only a jhoomla or pipe dream....Secondly which is the most important....Job creation at a massive rate otherwise the demographic dividend will become a curse...and will slow down the economy and with no effective demand in the economy and the ppl with no jobs will enter unlawful areas....these r the 2 areas which need immediate/emergency attention....and yes senior citizens of this country which is a substantial part of the population should be given handsome saving instruments in their sunset years...which is the least they can expect...when there is no social security concept still in INDIA...and connected to this take healthcare seriously not just for Senior Citizens but for the whole general population...where the healthcare costs r spiraling out of reach for the big chunk of our common man...and also do a surgical strike on corporate run money making healthcare set ups...where the exposes done by the media....have brought the spotlight on them ...and how also negligent medical care and deaths because of these have become commonplace ...and hence strict financial compensation should be made so that corporate/non corporate hospitals take the patient care as Seriously as should be taken...and since INDIA is becoming a mammoth Consumer/consuming class Country....class action legal suits should be introduced via both civil/criminal/consumer acts thru parliament covering even ecommerce companies since its a big part of the retail story...so just like in developed countries....financial compensation should be high thru class action legal suits...as mr.Arun Jaitley Union Finance minister had mentioned about introducing class action legal suits....a.l.a...U.S.A/Europe system...because also the e-commerce biz is assuming a big size of the economy and consumers need to have a effective financial deterrent against them... and fastest way possible...thats for now...We r with u moneylife...continue your tirade for the financial welfare of the common Indians..!!! :Sucheta Dalal...i including my father who is 79...ar a reader/follower/FAN since your articles used to appear in TiMES OF INDIA ..mUMBAI EDITITON...biz page...!! Thanx...and would like to meet u...in person...Akshay K

REPLY

Govinda Warrier

In Reply to akskot 3 weeks ago

Issues raised are all important and very relevant. Social Security related suggestions need to be taken seriously by policy makers. We have dismantled existing pension systems and are even thinking of diluting provisions for retired life now available through Contributory PF Scheme. The National Pension System is in effect No Pension Scheme and I've written about this in detail in articles published at moneylife.in

Dhiren

1 month ago

Modi is lucky that he has no worthy Opposition to face.Had there been a National leader of Indira Gandhi's calibre, Modi would have found it difficult to justify his various policy decisions .

sharafuddeen

1 month ago

The analysis is o.k. to agree. But Modi govt. has not touched the parallel economy which is the curse of the nation. Honesty vanished to be a virtue long ago from the society. Efficiency got meadured with lakhs one make. Double entry accounting principles must be tought every citizen from primary class to enable the individual to understand & appreciate the economic implication of every human activity, be it worship of God(all?)giving charity, pocket money to children etc. Modi sarkar will do great national ( or human) service if actions are taken to study why the gap in pay is so wide in India compared to many other civilisations. These actions will not attract public interest.

Suketu Shah

1 month ago

Wonderful reading.We need a man like Vinod Rai to fix India banks but anti-Modi camp is keeping him constantly busy with cricket.Now they are treating a coach who has won 10/13 tests last 1 yr(India's best coach ever) last 1 yr as an option and such nonsense.

Peter Menon

1 month ago

Mr. Modi is a victim of his own publicity machine. He has the Internet wrapped up tight with e-bhakts continuously praising each government move, regardless if they bear fruit or not. Mr. Modi has now started believing his own media machine and lost touch with reality. The influence of the Hindutva extreme on Government policy is also a very troubling reality. We are in danger of losing the secular character of our polity. The new GST with 37 annual filings is a typical case of More Government and less Governance. Mr. Modi has truly lost his way :((

PRAKASH D N

1 month ago

PSB's NPA needs to be addressed on a priority as growth of the economy depends on it. Merely empowering RBI will not serve any purpose. Creation of Bad Bank is a bad idea as it allows PSBs to shift the problem. PSBs knows how to recover, what is needed is political will to face the powerful. Govt.s efforts as rightly pointed out was only gimmick. There is need to identify honest task masters at the top of PSBs. PSBs are suffering from manpower shortage which is ignored in the name of technology. Addressing this will also help the Govt. to generate jobs.

All said and done, this Govt. has shown its honest intentions to implement its promises. This is why it still carries public faith.

Mahesh S Bhatt

1 month ago

Ajit Pawar 21000 cr no follow up/Chaggan Bhujbal 8600 cr in jail Sharad Pawar Padma Vibhushan against loss of BCCI post.
Visits Baramati and not Matoshree
Mera Bharat Modi Mahan

Mahesh S Bhatt

1 month ago

Modibhaiya couldnot find single MLA out of 325 elected & got Yogi from LS.
Intelligent Parikkar IIT/IIM downgraded to CM from Defence Ministry
No update in numbers of Demonetization since Jan 17 last count was 14lac crore collected.
Maligning Mamta/Shivsena/Congress/Lalu/Yadav/Mayawati etal and continues cool corrupt ways as Congress under radar.
USA/UK trips resulted in increase in VISA fees/reduction plans for H1 B /Infy Cognizant to recruit 10000 US residents
China enigma continues/Pak n Kashmir aggressive best
Land Reform Ordinance failed twice
Diverting attention from Economy Jobs to Swach Bharat / Sauchalaya
Vijay Mallaya escaped cooly and now CBI extradication
Only 5% surcharge reduction on Income Tax in 2017 budget slabs for working class ie Rs 12500 only against 5% doctored inflation every year
5 crore Suit auction bought by Gujrati?? No enquiry calmly broadcasted nuisance
Using Vinod Rai in IPL to see matches but allowing Ambani et al fixing.
Appearing Jio Ad & Mukesh Ambani fined Rs 500/Also recently a jeweller used PM for CSR Hospital in Gujrat
Illiterate Smriti Education Minister now Textile God Bless both Ministries
Jaitley busy fighting Kejri after charging 7000/day rental charges for printer at Delhi Cricket Association should be called straight & not CROOK?Another 10 crore defamation
Railways great transformation under Prabhu Highways not seen /no pics only news.
God Bless good political victories /poor economic sense Amen Mahesh Bhatt

B. Yerram Raju

1 month ago

There is glaring gap between assertion and action that needs to be bridged. Over a lakh core rupees seem to have been spent on farm sector but the farmers' suicides did not end. Farmers produced as promised but government failed them on prices. Incomes dipped deeper. Insurance did not prove beneficial. This large scale employment sector is struggling to grow in income uncertainty looking northwards. Let the agricultural market yards be rid of market agents and aggregation holding the key to trending prices take place at the farmers' and village level and let all the AMYs be fully computerised from entry of produce to farmer getting credit into his account.
MSMEs, untiringly referred as the biggest employers suffered the cascading effect of large scale enterprises landing in NPAs. Public praise and private acrimony, bank apathy represent the voice of the policy implementation. This needs immediate correction. Instead of 220 schemes of MSME Ministry reaching 20 enterprises, let 20 schemes reach 220 enterprises. The Ministry would do well to deliver the schemes in conjunction with the States. Companies Act 2013 requires still two addresses for residence proof of the founder directors for registration and one of them should be either electricity or landline bill!! The founder director may be living in the house standing in the name of his wife and the Bill obviously does not have the residence address. Otherwise they require Passport as second verification. This is in addition to the mandated PAN,and AADHAR.This is Ease of Doing Business in India.

Anand Vaidya

1 month ago

Quote: "Many hyped up schemes such as Digital India, Make in India, Start Up India, Stand Up India and Swachh Bharat have been more talk and less action."

While I agree mostly with your article, I have to disagree with the above statement. Certainly, for the first time, cleanliness has become a big issue and full marks to our PM for bringing unclean environs into sharp focus. This, after 70+ years of absolutely no hope of any improvement in cleanliness standards, is a big achievement. Modi has certainly raised the awareness and he expects people to act. (Probably he realizes that municipalities are gone cases)
Are you aware that volunteers are cleaning public places? RSS volunteers have cleaned temples, ponds, hospitals etc. By holding Swachh Sarveskan, now towns and cities are competing to sort their garbage, focus on cleanliness etc.

But certainly the local body zombies need to be whipped sharply to get their act together and actually start working....

ksrao

1 month ago

The tenor of a ruler can be easily found out by observing what he does in his first few months of power. Pr Trump is an example. PM Modi is good at coining nice slogans. Still, let us hope that he will not stop with the slogans but will change his style of thinking and functioning and will embark on a really effective programmes for tackling the country's problems. Note ban, glorified by the high-sounding name of demonetisation, has achieved nothing worthwhile and Modi knows that he and his govt have taken a hasty step, taking the country back to the original point through shock treatment. Let us hope he and his ministers will now tackle the real problems effectively.

Ralph Rau

1 month ago

Very happy to see execution and implementation of roads and power. Railways will take time. UPA II had become paralysed after ministers were jailed for corruption.

Very happy to see the government is implementing or continuing the plans of UPA government like MNREGA and Direct Benefits link to Adhaar. It is unfortunate that Adhaar is now being used as a tight collar to leash citizens who are human beings.

Let us hope that mass unemployment does not derail all the achievements. The situation in IT field is quite alarming although this is the fault of low end back-office work instead of pioneering work like Google and Samsung.

Felix A Fernandes

1 month ago

No mention of the biggest worry for Indians i.e. reduction in jobs instaed of generating millions of jobs. Otherwise a balanced review.

REPLY

Kalpesh Shah

In Reply to Felix A Fernandes 1 month ago

Dont get me wrong. We should get out of the thinking that it is govt's job to create jobs. They can act as facilitators/enablers or non-blockers, but not creators.

Govinda Warrier

1 month ago

Interesting analysis. We need not worry too much about external rating agencies giving a better or worse rating for India as they didn't help us in good times, they didn't support us in adversity. When we didn't have money, we carried tonnes of solid gold to UK to pledge (I think the gold is still in UK vaults, though no borrowings are outstanding!). We need not worry too much about RBI's accounting of SBNs returned, anyway the central bank will tell us more about it in its Annual Report 2016-17 to be published in August 2017. At the moment, there's little to gossip about Modi's worries. Let's look forward to coming months when some new problems will emerge.

Heena Prabhakar

1 month ago

very good article enjoyed reading it.

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