Team Narendra Modi readies itself to fix problems facing Indian economy
Shweta Punj and Anilesh S. Mahajan May 19, 2014
Critics and supporters alike acknowledge Narendra Modi's ability to focus. On May 13, the day after the end of a nearly year-long gruelling campaign - covering 300,000 km, 5,187 events and direct interaction with 234 million people - Modi was back in Gujarat, chairing a meeting to review the water situation in the state.
After its high-decibel campaign, the Bharatiya Janata Party now needs to deliver on its promise - acche din aane wale hain (better days are ahead) - to keep the faith of those who identified with Modi's politics of hope. This includes Sunita Singh, a resident of Veerganj village in Amethi, Congress Vice President Rahul Gandhi's constituency in Uttar Pradesh. Singh, who had never even heard of Smriti Irani, her local BJP candidate, is hoping Modi will bring jobs to Amethi. "Humne Modi ji ko suna hai TV par (I have heard Modi ji on TV)," she said, adding that even her 12-year-old son had asked her to vote for the BJP on the party's development agenda. Gandhi eventually defeated Irani, but with what would be considered a wafer thin margin in the Gandhi bastion - of 107,000 votes. In 2009, Gandhi had won with a margin of 370,000 votes.
Modi's critics say he may have over-committed. "The new government comes in with extreme expectations," says Jagannadham Thunuguntla, Head of Research and Chief Strategist at SMC Global Securities, an investment advisory firm.
In the corridors of power in Delhi, there is a sense of panic, understated as of now, though, as Modi, an outsider, is expected to unsettle the status quo by replacing largesse with efficiency and loyalty with talent. A leaner cabinet, accountable bureaucrats and a reformed Prime Minister's Office (PMO) will be the cornerstone of his political management in Delhi, say those who have worked with him. The UPA government had 82 secretaries and around 80 ministers; Modi's cabinet is expected to be two-thirds the size. His team is likely to be a mix of bureaucrats, technocrats and politicians. In March 2013, an alternative budget prepared for India Today magazine by economists Bibek Debroy and Laveesh Bhandari suggested scrapping 31 ministries and restructuring others into a dozen major ministries, saving Rs 1.5 lakh crore.
Business leaders are hopeful that quick decision-making will replace the policy inaction that weighed down the second avatar of the Congress-led United Progressive Alliance coalition government (UPA-II). Chanda Kochhar, Managing Director and CEO of ICICI Bank, says: "What Narendra Modi under the new government will do immediately is to take existing pending projects and make sure that they become productive. Modi can do it... he ran a state and is aware about what it takes to make projects happen."
Corporate India's sentiments were echoed on the stock markets, and the BSE Sensex touched a lifetime high of 25,375 on May 16, the day of the election results. Others believe that with a majority verdict, Modi will initiate reforms. Adi Godrej, Chairman of the Godrej Group, says: "He will work on restoring investor confidence and address manufacturing issues."Under Modi, India's federal structure may be at the cusp of change. The traditional model of instructions to states needs to evolve into a partnership, and Modi has on several occasions suggested greater devolution of power. "States are important. And real-time functioning should have the PM and the CMs of the states working in tandem. The federal structure is important in letter and spirit. It is our strength," he said at one of the 477 rallies he addressed.
A senior BJP leader says: "Now that the BJP has a majority in the Lok Sabha, it will put pressure on chief ministers of other parties to perform. Now there is a good chance that this idea of a PM-CM committee will work."
Modi is also likely to build a more powerful PMO, addressing the concerns of Manmohan Singh's critics. Sanjaya Baru, former media advisor to Singh, notes in his book, The Accidental Prime Minister, that "even with its combined strength of T.K.A. Nair and Pulok Chatterjee, [the PMO] was not a patch on the magisterial Brajesh Mishra who ran Vajpayee's PMO with great aplomb".
Congress President Sonia Gandhi's National Advisory Council - which ran parallel to the cabinet - is likely to be dismantled. Frequent disagreements on important issues led to delays and dilution of the PMO's power. A few days before election results were announced, BJP leaders huddled to ensure that senior party colleagues, such as L.K. Advani, Murli Manohar Joshi and Sushma Swaraj, would be satisfied with the formation of a new government, and to persuade Rajnath Singh to join the cabinet. (This was before Business Today went to press Saturday night.) A senior leader of the Rashtriya Swayamsevak Sangh, who did not want to be named, says: "All this is to avoid evolution of two power centres in the government."An empowered bureaucracy makes for swift decisions and action, and Modi has a record of empowering bureaucrats . For example, the Gujarat Chief Minister's Office is run by a core group of officials, including Chief Principal Secretary Kuniyil Kailashanathan, whose post was specifically created for him. Modi is expected to codify the roles of decision-makers and set clear expectations of them. Suresh Prabhu, who was the power minister in the former BJP led National Democratic Alliance (NDA) government, says: "Codification means that any interference stops."
Key ministries, such as finance, commerce, home, and the railways, are likely to get a new structure. Modi has also talked of restructuring the Ministry of External Affairs (MEA), which will work closely with the commerce ministry. The Directorate General of Foreign Trade is expected to be withdrawn from the commerce ministry and merged with the MEA. Restoring institutional credibility is likely to be at the top of the new government's agenda. Besides the PMO, this would include the Interstate Council and the Cabinet Committee on Security. Measures are likely to include the setting up of a transparent mechanism to grant clearances, and possibly a project monitoring system directly overseen by the Prime Minister. Something similar was introduced last year, headed by Chatterjee, the Principal Secretary to the PM."For many actions that require inter-departmental clearance, coordination has to happen through the PMO, which has not been happening. A decisive, well-functioning PMO has to come to action in 30 days," says a close aide of Modi.
The new government will have about 60 days to put together its first budget, in which major announcements are expected relating to the streamlining of processes for small and medium enterprises, river interlinking, rural roads, and supply-side constraints. A July budget could set out a timeline for the implementation of the Goods and Services Tax (GST) and Direct Tax Code (DTC). Stressed assets of banks, the pricing of agricultural produce, and direct cash transfers could also find a place in the budget.
Stressed loans total $100 billion, or 10 per cent of all loans. An economist who does not want to be named suggests reduction of the government's stake in banks, so that they can raise equity. Some weaker banks, he says, could be merged with strong ones. (The recently released report of the RBI-appointed P.J. Nayak committee has also made similar recomm-endations.) Modi's advisors have also hinted at the reversal of water, fertiliser and power subsidies at a later stage. Scrapping a subsidy is a politically contentious decision. The July budget will have to account for additional subsidy payments of $16 billion.
"The starting point should be to balance the budget as much as one can - the number of supply-side measures to control inflation and create space for the Reserve Bank of India to start reducing interest rates, and create infrastructure by clearing all the pending projects and reviving the investment cycle," says former finance minister and BJP leader Yashwant Sinha.
"The new finance minister will have to correct [UPA-II finance minister Palaniappan] Chidambaram's statistical jugglery," says economist Debroy. "The current account deficit [CAD] has been reduced through artificial means. He has not accounted for all the expenditure in the fiscal deficit. According to my calculation, the fiscal deficit is 5.2 per cent."
The Congress-led government, in an attempt to prune the fiscal deficit to 4.6 per cent for 2013/14, cut spending by $13 billion. Its interim budget sought to contain the fiscal deficit to 4.1 per cent for 2014/15, the lowest in seven years, but many consider this an unrealistic target.
The CAD was brought under control by nearly halving gold imports, which has revived gold smuggling. The BJP has promised to review gold import duties within three months of coming to power. Another way to keep the CAD in check is to increase manufacturing exports. Modi, who has been instrumental in diversifying Gujarat's manufacturing base away from petrochemicals, is expected to appoint a commission to boost manufacturing.
On the expenditure side, to fuel growth, the government would have to increase capital expenditure, which has shrunk to 1.7 per cent of GDP, from four per cent in 2003. "It's a tough task, but they need to do it to start rebuilding infrastructure," says the economist quoted earlier.
Economists question whether fiscal space is available for substantive reforms - as the tax-to-GDP ratio has slipped to 10.2 per cent from a peak of 12.5 per cent in 2007/08 and tax revenues are unlikely to recover immediately - but the new government is likely to take the opportunity to lay out its vision. A plan to tackle supplyside constraints, a key reason for spiralling inflation, is likely to be put into action almost immediately. Rajiv Kumar, Senior Fellow at the Centre for Policy Research, says: "It could be a combination of administrative and economic measures, from taking action on hoarders to setting up a task force on the APMC (Agriculture Produce Market Committee) Act. Supply-side constraints can be addressed without going to Parliament."
One of Modi's biggest achievements has been the revival of agriculture in Gujarat, and he is likely to replicate that nationwide. An International Food Policy Research Institute paper says that between 2000/01 and 2007/08, agricultural value added grew at 9.6 per cent a year in Gujarat - double the rate for India, and among the fastest rates recorded anywhere. Modi has proposed a market stabilisation fund for farmers to get the optimum price for their produce.
First-quarter subsidy payments are likely to be much higher than the year-ago quarter, but a Modi government is unlikely to change it. "We will not sell dreams," says BJP national treasurer Piyush Goyal. "The hard reality is government money is required to be spent in more targeted areas. Subsidies must benefit the poor, not fuel the SUVs of the rich."
Former minister Prabhu says: "Certain forms of subsidy are inevitable - 30-40 per cent of people are poor. Subsidies cannot be wished away in the foreseeable future." The BJP seems aligned with Congress thinking on welfare schemes. BJP leaders say their government will implement the right to food better, and BJP-ruled states have embraced the UPA's welfare schemes. A senior BJP leader who is close to Modi says UPA schemes such as the employment guarantee programme and Right to Education will continue.
Modi is likely to use the unique identity platform for better targeting. India's most populous state, Uttar Pradesh, which sent a record 73 lawmakers of the NDA to Parliament, may find some favour with the new Prime Minister. He is likely to take steps to boost the sugarcane industry, and may give UP's sugar mills incentives to clear their arrears of over Rs 7,500 crore.
The budget is likely to set a deadline for the implementation of two key tax reforms - the GST and DTC - which have been delayed due to lack of consensus among states. "In the next two years, expect GST and DTC to be in place," says Kutumba Rao, finance expert with the Telegu Desam Party, a BJP ally. "With GST, the GDP will go up by at least 1.5 to two percentage points without any effort by the government, and the DTC will improve compliance."
Sushil Modi, former finance minister of Bihar and ex-chairman of the empowered committee of state finance ministers on GST, says the BJP is committed to implementing the GST. "In my view, no state has opposed the GST in principle. States have specific concerns, and we will take care of those," he says.
Restarting mining would be another priority for the new government. Corruption and lack of transparency in coal block allocation, and lack of clearances have led to underutilisation of coal reserves, and the use of forex reserves to meet energy needs. Modi's aides who are working on a white paper on mining say he is keen on a model similar to Ultra Mega Power Projects, by which mining rights would be awarded as a package, with all clearances in place. This, they say, would reduce the time spent on getting permissions.Setting up a coal regulator would be another priority for the new government. Modi has vehemently attacked the UPA government's inability to extract coal and give it to power generation companies. "The immediate priority is to institute a policy of transparent allocation of natural resources including that of coal," says Narendra Taneja, national convener of BJP's energy cell. "We must realise that if we don't commit to these reforms, India would have to import fuel worth $1.25 trillion by 2035 (oil, gas, coal and uranium)." A senior BJP leader says India must develop energy intelligence-gathering resources and reduce reaction time to convert acquisition leads into deals, as China and the US do. India spends $167 billion a year to import fuel.
The Supreme Court lifted the ban on mining in Goa in April, but licensing procedures could take 18 months before mining can resume. Expediting these would be a way for the new government to signal that it means business.
To facilitate clearances, Modi has spoken about using technology to make decision-making transparent - a system to track files across ministries. In Gujarat, for example, everything from the availability of plots of land to status of projects can be tracked online.
The new government is likely to continue oil decontrol, and restructure oil subsidies, which total Rs 1 lakh crore. The BJP's clear majority in the Lok Sabha will help its government take decisions that were stymied in the coalition government.
BJP sources say Modi intends to build a cross-country power grid. India is already connected with Nepal, Bhutan and Bangladesh under the SAARC (South Asian Association for Regional Cooperation) grid, and talks are on for partial connectivity with Sri Lanka and Pakistan. "The plan is to connect Myanmar and subsequently get into the ASEAN grid, and on the other side have connectivity with Central Asia," says BJP energy advisor Taneja. The new government is also expected to tweak clauses in the nuclear liability law to increase nuclear power generation in the country.
After nearly three decades, Indian voters have delivered a historic verdict. Now it is time for Modi to deliver on his agenda of hope.
Follow the authors at @shwetapunj, @anileshmahajan
With inputs from Anand Adhikari, Ajay Modi, E. Kumar Sharma And Manisha Singhal. Research inputs by Jyotindra Dubey