The Modi Govt is Finally Unleashing the Power of Executive Action


Any stock market survives on two things—hope and stories.

Sometimes both hope and stories run parallelly.

Sometimes the stories run out and hope takes over. Sometimes the hope runs out and the stories take over.

When Narendra Modi was elected as the prime minister of India in May 2014, there was great hope among stock market investors that he would unleash a new wave of economic reform that would fast-forward the economic reforms process started in 1991.

But nothing of that sort happened. As economist Vijay Joshi writes in India’s Long Road—The Search for Prosperity: “There can be little doubt that the Partial Reform Model has left India unprepared.”

The country is unprepared to take on the challenges that lie ahead, the biggest among them being the fact that nearly one million individuals will enter the workforce every month, over the next decade and a half.

For the stock market investors, the story did not turn out the way it was expected to. Initially, they went back to hoping that some economic reforms will be initiated. When that did not turn out to be the case, they found another story to explain to themselves, and anyone else who was ready to listen, why things hadn’t turned out as expected.

This time the story was that the Modi government did not have majority in the Rajya Sabha and given this, the Congress party was in a position to block key legislation, which they did. What they forgot to tell us was that the Bhartiya Janata Party had behaved along similar lines in the past when it was in the opposition.

As Joshi writes: “Lack of a majority in the Rajya Sabha is also not a completely new problem: other governments in the past have faced it quite successfully by using their negotiating skills. It was therefore widely expected that the new government would undertake a programme of sweeping economic reform.” Nevertheless that did not happen.

Also, every reform does not need a legislation. As Joshi puts it: “Quite a lot can be done without new legislation, simply on the basis of ‘executive action’.” An executive action of the government unlike a new legislation does not need the approval of the Parliament.

The Modi government has started to unleash the power of executive action in the recent past and that is a good thing. Here are a few things that it has done in the recent past and plans to do in the days to come, which should work well for the Indian economy.

a) Starting this month, the government has allowed oil marketing companies to increase kerosene prices by 25 paisa every month, up until April 2017. This will result in a saving of Rs 2.25 per litre (25 paisa multiplied by nine months) of kerosene sold during the current financial year.

The strategy is similar to the previous Congress led United Progressive Alliance government allowing the oil marketing companies to increase the price of diesel by 50 paisa every month. It was ultimately this strategy which helped the Modi government to deregulate diesel in October 2014.

The under-recovery on diesel for the month of July 2016 stands at Rs 13.12 per litre. The Bank of America-Merrill Lynch expects that this gradual increase in prices will lead to savings of Rs 1,100 crore for the government during this financial year. If the price increase continues in 2017-2018 as well, then the government will see savings of another Rs 2,400 crore.

While this is not a huge amount, it is a step in the right direction. Also, it needs to be pointed out here that 46 per cent of kerosene distributed through the public distribution system does not reach those it is intended for. The leakage into the open market is used to adulterate diesel and is also smuggled into neighbouring countries.

b) In June, the government had introduced some reforms in the textile sector through executive action. The government re-introduced the concept of a fixed term contract which allows textile companies to hire workers for a fixed period, instead of offering permanent employment.

Up until now companies had been hiring contract workers, who in many cases are not paid as much as permanent workers are, even though the work being done is exactly the same. The fixed term contracts will also allow companies the flexibility to hire according to their demand. And they won’t have to keep workers on the rolls even when they don’t actually need them.

This should help create employment in the low-skilled workers space, which is India’s natural competitive advantage and that is precisely what India wants. (You can read the complete article here).

c) Another good decision is the government’s move to invite merchant bankers to sell shares of 51 companies that it holds through the Specified Undertaking of Unit Trust of India(SUUTI). The SUUTI was formed in 2003 to bailout the investors of US-64, the flagship scheme of the UTI.

The government owns companies like ITC, Axis Bank and L&T, through SUUTI. And it’s time the government sold these shares to raise some money. Also, it is important how this money is used. Instead of simply going into the general coffers of the government, it should be specifically earmarked towards creating better physical infrastructure.

In fact, as I write this, there is a report in the Mint which suggests that the government will get the Life Insurance Corporation of India to pick up a major portion of the shares held by SUUTI. The Mint quotes an official as saying:LIC has been asked to pick up at least a third of the overall SUUTI holdings. This primarily includes (its holdings in) ITC, Axis Bank and L&T. The cost of the deal could be Rs 25,000-30,000 crore for LIC.”

If anything of this sort happens this will dilute the entire idea of the government selling out shares held by SUUTI, lock, stock and barrel. Basically money will move from one arm of the government to another. It is estimated that the current value of shares held by SUUTI is around Rs 60,000 crore.

d) A news report in the Swarajya Mag suggests that the NITI Aayog has recommended that “as many as 16 PSUs” be put up for strategic sale and 26 others be closed down. If the government does get around to doing this, it will be a huge thing. A lot of money that is currently being wasted will no longer be wasted. The loss making public sector enterprises lost more than Rs 27,000 crore in 2014-2015.

Other than money being saved, it will also give the government more bandwidth to concentrate on more important things than looking after loss making public sector enterprises.

The column originally appeared in Vivek Kaul’s Diary on July 14, 2016