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.