Do it yourself: UPA

Showing posts with label UPA. Show all posts

Thursday, May 23, 2024

What if? - Part 4

The ongoing celebrations of the Festival of Democracy shall end on 4^th June 2024, with the announcement of election results for the 18^th Lok Sabha. In the past two months, the market narrative in India has pivoted around the election outcome. Even though 4QFY24 earnings did impact the performance of specific stocks materially; speculation about the election results has mostly dominated the sentiments.

Once the elections are over and the contours of the new government are clear in the first fortnight of June, the focus will shift to the presentation of a full budget for the current financial year. To keep the tradition, only an interim budget (vote on account) for FY25 was presented in February 2024 to run the government till a new government is formed for the next five years. A final budget is expected to be presented by the new government in the last week of July 2024.

Some media commentators and market experts have attempted to sketch the final budget based on the election speeches and media reporting of the party’s manifestos. Fears have been expressed that in the event of a non-BJP government assuming power at the center, the pace and direction of economic growth and development may slow down as resources are diverted to fulfill the populist agenda of opposition parties. In a non-BJP regime, the budget allocation for capital expenditure and infrastructure development may diminish materially.

I find that this narrative suffers excessively from an intrinsic fear of change. I could not find anything in the manifestos of opposition parties, mainly Congress, that would suggest any change in the focus on infrastructure development and faster economic growth. Most social welfare schemes promised in the manifesto aim to reduce poverty and achieve equitable growth. Almost all these schemes are in vogue in many states and at the central level. A set of similar schemes is also promised in the BJP manifesto also.

Technically speaking, market participants should rejoice the Congress manifesto, as it promises a much larger amount of cash in the hands of consumers. This could help put the missing piece of Indian growth, viz., consumption, in place. Provisions like statutory guarantee for MSP can also boost the farm input sector. Consumers and Chemicals are two major underperforming sectors of the market.

Besides, if a non-BJP government assumes power at the center, the market participants may again begin to speculate about tax exemption for the LTCG and dividends, etc. On the other hand, several BJP leaders and think tank members have spoken about the need for estate duty (inheritance tax) in the recent past. This has been a fear factor in pre-budget analysis since 2017. The finance ministers have defended LTCG taxation and dividend tax. In the past 10 years, effective personal taxation rates have remained high and the proposed Direct Tax Code is expected to remove more exemptions.

Insofar as fiscal profligacy is concerned, there is no evidence that the UPA government (2004-2014) indulged in fiscal indiscipline during their regime. Center’s fiscal deficit did jump from 2.54% in FY06 to 6.46% in FY09 due to the stimulus necessitated by the global financial crisis. However, it was gradually brought down to below 4% by FY15. This was despite welfare schemes like MNREGA, fuel subsidies, etc. Similarly, during the NDA regime, the center’s fiscal deficit jumped to 9.17% in FY20 and has been on the mend since then. This is despite the implementation of Food Security, cash payout to farmers, and many other welfare schemes.

There is no empirical evidence to support the fears of fiscal indiscipline by a non-BJP government.

I find that most schemes and programs promised by NDA and opposition INDIA groups would be implemented, if at all, gradually and mostly by merging and optimizing existing schemes at the state and center levels. The fiscal burden will come only incrementally with the equivalent or higher rise in nominal GDP. The fear of likely fiscal slippages may therefore be unfounded.

Logically, the analysts should be looking forward to a stock market rally in the short term if a non-BJP government is formed at the center. Though, it may not actually happen. We may see a knee-jerk reaction down and then a recovery, after the full budget is presented in July.

In case of a BJP victory, we may see a euphoric move up and then a corrective move down as the budget may not enthuse the market participants and earnings fail to justify some lofty valuations.

In either case, after July 2024, the markets shall be guided by the earnings, macro conditions, and global developments, rather than the outcome of elections.

So to answer What if? – I would say Nothing, just chill.

Also read

What if? - Part 1

What if? - Part 2

What if? - Part 3

Thursday, May 16, 2024

What if? – Part 3

Verdict 2024: Market Implications

An analysis of the past 30 years of market trends provides no evidence to suggest that elections, the form of government, or the strength of a particular party in the parliament impacts the market performance significantly. However, it is common to see higher volatility during or around elections.

Insofar as the fear of a multi-party coalition or a fractured mandate is concerned, I believe, the investors should be relieved by the prospects of a true coalition coming to power. Because, in the post-independence era, the best periods for the Indian economy have been those when a “coalition” government was in power.

It is however important to note that by “coalition” I do not mean just a multi-party government. In my view, coalition government means where people with diverging socio-economic policies jointly participate in a government. Empirical evidence suggests that such coalition governments in India have agreed on a common minimum agenda and focused on executing the same, avoiding conflicts and logjams.

The first cabinet of India post-independence had R. K. Shanmukham Shetty (Finance), Shyama Prasad Mukherjee (Industries) B. R. Ambedkar (Law) and Jagjiwan Ram (Labor). These people did not subscribe to the Nehruvian socio-economic agenda, but we got a robust socio-economic framework. The singular governments of Nehru (post BRA, RML, SPM - 1956 and 1961), Indira Gandhi (1971, 1980), Rajiv Gandhi (1984) are not known for good governance or transformative socio-economic reforms.

Morarji Desai (1977 – FERA dilution, Gandhian socialism), V. P. Singh (1989 – tax reforms, social justice), Chandershekhar (1990 – disinvestment, fiscal reforms), PV Narsingh Rao (1991 - liberalization, delicensing), Devegoda/IK Gujaral (1996 – dream budget), Vajpayee (1998, 1999 – divestment, infra development) and Manmohan Singh (2004 – RTI, RTE, UIDAI, Right to Food, Right to Healthcare, MNREGA, Civil Nuclear Deal, FDI in retail & pension etc.) were all coalition governments. These governments are all remembered for socio-economic reforms causing fundamental changes in the socio-economic milieu of the country. None of these governments is remembered for non-governance, anti-market policies or anti-business stance.

The incumbent government has taken three major initiatives in the past 10 years, that have helped Indian equity markets:

(a) Abolition of 86% of currency notes in circulation in November 2016. This measure is popularly believed to have benefitted the large organized sector businesses (mostly listed) at the cost of smaller and marginal businesses (mostly unlisted).

(b) Implementation of GST from July 2017. This is also popularly believed to have enhanced the competitiveness of large businesses (mostly listed) at the cost of smaller unorganized and non-compliant businesses.

However, the gains from these initiatives have not been true to the expectations due to the unpredictability that crept into the policy framework and sub-optimal execution.

Thus, in my view, the policy risks in India from the political side are low and not to be much bothered about. The key risk is execution and this risk has little to do with the form and constitution of the government of the day.

Insofar as the market performance during coalition or minority governments is concerned, there is no evidence that markets have performed poorly due to the form or constitution of government.

2024: Market after elections

Regardless of election results, the markets may remain volatile and directionless until a government is formed.

Bonds: The bond market will be guided by the full budget for FY25 that may be presented in the last week of July 2024. A significant violation of fiscal discipline, and disappointment in the inclusion of Indian bonds in global indices may lead to a sell-off. Else, we may see a stable bond market. A good monsoon, as forecasted by IMD and other agencies, may brighten the outlook on inflation, and a softer RBI monetary policy stance.

Equity: The corporate earnings for 4QFY24 have been below the consensus estimates. This has resulted in downgrades in FY25 and FY26 earnings forecasts. If the trend continues in 1QFY25, we may see further earnings downgrades and de-rating of the market in general.

A BJP victory, as widely expected, may extend the rally till mid-July. After that, the market direction would be determined by the budget proposals and earnings outlook.

In a less likely situation of an INDIA government, we may see a knee-jerk move downward that may get reversed in the next few weeks. After that, the market direction would be determined by budget proposals and earnings outlook. In this case, however, we may see a material sectoral rotation towards consumption, given the INDIA promise to afford significant cash in the hands of consumers.

In any case, the impact of election results may not last beyond July 2024. The strategy should therefore be to actively look for opportunities (to buy or sell) in case of any material rise or fall in prices on or after 4^th June.

Wednesday, May 15, 2024

What if? – Part 2

“Did you notice that no politician takes moral responsibility for any wrong these days!”

In the past two months, many readers have asked about my expectations of the outcome of the ongoing general elections and the likely impact of it on the Indian economy and financial markets. I am glad to offer my opinion, with the rider that I am an independent observer of Indian politics and have no affiliation or inclination towards any particular political party or group thereof.

Economic impact

I believe that in India economic policies, and therefore financial markets, are politics agnostic. I do not see the outcome of general elections impacting the Indian economy in any significant manner.

A study of the history of Indian politics would suggest that, unlike the Western democracies, only an abysmal minority of Indian voters are strongly committed to a political or socio-economic ideology. Contemporary issues, personalities, and election promises usually dominate the political discourse in India. Economic issues raised during elections are mostly confined to the slogan of poverty alleviation and handouts to the voters. Unfortunately, no political party has taken the issue of poverty alleviation seriously. Therefore, no one has bothered even to outline a conceptual or ideological framework for solving this problem.

Ideologically, in the early days, the Congress Party abandoned the most acceptable and perhaps most suitable Gandhian Socialism in favor of Nehruvian Socialism - a poorly mixed concoction of Leninist central planning (central ownership and management of resources and businesses) and British colonial legacy (discretionary patronage to the faithful and loyal). The model was certainly at cross-purpose with the constitutional federal structure. Poverty, poor governance, and corruption were natural off-springs of this system.

BJP started with Deen Dayal Updhaya's Integral Humanism. However, in the 1990s it briefly adopted Gandhian Socialism (which is not too far moved from Integral Humanism) as the principal doctrine. The present leadership has, however, mostly followed a poorly mixed concoction of Leninist socialism and the Laissez-faire model used by some developed economies principally the USA.

Politically leadership preaches "Human Being" as the fulcrum of policy making. Whereas the executive is more focused on "Business" and "Macroeconomics" as the central theme. The conflict is for everyone to see. The consequence is slower and inequitable growth.

Until the mid-1980s, the people at the left end of the spectrum exercised significant sway at the bottom of the pyramid in Indian society since independence. They controlled most of the labor unions. Though divided between Marx, Lenin, and Mao they still were the preferred choice of landless, oppressed, and intelligentsia. There was a time when being poor, intelligent (economist, thinker, poet), or rebellious meant being communist.

Things however began to change in the late 1980s, after dismantling of the USSR and the German wall. The Lenin and Marx were relegated to the history lessons. The economic reforms initiated by Deng Xiaoping in China further pushed back the traditional Marxists.

Insofar as the socialist parties occupying the left of the center space in Indian politics are concerned, they deserted both Lohia and his ideologue Gandhi as soon as they came into power. Degenerated into motley feudal, they show little commitment or preference to any specific economic idea.

As I have been reiterating rather frequently, that the governments in the past 40 years have mostly adopted similar socio-economic policies consistently irrespective of their form or constitution.

The Ctrl C + Ctrl V has been the most preferred practice in the formulation of most government policies and programs, with some semantic changes to give it a different hue.

For example, consider the following:

1. The process of meaningful tax reforms was started by the then finance minister V. P. Singh (Congress 1984-89) by rationalizing the tax slabs, lowering maximum marginal tax rates substantially, rationalizing wealth tax and introducing CENVAT. The recommendations of Raja J. Chelliah Committee (1991-93) on tax reforms constituted by the government (Congress 1991-96) have since formed the basis of tax reforms in India. All successive governments have implemented these recommendations. No government has sought to reverse or alter the process started by the Congress government (1984-89). These recommendations formed the core of the much awaited Direct Tax Code. The origin of the tax proposal like lower tax rate with lesser exemptions and no wealth tax could also be traced to that.

Committees formed under the chairmanship of other members of the Raja Chelliah Committee like Govinda Rao, Partha Shome and Vijay Kelkar, etc. subsequently updated the recommendations to provide further impetus to the entire process of tax reforms in the country.

It was the Finance Minister of H. D. Devegoda led United Front government who presented the most talked about "dream budget".

2. The recommendations of the Narsimhan Committee (1991-92) appointed by Dr. Manmohan Singh, the then finance minister in the Congress government, have largely formed the basis of financial and banking sector reforms in the country. Most successive governments have implemented the recommendations consistently. P. Chidambram, the then finance minister in the United Front government (1998) had re-appointed the Narsimham Committee to make recommendations about the second-generation banking sector reforms. The report was submitted in 1999 to the NDA government which accepted the recommendations. However, almost all governments have failed to build a wider consensus on these recommendations and have only partially implemented them. But acceptance and rejection have been very consistent irrespective of the form and constitution of govt.

3. The BJP led NDA government enacted the Fiscal Responsibility and Budget Management Act (FRBMA) in 2003. The arch-rival Congress led UPA-I government implemented the same in 2004 in letter and spirit. This still forms the basis of fiscal discipline at central and state levels, though implementation was suspended in 2009 in the wake of the global crisis and again in 2020 due to COVID-19 stimulus. The incumbent govt. has committed to achieving the targets in the next two years.

4. The minority government of Chandrashekhar introduced a disinvestment policy in 1991. Every successive government since then has accepted the policy in principle. They have tried to incorporate disinvestment policy into the evolving economic model. However, they have consistently failed to implement the policy in the right spirit. None has achieved the disinvestment targets set in the respective budgets.

Prime Minister A. B. Vajpayee took it further by divesting many government monopolies like coal, power, roads, ports, airports, telecommunication, insurance, etc. Subsequent governments added to it by allowing private players in sectors like pension, defense production, etc. No government has sought to reverse the decisions of the earlier governments.

5. A single national market (GST), as a desirable idea, was conceived long ago. Many governments deliberated and developed the idea. The incumbent government finally implemented it in 2017, when the infrastructure and logistics considered necessary for rolling out GST reached a reasonable stage.

6. Programs such as cleaning the holy rivers of Ganga & Yamuna and provision of toilets in every home have been accorded priority by all successive governments.

7. One of the key areas of corruption in public life has been the executive's right to allocate natural resources for commercial exploitation. The Supreme Court effectively curbed that right in its judgment in the allotment of 2G spectrum case.

An auction-based transparent regime is the outcome of the court-directed process, which is mostly irreversible and therefore party agnostic.

8. The UPA government created enabling infrastructure for the digitalization of the economy through UIDAI, NPCI, etc. The subsequent NDA governments used this enabling infrastructure for the massive development of the digital transaction ecosystem.

9. The NDA-1 government started the ambitious National High Development Program (NHDP) in 1998. The UPA government removed the obstacles in the implementation of this program through a remunerative and widely acceptable compensation and execution policy. The NDA-2 used it for accelerated construction of roads and highways, without seeking to change anything in UPA policy.

10. The UPA government started a new practice of lateral appointment of professionals by appointing Nandan Nilekani to head UIDAI. The later governments continued with this practice and appointed many professionals to head the NITI Aayog.

From the above-cited example, it is evident that the direction of policy-making has been mostly the same on most accounts during the past three decades. The difference lies in the execution.

It is pertinent to note that the governments led by P. V. Narasimha Rao’s and Atal Bihari Vajpayee made many historic departures from the past and took many new policy initiatives.

The end of the Nehru era's license, quota & permit raj, abolition of capital controls and introduction of LERMS, entry of private players in civil aviation, opening of the financial sector, etc. were some major path-breaking reforms introduced by P. V. Narasimha Rao government.

Divestment of major government monopolies like power, roads, wireless communication, ports, airports, insurance & hydrocarbons, focus on rural connectivity, deregulation of fuel pricing, and liberal FDI regime, etc., were the key new policy initiatives during the Vajpayee led NDA regime.

The 10 years of the UPA regime introduced a new paradigm in the Indian socio-economic milieu, viz., the Right-based Socio-Economic regime. Right to Work, Right to Food, Right to Education, Right to Information, Right to Health, etc. some of the ideas propagated in their regime.

Implementation of right-based entitlement has been patchy and questionable, but no one has so far challenged the approach. The incumbent government has sought to partly implement the Right to Health that was promised by UPA in the last few weeks of its regime, through a universal health insurance scheme in the union budget for FY19. The current government has also enhanced the Right to Food program.

The UPA government signed a civil nuclear deal with the US. This started a new era of India’s strategic partnerships with developed countries like the US, France, Germany, Japan, and Australia, etc. The incumbent NDA government has taken this further through multiple bilateral agreements for Free Trade and movement of capital and labor with many of these countries.

The change that we have seen in the past ten years of the incumbent government's regime is the dominance of market economists (against development & social economists before) in the consultative bodies of the incumbent government. This change in my view is the outcome of the change in the global positioning of the Indian economy and markets. There is nothing to suggest that a change in the government at the center would materially change this position in the near-term, unless international developments completely change the global balance of power and global market paradigm.

In short, the economic policy of India is still a work in progress. all governments in India in the past 40 years have made incremental improvements in the policy framework to make it congruent with the scale of economic development and changes in India's position in the global economic and strategic order.

…to continue tomorrow

Wednesday, October 18, 2023

Policy paralysis – UPA vs NDA-2

Continuing from yesterday…(see here)

In the enterprise world, new ideas or innovations are usually valued much higher than the ability to execute such ideas. I believe for a successful enterprise both ideation as well as execution are equally important. The question of execution would not arise if there is no idea to execute. Similarly, an idea, howsoever innovative and brilliant it is, would remain just a thought or piece of paper unless it is executed well. Nonetheless, since the idea is the starting point of any enterprise, the innovator deserves to get a relatively higher valuation.

Taking this further, in the realm of politics and governance, the two key components of good governance are:

(i) Conceiving, formulating, and instituting policies that would ensure inequitable, sustainable, and accelerated socio-economic development and growth.

(ii) Execution of instituted policies through a set of structured programs, efficient delivery modules, and effective & prompt review and corrective mechanisms.

I believe that the performance of any government must be evaluated on these two parameters.

As I mentioned yesterday (see here), I find that the previous UPA government under the leadership of Dr. Manmohan Singh scored excellently on the issue of conceiving, formulating, and instituting policies that would aid in achieving accelerated, sustainable, and equitable growth. A high rate of GDP growth, especially in light of the global financial crisis, and the challenges of running a government with the support of a large coalition comprising parties with divergent ideologies and agenda underlines the efficiency of execution. The policies not only helped the Indian economy navigate safely through the global financial crisis and a subsequent current account crisis; but also helped bring a record number of people out of poverty.

Now, if we were to assess the performance of the incumbent government under the leadership of Prime Minister Narendra Modi on these two parameters, I strongly believe that the current government has performed very well on the execution front. This government has definitely—

(i) Executed policies instituted by the preceding government like MNREGA, UIDAI, RTE, Food Security, DBT, financial inclusion, FDI in retail trade, infrastructure development etc. rather efficiently;

(ii) Devised good programs and delivery modules for the policies formulated during the last years of the UPA government like digitization payments, GST, Direct Tax Code, implementation of 14^th finance commission recommendations, etc.

(iii) Augmented many policies like Unique identity and digital payments brilliantly to exploit maximum benefits out of these policies.

This strong execution helped the Indian economy navigate through the Covid-19 pandemic and subsequent global slowdown very well. Despite all challenges, India remains the fastest-growing major economy in the world. The programs like Unified Payment Interface (UPI) have become extremely popular globally. Road network development is happening at an accelerated pace. Many large infrastructure projects that were stuck due to a variety of reasons are getting completed.

However, insofar as conceiving new ideas and policies is concerned the performance of the incumbent government is ordinary. In the past nine years hardly any new idea has been conceived and/or converted into policy and programs.

NITI Aayog – the Think Tank

One of the earliest policy decisions taken by Prime Minister Narendra Modi led government at the center was to disband the planning commission and constitute a new Commission to provide directional and policy inputs to the government.

The commission, named NITI Aayog, was formed through a resolution of the Union Cabinet on 1 January 2015. NITI Aayog is “the premier policy think tank of the Government of India, providing directional and policy inputs. Apart from designing long-term policies and programmes for the Government of India, NITI Aayog also provides relevant strategic and technical advice to the Centre, States, and Union Territories. NITI Aayog acts as the quintessential platform for the Government of India to bring States to act together in national interest and thereby foster cooperative federalism.”

A careful reading of the latest Annual Report (2022-23v) of the NITI Aayog suggests that the Aayog has focused more on the review and assessment function and less on thinking and policymaking function.

As per the report, the government has implemented only one noteworthy development policy namely Aspirational District Program (including Aspirational Block Program).

In the first five years of this program (2017-2022) “the programme has acted as a successful template of good and effective governance, Under this programme India’s 112 backward districts have shown remarkable progress across key sectors that matter to the people. The core strength of the programme is its focus on data driven governance that drives evidence-based policy interventions at the district-level. NITI Aayog monitors the 112 Aspirational districts on Key Performance Indicators (KPI) on a monthly basis. The KPIs are designed in a way that the input and process indicators are being evaluated so as to achieve desirable outputs and outcomes across major socio-economic themes such as health & nutrition, education, agriculture & water resources, financial inclusion & skill development, and basic infrastructure. The robust monitoring strategy has enabled the district administration to engage in cross-departmental reviews and thus drive convergence. The competition through the monthly release of delta ranks keeps the districts constantly motivated to improve the KPIs.”

The achievements under the National Monetization Pipeline programs and Production Linked Initiatives (which are restructured models of old policy initiatives) are below par.

Besides this, New Education Policy is under implementation and Integrated Health Policy is under consideration.

Mission LiFE – Lifestyle for Environment is mostly at the conception stage.

In my assessment, the incumbent government has in fact performed less than ordinary on the policymaking front, while scoring well on execution.

I shall be happy to receive views of the readers on this aspect.

Tuesday, June 27, 2023

Nine years of continuity and low growth

Last month the incumbent NDA government completed nine years in power with BJP having full majority in the Lok Sabha on its own. In the 2014 general election, it was after three decades (post the landslide win of the Congress party led by Rajiv Gandhi in 1984) that a single party (BJP) had secured over half the seats in the Lok Sabha. Obviously, the people had great hopes from the new government that has won their confidence on the promises of a corruption free regime with equal opportunities (Sabka Saath Sabka Vikas).

For the 5years (2014-2019) the Indian economy (Real GDP) grew at a CAGR of ~7.4%, slightly better than the CAGR of ~7.1% during the previous five-year term (2009-2014). In 2019, the BJP returned to power with an even larger majority. During the first four years of the current term, the Indian economy has grown at a CAGR of 3.1%, the slowest pace of growth achieved by any government in the post liberalization (1991) era.

The best growth trajectory was seen during UPA-1 tenure when the economy managed to grow at a CAGR of 8.52% (2004-09). This was perhaps the outcome of massive reforms implemented by the preceding NDA-1 government (1998-2004); in which monopolies of the government over the core sectors like power, mobile telecom, coal, roads, oil & gas, airports, ports, etc. were divested. NDA-1 also implemented massive investment-oriented policy initiatives like SEZ, NHDP, PMGSY, Missile & GPS development, UMPP, NELP, etc. that led to accelerated investment and growth in the following decade.

The UPA government (2004-2014) earnestly took forward the reforms initiated by the NDA-1. It substantially liberalized the FDI regime; signed the Civil Nuclear Deal to usher a new era of strategic partnership with NATO & NSG; and introduced the first universal basic income scheme in the form of MNREGA and food security scheme in the form of National Food Security Act 2013.

Most important, it laid the foundation of complete digitization of the Indian economy in the ensuing decades by creating robust platforms like UIDAI (Aadhar) and NPCI (UPI, Fastag etc.); and laying an aggressive roadmap for financial inclusion in the budget speech of FY11 in accordance with the recommendation of the Rangarajan committee (2008).

The financial inclusion roadmap required banks to reach 73,000 rural habitations with a population of over 2000 by March 2012, using information and communication technology-based models and banking intermediaries (Business Correspondents). RuPay – an Indian domestic debit card, introduced on 26 March 2012 by the NPCI was a key landmark in this journey. Basic Savings Bank Deposit Account (BSBDA) along with BC proved extremely successful in increasing the total number of banking touch points from ~67k in FY10 to 586k in FY16 (RBI Annual Report FY17). (BSBDA was rechristened as Jan Dhan Yojna- PMJDY with enhancement of scope to include some other financial services within its ambit.)

The UPA government also introduced The Constitution (115th Amendment) Bill, 2011 to implement a common nationwide GST based on Ajit Kelkar committee (year 2000) recommendations; though the bill could not be passed due to opposition from other parties. The UPA government also introduced The Real Estate Regulatory Authority (RERA) Bill in August 2013. The bill was referred to the standing committee of the parliament, which submitted its report after considering public comments in February 2014. The Bill therefore could not be passed during UPA-2 tenure.

It could be argued that sub-optimal performance of the economy in the past four years is primarily due to the impact of Covid-19 pandemic that shutdown the economy for almost 6 months in 2020. In my view, however, the argument could be accepted only as partially valid. Most previous regimes had also witnessed massive disruptions and displacements like the financial sector crisis (failure of UTI, ICICI, IDBI, ICICI etc.); Asian currency crisis (1997), global economic sanctions post 1998 nuclear tests; dotcom burst; global financial crisis (2008-2010); energy inflation due to wars in the Middle East Asia; banking crisis due to collapse of infrastructure sector that was used to stimulate the economy since 1998 with numerous unsustainable projects; political instability (three election in three years 1996-1998); Kargil War; incoherent political alliances (especially UF, NDA-1, UPA-1) etc. Despite all this, most governments could achieve a higher growth rate than what we have seen in 2019-2023.

It is evident from the pace of highway construction, digitization of the economy, financial inclusion, and extension of universal basic income schemes, etc., that the incumbent government has pursued the programs and policies initiated by the previous governments and continued to build upon the platforms created by his predecessors. Schemes like PLI have also set ambitious targets; even though the results so far have not been encouraging.

However, we have not seen any transformative policy initiative that can lend the necessary velocity to the economy to catapult it into a higher orbit. There is little progress in the areas of agriculture reforms, disinvestment etc. Fiscal sustainability has remained compromised, as the debt burden has continued to increase. The private capex has mostly remained evasive due poor demand conditions and risk averseness of banks. Though the situation has shown marked improvement in the past 15-18months. The price situation has remained volatile, mostly governed by external factors like global prices of commodities and weather conditions. There is little evidence to show that the government and/or RBI have any plan in place to control the volatility in prices.

In my view, however, the worst aspect of the current regime has been the failure to ensure adequate employment, especially in the manufacturing sector. More on this tomorrow.

Tuesday, March 22, 2022

Rome was not built in a day

I travelled to the Agra, Aligarh and Bareilly divisions of the state of Uttar Pradesh last week. Holi being the principal festival of these regions, it was the peak season of festivities in these areas. Since, in the past two years, the Covid pandemic impacted the festivities to a great extent; this year’s celebrations were particularly enthusiastic. A good sugarcane and bumper wheat crop added to the farmers’ delight. Poor realization for potatoes was a little dampener.

The elections to the state assembly have just concluded and the new government is yet to be formed. Both the principal political parties, the BJP and SP, have performed well in the elections. So the political leaders and workers were also seen celebrating with fervor.

Broadly, the aerial socio-economic view of the region appeared quite ebullient and promising.

There are few observations that I would like to share with the readers. These observations are relevant for understanding some popular political narratives, and more important, understanding the (un) relationship of politics and economics.

I have been travelling to Bareilly from Delhi for the past 25years, at least 4 times a year. In late 1990s, the distance of 260kms used to take 8 to 9 hours by road and more than 7 hrs by train in normal course. The highway was a single road (without a divider) and the train route was not electric. We had to pass through cities like Hapur, Moradabd, and Rampur. Crossing Ghaziabad district was a nightmare even till a few years ago. There were five railway crossings on the way. On a bad day, each crossing could take 30-40 minutes to cross. Travelling in daytime would mean 30-60minutes of time to cross Hapur and Moradabad cities. On the way we had to cross the river Ganges at Garh Mukteshwar, which had a narrow bridge, barely sufficient for two buses to cross each other. One overladen truck, bullock cart or tractor trolley would mean one hour of jam. A vehicle breaking down on the bridge would mean 6 to 8hrs of traffic jam and a 30-50km detour through nearby villages using unpaved roads. In the Bareilly city 5-6hrs of power cut was considered normal. On bad days the power cuts would last 10-12hrs.

The highway being a single road, it was a constant struggle to save one-self from road transport bus drivers, who for some unknown reason were always in a tearing hurry, and enjoyed scaring the traffic coming from the opposite side. The trucks were mostly overloaded with sugar cane, fodder, food grains or perilously hanging steel rods. Almost every person driving a personal vehicle had the James Bond like driving skills, for dodging the cattle freely crossing the roads; transport buses swirling like missiles; bullock carts strolling in the middle of the road; and big potholes in the middle of the roads. Driving at night was particularly challenging.

Things started improving towards the end of the millennium. Construction of Moradabad bypass road obviated the need to cross the crowded city. An Inland Container Depot (ICD) in Moradabad was set up and the project to widen the highways to 4 lanes was undertaken. Bridges were made on numerous intersections on the highway. Then Hapur bypass was constructed. The rail route was electrified to increase the speed of trains. Then the highway was further widened to 6 lanes and rail over bridges were built over all railway crossings. A new wider bridge was built on Ganges to avert traffic jams. The Delhi Merrut Expressway has made the drive on Delhi-Hapur section a breeze.

The journey now is much safer and faster. The travel time now is about 5hrs, both by road and train. More importantly, this 5hr is highly predictable since there are very low chances of a traffic jam on railways crossing or bridge.

The power availability has improved significantly in past 25years with completion of plants like Rosa (1200MW), Anpara units 6 to 9 (2200MW). The availability of power also increased from the Tehri hydro project. The distribution of power was privatized in the region, resulting in better distribution infrastructure (fewer breakdowns) and lower losses.

Similarly, the Noida Agra expressway, Agra Lucknow expressway, Lucknow Faizabad Expressway and numerous other highways and infrastructure projects have been undertaken and completed in the state in the past 25years.

The most significant development project in the state has been the focus on girl education. Significant monetary and other incentives have been provided for the primary, secondary and higher education of girls, especially the girls from minority and backward communities. This has resulted in lower net fertility rate in the state and better labour participation in past one decade. We saw some glimpses of this in 2011 census data. The 2022 census data will definitely show a bigger picture.

It is pertinent to note that past 25yrs have seen BJP (1996-2002 and 2017-2022); SP (2002-2007 and 2012-2017); BSP (2002-2007) governments in the state and NDA (1998-2004 and 2014-2022) UPA (2004-2014) and United Front (1996-1998) governments at the center. The infrastructure improvement has been a consistent quotient during all regimes. No particular government can claim exclusivity in this context.

More than the highways, the roads built under the PMGSY scheme started by the NDA-1 government and consistently pursued by the subsequent governments have made a larger impact on the life of the predominantly rural population of the state. Because these roads have brought schools and hospitals within reach of the rural population.

The point I am trying to make is that the development in India has been a gradual process. It has gained momentum in the past 25yrs with increased participation of the private sector, improved regulatory and legal framework, and advancement in technology. For example, the change in land acquisition compensation policy (2013) has played a major role in faster execution of highway projects. Availability of better equipment, improved availability of essential raw material like steel and cement, and use of geospatial technology for mapping and monitoring etc. have also made execution efficient. The political parties have the right to lay claim on exclusivity of development in their regime, but the people, especially voters and investors must learn to believe what they see and experience, rather than what the political leaders tell them in their speeches.

The trajectory of economic development in India in present days is mostly a function of demand for infrastructure, availability of risk capital, and technology advancement. The political party in power usually has a minor role in the entire development process.

There are many things that have not changed in the state or worsened with each change in the regime. I would leave that discussion for some other time.

Saturday, July 10, 2021

Three decades of reforms and still miles to go

Three decades ago, on 24th of July, 1991, when Pallath Joseph Kurien, Minister of State for Industry in Government of India, tabled the New Industrial Policy (NIP) in the Lok Sabha, not many would have realized how big was the moment in the socio-economic history of Independent India. After six years of preparation and facing political challenges, the new policy, which sought to end the Nehruvian Socialism in the country, finally saw the light of the day.

The process of economic reform was set in motion by Vishwanath Pratap Singh, the finance minister in the government of Rajiv Gandhi (1984-1987). It gained further impetus when Ajit Singh, the MIT educated, tech savvy industry minister of National Front’s government assumed the charge (1989-1990).

The original draft of NIP was prepared by Amar Nath Verma (then Industry Secretary) and Mohan Rakesh (then Chief Economic Advisor to Industry Minister Ajit Singh) in 1990. The proposal to radically reform the industrial policy of India were patronized first by Ajit Singh & Vishwanath Pratap Singh (1990), then by Yashwant Sinha & Chandrashekhar (1991) and finally by Manmohan Singh and Pamulaparthi Venkata Narasimha Rao (1991).

The NIP was followed by supporting reforms in the financial sector and fiscal policy. The committees set up in 1991 under the chairmanship of Raja Jesudoss Chelliah and Maidavolu Narasimham for Tax reforms and Financial Sector Reforms respectively. The recommendations made by these committees and several follow up committees like Narsimhan Commmittee 2.0, Shome Panel, Kelkar Task Force etc. have formed the basis of the economic and fiscal reforms in the country in past three decades.

Indubitably, we have travelled a long distance from 50% corporate tax rate to in 1990 to 25% in 2021. The journey in indirect taxation has been even more spectacular. From a multitude of classifications and tax slabs in 1980s, we have achieved minimum number of tax slabs and a single Goods and Services Tax (GST) in three decades.

Financial sector has also seen a metamorphosis in past three decades. Capital controls have been materially relaxed. A developed national trading & settlement system for financial instruments has been established. Foreign trade is materially deregulated. Financial inclusion has progressed materially with liberalization of banking, insurance and pension sectors. After initial hiccups, the Insolvency and Bankruptcy Code is now evolving fast.

The work of reforms though is still in progress and we have many more miles to cover. The reforms in two key sectors Agriculture and Industrial Labor have started by passing key legislations in 2020. The government has also outlined a clear policy on disinvestment of public sector enterprises. From the legacy process of reforms, The Direct Tax Code, The Indian Financial Code, Development of Retail Debt Market, Land Reforms, GST rates rationalization and coverage expansion, etc. are some of the areas where progress is still needed.

In recent years an entirely new economic development paradigm has emerged globally. Sustainability and Tech driven trade and commerce have emerged as the most dominant global socio-economic trends. India has the opportunity to adapt to these trends early by implementing a futuristic policy framework. The progress made so far appears patchy and reluctant. Comprehensive and constitutionally enforceable policies for sustainable development and digital commerce (including currencies) need to be evolved and implemented earnestly, at the earliest.

Backdrop of 1991 reforms

The reforms in 1991 were neither ushered voluntarily, nor enjoyed wider support. These were rather necessitated as the socio-economic milieu of the country had reached the brink of disaster. Four decades of pseudo-ness in post-independence policies had introduced numerous distortions in the society and economy.

The pseudo socialist model of development adopted post-independence in fact perpetuated the colonial feudal model. The private sector monopolies were protected through licensing controls & state patronage, and hugely inefficient public sector monopolies were created. Even implementation of Monopolies and Restrictive Trade Practices Act and Foreign Exchange Regulation Acts in 1972, were misused to perpetuate the dominance of already well-established industrial families.

The entire development paradigm was designed to focus on the weaknesses (risk capital and technology) of the country. The strengths of the country (food, art, culture, religion, languages, etc.) were undermined and allowed to dissipate easily. The effort of the government was on discouraging and regulating consumption, rather than increasing production and productivity. Industrial and scientific knowledge and technologies were mostly imported. The term “imported” became synonymous with quality and prestige and “local” became a derogatory reference. Even to date, many companies of old era proudly include “imported” or “foreign” technology in their promotion campaigns.

The backdrop of 1991 reforms was set by convergence of many social, political and economic factors.

Firstly, the country was witnessing unrest on many counts, most notably - Implementation of Mandal commission and Ram Mandir movement had become major socio-political issues.

The Congress leader Rajiv Gandhi had just been killed by Sri Lankan Tamil suicide bombers. Regional socialist parties had risen to capture power in the Congress strongholds UP and Bihar. Having permanently lost West Bengal and Tamil Nadu earlier, the Congress party’s popular support was shrinking to a few states in central and western India.

The collapse of USSR and Berlin wall meant realignment of global order. The non-aligned India, which was in fact closer to USSR, was left vulnerable on many counts, especially geopolitical support and crucial defense technologies.

In the post emergency era, the efforts of various governments to catapult India to higher growth rate through fiscal expansion had culminated in significant balance of payment crisis. The ten years of fiscal expansion did manage to break the vicious cycle of the Hindu rate of Growth (3-4%). Briefly a higher growth rate (7.6% average during 1988-1991) was also achieved; but it was not sustainable for obvious reasons. The gulf war and two years of severe droughts further aided to the economic woes.

The multitude of crisis pushed the policy makers to adopt a pro market approach. The Congress Supported minority government of Chandrashekhar sought IMF help and committed to a radical reform in fiscal policy and industrial policy. A roadmap was prepared for disinvestment of PSEs, fiscal reforms and implementation of NIP. However the government fell days before the finance minister Yashwant Sinha could present, what could have been the first dream budget of Independent India.

Impact of reforms

There is little argument over the fact that the economic and fiscal reforms initiated in 1991, India were inevitable. These reforms did help in bringing the Indian economy back from the brink of disaster; even though the adequacy and efficiency of reforms has remained a matter of intense debate ever since.

Three decades of reforms have resulted in many structural changes in Indian economy. The contribution of agriculture has reduced to about one sixth, while services now contribute more than half of the GDP. The structure of foreign trade has also changed in favor of manufactured goods and services. The balance of payment has remained robust. We have faced three global crises (2000, 2008, and 2020) without an iota of problem.

Financial markets have remained an example to the world. India has perhaps been the only major global financial market that neither shut down nor imposed any trade restrictions during 2000 and 2008 market crisis.

Positives

In my view, the 1991 reforms made three most important contributions to the Indian economy:

1. The process of reform dismantled the pseudo socialist mindset of the policy makers; unleashing the private enterprise which had remained constricted since independence. Consequently, the minority socialist government of United Front in 1996-1998 presented the second dream budget. Another minority government supported by socialists (NDA 1998-2004) divested numerous government monopolies like coal, ports, mobile telecom, roads, power, airports, etc. without much trouble. The response to global sanctions post 19998 nuclear test was not lower spending, but larger capex on building local capacities. The UPA-1 government supported by communists made a nuclear deal with USA and UPA-2 allowed foreign capital in retail trade. The final epithet of older policy regime was written by NDA-2 with dismantling of planning commission; permitting off the shelve banking licensing; and move to privatize two PSU Banks (NDA-3).

2. Shifting of policy focus on increasing production & productivity rather than constricting consumption. This allowed the Indian businesses and consumers to globalize; aspire more and achieve more. We could become part of global alliances and treaties without much resistance. We could set up large scale capacities in automobile, pharmaceutical, textile, space technology, civil aviation, ITeS, and housing etc. Private enterprise could attract significant capital from global investors.

3. The horizons of the entrepreneurs expanded materially. The post reform generation of entrepreneurs was not infected by the traditional constraints. The new generation could think about globally competitive scale. They were not constrained by traditional characteristics like complacency, frugality, austerity, contentment etc. Targtes were now being frequently expressed in “Billion dollars” terms rather thn millions. Dreams not only became larger but also started to get realized. Consequently, the Indian MNCs started to grow in diverse areas like metals, automobile, ITeS, pharmaceuticals, hospitality etc.

Not so positive

However, statistically speaking, the reforms have not been adequate in putting India firmly on the path to become a middle income economy.

The reforms implemented so far have no dramatic impact on growth. As per Macrotrends in the USD terms, India’s GDP grew from ~US$37bn in 1960 to ~US$321 in 1990, a CAGR of 7.46%. In the next 29 years (1991-2019) India’s GDP grew to ~2.89trn, a CAGR of 7.84%. Though, the per capital growth rate was little faster as population growth began to taper from late 1990s. The per capita GDP of India grew at a CAGR of 5.12% during 1961-1990. During 1991-2019 this rate has been 6.19%. (Avoided 2020 as it was an exceptional year).

The Gini coefficient that measures the inequality in income distribution, increased from ~35 in 1990 to ~48 in 2018, making India one of the worst countries in terms of inequality. This highlights that the growth has not be equitable.

On relative basis, the peer economies like China, South Korea, Thailand etc. have done better than India. Our share in global trade has only marginally increased to ~3%, while China more than tripled it share in global trade to over 17%.

Not making national education & youth policy an integral part of reforms has perhaps been a grave mistake. The growth in India has definitely failed in ensuring adequate employment generation. Despite significant reduction in agriculture’s share in national income, the percentage of population dependent on farm sector continues to remain in excess of 60%. We have miserably failed in exploiting the demographic dividend.

Though, the financial markets developed a global scale infrastructure, we have not been able to implement a robust system for early detection of frauds and scams. Consequently, the investors continue to lose significant amount of money due to frequent scams and frauds in banking system and financial markets.

Many recent steps taken by the government indicate that the policy makers are full cognizant of the inadequacies of Indian economy. The new education policy, schemes and incentives to promote local manufacturing and exports, farm sector reforms, etc. are important steps that shall help in overcoming these inadequacies in the decade of 2020s.