The expectations from the Modi government was sky high when it came to power after a series of mega-scams and policy paralysis under the previous government. The new government was expected to start the second-generation reforms to put India back on high-growth track. It did not disappoint and hit the ground running. After five years, it is time now to take stock of its achievements. There have been many hits as well as major misses.
The GST (Goods and Services Tax), IBC (Insolvency and Bankruptcy Code) and Fugitive Economic Offenders Act are three of its biggest legislative accomplishments that will have significant impact in coming years.
GST (Goods and Services Tax)
Touted as the biggest reform since Independence, GST is the indirect tax that has subsumed a variety of central and state levies and replaced cascading complicated tax system. It transformed India’s 29 states into one market with one tax rate. The GST Council, formed with the States having two-third vote and the Centre a one-third vote, is a prime example of cooperative federalism. The council slashed rates for a range of daily items of consumption, relaxed penalties and tweaked rules to make it easier for businesses to comply. It was rolled out with five slabs of rates: 28 per cent, 18 per cent, 12 per cent, 5 per cent or zero. The new tax system eliminated the maze of check posts at state borders, improving productivity of the transport system.
The implementation of GST was not without criticism as it was made exceptionally complicated, the very antithesis of what a GST is supposed to be. The complex filing process with five tax slabs alienated small traders and businessmen. The government did respond to various issues encountered in GST structure swiftly tweaking the tax slabs for many commodities.
Insolvency and Bankruptcy Code
The government inherited a banking system burdened with huge bad debt. The non-performing assets (NPAs) of banks had risen for a number of reasons – from bad credit decisions, to poor monitoring, connivance of bank employees, as well as cyclical business downturns. Insolvency and Bankruptcy Code (IBC), legislated in 2016, proved to be a game changer as it took NPAs head-on. The code allows either the creditor or the borrower to approach the National Company Law Tribunal (NCLT) to initiate insolvency proceedings. There are also provisions for debt resolution within a span of three to five months.
The recent interest shown by various reputed domestic and global business houses to acquire these bankrupt companies with large bank NPAs but good underlying assets, points to the successful implementation of the IBC code. This will restore the health of the Indian banks and enable them to start lending to viable projects. Banks have recovered Rs 36,551 crore in the first quarter of 2018-19 after recovering Rs 74,562 crore during 2017-18 through IBC.
Fugitive Economic Offenders Act
The Fugitive Economic Offenders Act, envisioned in Budget 2017, came into force from the April 2018. The Act was needed as number of large fraud cases reported by banks rose alarmingly in last few years with over 30 people accused and under probe for various financial scams/frauds absconded from the country. The existing laws and regulations were simply inadequate to control white collar crimes. The Bill aims to stop economic offenders (Rs 100 crore or more) to leave the country to avoid due process. Once declared a ‘fugitive economic offender’, their properties can be confiscated. This law helped declare Nirav Modi and Mallaya as economic offenders. Their property including art collection and cars can be auctioned off to recover part of their debt.
There were several flagship programs undertaken by the government from Swatch Bharat to Make in India to Direct cash transfer, Start Up India, Skill India etc. We can look at a couple of important ones.
Swachh Bharat Abhiyan
The Swachh Bharat Mission is the most celebrated flag ship program that has caught the imagination of the nation. It was announced by the Prime Minister himself in 2014 to make India free from open defecation by 2019. Under this program, over nine crore toilets have been constructed, with coverage of rural sanitation increasing to 98 per cent from less than 40 per cent in 2014. Many municipality areas of the country have been declared open defecation free (ODF) since the launch. The program has brought the discussion about cleanliness and sanitation to the mainstream which were considered a taboo earlier.
This is a very important and successful program of the government. However, the ground level report from some areas show that the toilets were built in a hurry with no proper water supply or drainage system resulting in unusable toilets. So, implementation of the scheme is not without some criticism.
JAM and Direct Cash Transfer
The ‘JAM Trinity’ is the scheme of effectively connecting the Jan Dhan Yojana bank accounts, Adhaar and Mobile numbers for better transfer of subsidies to the intended beneficiaries. Jan Dhan accounts are the no-frill accounts launched to bring the unbanked population into the system. It is an inclusive program that can be used for direct cash transfer to the poor that significantly cut pilferage.
The government has claimed that nearly ‘Rs 2.8 lakh crore of sops were transferred directly into the bank accounts of authentic beneficiaries last fiscal year, thereby saving Rs 1.20 lakh crore in leakages over the last four years, and eliminating almost 7 crore fake accounts over several schemes’.
The foundation of ‘Aadhar’ was laid during the UPA government which was vehemently opposed by BJP at that time. However, once in power, the NDA government not only adopted it but took it to a new level.
Make in India
The ‘Make in India’ was launched with much fanfare. However, despite opening up several sectoral caps for FDI and improving ‘ease of doing business’ ranking, manufacturing has not picked up as expected.
Manufacturing value added in the third quarter (September to December 2018) is estimated to have moderated to 6.7 per cent from 6.9 per cent in the second quarter and sharply decelerated from April-June’s 12.4 per cent. The sector is facing headwinds from both demand and supply side. On one hand, consumption demand has softened as can be also seen by the large pile up of inventory in the auto sector, softer sales figure of FMCG companies. On the other hand, the supply side is still limping back after the disruption of the informal small and medium manufacturing units by demonetization and complex Goods and Services Tax (GST) rate structure.
Furthermore, the eight core sectors that constitute about 40% of India’s total industrial output—coal, crude oil, natural gas, refinery products, fertilizer, steel, cement and electricity— cumulatively grew by only 1.8% in January 2019. Centre for Monitoring Indian Economy (CMIE) data on projects show that value of new project investments has actually declined in the third quarter of FY2019.
The government did not make any sincere effort to reform the arcane labour laws or tweak the land acquisition law as expected. Without reforms in these two areas, it may be difficult to realise full potential of ‘Make in India’ scheme.
The general perception was that the government would undertake several reforms including petroleum products pricing, banking sector and privatise several underperforming PSUs (including Air India) to improve productivity.
Petrol Price Deregulation
The NDA government was lucky as oil prices fell soon after it came to power in 2014. This helped the government to continue to deregulate diesel and petroleum prices that was started in previous regime. India joined the club of select countries like USA and Australia where fuel prices are revised on a daily basis. This also helped to substantially reduce the subsidy bill.
However, at the same time, the government wisely decided not to pass on all the benefits to consumers. It increased excise duties on petrol and diesel in small doses. Currently, taxes levied by the Centre and states account for around almost 50% (including dealers’ commission) of the retail selling price. According to Ministry of Petroleum and Natural Gas, the central government has earned a whooping Rs 2.3 lakh crores from only excise duties on petroleum products in 2017-18 (compared to Rs 99,069 in 2014-15). This amount has helped the government in balancing the fiscal maths.
The government not only reached the disinvestment target of massive Rs 80,000 crore for FY 2018-19, it actually surpassed it by Rs 5,000 crore. However, unfortunately, instead of taking the IPO route as expected, the government preferred cross-sale of government equities in companies of same sector, and share buybacks by PSUs to achieve its target. This can hardly qualify as proper disinvestment.
For FY 2018-19, the exchequer received Rs 14,500 crore from the deal between Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) when REC acquired government’s 52.63 per cent stake in PFC. Similarly, in the previous fiscal, ONGC bought the entire stake of government in HPCL for a total of around Rs 37,000 crore in order to meet the disinvestment target. Only five companies could be listed in FY 2018-19 garnering only about Rs 2,000 crores. The government also raised about Rs 8,000 crores from share buybacks by PSUs.
The government could not achieve the expected strategic sales, listing of state-owned companies through initial public offer (IPO) and planned privatization of Air India during the year as announced in the budget.
Banking Sector Reforms
Stressed balance sheet of the banks meant that they remained risk-averse and could not support credit offtake and growth. These banks needed immediate capital infusion. The government started on the right path with aggressive recognition of NPAs and clean-up of balance sheets with pro-actively steps in default cases. It announced major management reforms to be undertaken in the sector such as hiring professionals laterally at least in five large banks. By early 2016, the Banks Board Bureau (BBB) was announced headed by Vinod Rai (former CAG of India) to formulate recommendation for the sector. However, the government managed to appoint managing directors from the private sector for only two large banks. The recommendations from BBB were not implemented.
The banking sector played a central role during demonetization and remonetisation process. The sector that was already under major performance stress due to large NPA had to deal with the massive operational stress during this time. The government did infuse much-needed capital amounting about Rs 2 lakh crore after kicking the can along for some time. The IBC code also has helped recover some bad loans. Finally, it looks like the banks might be slowly coming out of the NPA problem. However, according to analysts, the recent decision to merge Bank of Baroda, Vijaya Bank and Dena Bank seems to be taken without due diligence and any research into the synergy. It seems that the reforms in the sector could have been handled in a much better way.
The impact of the all these reforms on the economy can be assessed by looking at some of the key macro-economic factors.
According to the latest growth numbers announced, growth in last five years will average 7.5 per cent higher than the average growth rate of previous five years. This makes India the fastest growing major economy in the world, ahead of China.
However, the same GDP data shows that the growth is losing momentum. The growth slowed considerably from 8 per cent in the April-June’18 quarter of FY2019 to 7 per cent in July-September’18 quarter to 6.6 per cent in the October to December’18 quarter – a six-quarter low. Growth is expected to slow further in the fourth quarter pulling down the full year growth to around 7 per cent from 7.2 per cent expected earlier. This will be lower than the 7.4 per cent growth clocked in 2014-15 when the NDA government came into power. It is worrisome that slower growth is reported in sectors like Agriculture where majority of the population is engaged.
The government can be proud of its achievement in the inflation front. The Reserve Bank of India Act, 1934 (RBI Act) was amended in 2016 to provide a framework for Monetary Policy Committee (MPC) to focus on flexible inflation targeting. It was a historic monetary policy overhaul. According to the framework, the RBI would aim to contain headline CPI within 4 percent with a band of (+/-) 2 percent. Since then, inflation has come down and been at the lower side of the target band after remaining at 10 percent in FY13 and FY14. This can be due to both structural and cyclical factors. Softer crude oil prices helped in keeping inflation down. As global growth recovers and oil prices surge, the cyclical pressures could reverse.
The government remained fiscally prudent under challenging circumstances. It was not an easy task balancing the fiscal maths considering higher expenditure needed for capital infusion in banks and increased public capex to support growth. As luck would have it, global crude oil prices crashed which allowed the government to continue with subsidy reforms that brought oil subsidy expenditure to Rs 24,833 crores in FY2018-19 from the peak of Rs 96,880 in FY12-13. Moreover, the government collected significant excise revenues from petroleum products.
Higher contribution of non-tax revenues like disinvestments and dividends helped plug the deficit. The disinvestment receipt in FY2017-18 was Rs 1 lakh crore vs an average of around Rs 36,000 crore in previous three years. Similarly, ‘Dividend/Surplus of RBI, Nationalised Banks & Financial Institutions’ for FY 2018-19 was revised to Rs 74,140.37 crore vs the budgeted Rs 54,817.25 crore. It is budgeted at Rs 82,911.56 crore for FY 2019-20.
The fiscal deficit narrowed down to 3.3 per cent of GDP in FY 2018-19 from 4.5% when the UPA left office. In its last interim budget, the government revised the fiscal deficit glide path once again and budgeted fiscal deficit at 3.4 percent for FY 2019-20. According to the Finance Minister’s statement this “pause” in fiscal consolidation was necessary for the farm package.
With global growth below potential, it is not surprising that exports have not grown at a faster pace in last four years. However, exports from India in the fiscal year 2018-19 are expected to surpass the record exports achieved during the UPA II era – a major achievement considering headwinds like economic slowdown and trade-war hurting global trade. Total exports during April-February period came in at $298.5 billion (annual growth of 8.8 per cent), raising the hope that year-end cumulative exports could go past $314 billion achieved in the last year of the UPA government.
However, it needs to be mentioned that subdued oil prices helped keep our import bill and hence trade deficit and current account deficit (CAD) low. We have witnessed how sudden jump in oil prices last year caused CAD to rise to -2.9 per cent in quarter ending September 2018 increasing macro vulnerability. It reveals how our macro stability is still connected to global crude oil prices and we have not managed to do any structural reform in that area.
The NDA government can show considerable success in infrastructure building. The pace of road building has been major success. Currently, over 40 km of roads are being constructed daily compared to 17 km daily under UPA regime. Railway modernisation too is gathering pace. From airports, ports, bridges, waterways, the government has managed to expediate and complete many stalled projects as well start new ones.
The government has come under considerable criticism for repeated revision of the GDP growth numbers and supressing several survey results including the unflattering job data of NSSO. It is reported that the NSSO job data shows a record 45-year high unemployment rate and an absolute decline in employment between 2013–14 and 2015–16, probably for the first time since Independence. But the government claims otherwise. It is true that employment numbers are always contestable in India with large part of the population employed in the informal sector which is difficult to track. Whatever may be the case, there needs to be more transparency in data and methodology. Credibility of the statistical agency of the country cannot be compromised.
Based on discussion above, on political intent, decisions and economic reforms, the government gets an A. On clarity of process and sequence of steps, it gets a B and a grade C for implementation.