100 days of Modi govt: It’s been ekdum thanda on the economic front

narendra_modiVivek Kaul

In an essay titled Political Leadership (The Oxford Companion to Politics in India edited by Niraja Gopal Jayal and Pratap Bhanu Mehta) historian Ramachandra Guha writes about the various styles of political rhetoric: “The modern idiom is often expressed through a rhetoric of hope—the offer of a better and fuller life, whether expressed in material terms or otherwise. The traditional idiom, on the other hand, privileges a rhetoric of fear—warning the members of a caste, or religion, or region, that they would be swamped by their enemies if they do not bind together.”
Indian politics, over the last seven decades since independence, has largely been fought on what Guha calls the traditional idiom of fear. Given this, Narendra Modi’s campaign in the run up to and during the 16th Lok Sabha elections came as a breath of fresh air. Modi campaigned around the idiom of hope. “
Acche din aane waale hain,” was the line that he tried to sell to the voters of this country. And voters bought it lock, stock and barrel, giving an absolute majority to the Modi led Bhartiya Janata Party(BJP). This was the first time that a single party other than the Congress got an absolute majority in the Lok Sabha.
Once the majority was in place, the hope among analysts, economists and everybody who had some sort of an opinion on Modi and his politics, was that he would push big bang economic reforms, like the kind that had happened in 1991, when the Indian economy was thrown open to the world. Nevertheless, nearly 100 days since the Modi government assumed power on May 26, 2014, nothing of that sort seems to have happened. This is not to say that no economic reform has happened. The government allowed 100% foreign direct investment(FDI) in several areas in the railways sector. It notified that the FDI limit in the defence sector would be increased to 49% from the current 26%, through the approval route. At the same time it has cleared the FDI limit in the insurance sector to be increased to 49% from the current 26%. Further, land acquisition laws put in place by the Congress led UPA government are set to undergo a transformation.
But other than the “proposed” change in land acquisition laws these are not big bang reforms exactly. This is minor tinkering at best. The union budget presented by Arun Jaitley lacked a vision of what the Modi government plans on the economic and the financial front over the next five years. Also, it continued with the unrealistic estimates of both revenues and expenditure made by the previous finance minister P Chidambaram.
Given this, it is highly unlikely that the fiscal deficit number projected by Arun Jaitley and his team is a realistic one. In that sense Jaitley has continued the process of projecting lower expenditure and higher revenue, started by Chidambaram.
Also, like Chidambaram, Jaitley has started to suggest that the Reserve Bank of India (RBI) should start to cut interest rates.
But as I explain here, there is very little that the RBI can do to cut interest rates. Interest rates will only come down once the government starts to manage its fiscal defict, borrower lesser and leave more money on the table for everyone else to borrow. Fiscal deficit is the difference between what a government earns and what it spends. The government spends it through borrowing money.
Over and above this, there has been almost no talk about what the government plans to do on the Goods and Services Tax(GST) and the Direct Taxes Code (DTC) front. These are two big bang economic whose implementation has been pending over the last few years.
In his independence day speech Modi announced that his government was doing away with the Planning Commission. There is no doubt that it was an institution that had outlived its utility, nevertheless, with what and how does the government plan to replace it. More than two weeks after the independence day speech, there is almost no clarity on this front. As economist Bibek Debroy,
wrote a recent column in The Economic Times “We are in end-August. In 2014-15, what happens to the (central assistance) money disbursed to states through the Planning Commission? Will that be released in December 2014 to be spent by March 2015?”
Oil prices have been falling for a while now. Given this, it was widely expected that the government would use this lucky streak to move towards market determined price for diesel and do away with some of the “under-recoveries” that the Oil Marketing Companies have to face everytime they sell diesel, cooking gas and kerosene. It was also expected that the cooking price would be raised by an equal amount every month and the “under-recoveries” on it would be done away with over a period of time. But nothing of that sort has happened.
Also, no moves have been made to sort out the food subsidy mess that the country finds itself in.
A recent new report pointed out “Food corporation of India has informed the food ministry that dues on the food subsidy have piled up to Rs 50,000 crore at the end of 2013-14 over the last three-to-four years as it has not been allocated enough funds.” This is something that needs to be sorted out immediately.
A possible explanation for economic reforms being put on the back-burner being bandied around by Modi sympathizers has been that economic reforms will start streaming in after the Maharashtra elections are done with. The government does not want to make any publicly unpopular decisions before the Maharashtra elections are over. The thing is that state assembly elections will keep happening all the time. After there Maharashtra there is Bihar in 2015. And by the time the state assembly elections are over, the next Lok Sabha elections will be upon us. The government, like most other governments in the past, is likely to get into the election mode by 2017, two years before the next Lok Sabha elections are due. So, when will it actually get around to implementing any big-bang economic reforms is a question worth asking? Given this, the explanation does not really make much sense.
If the government is serious about economic reforms, the best time to do it is now. These are the early days for the government and it still has a lot of leeway to push through these reforms. An excuse offered here is that the Modi government does not have a majority in the Rajya Sabha and hence, legislation required to push through these reforms can get stuck there. This is indeed true, but then the government also has the option to call a joint session of Parliament and pushing through these reforms.
To conclude, it is worth pointing out what Guha writes about being the bane of almost all the governments in India over the last 25 years, before the Modi government came to power: “[The] deepening of Indian democracy has come at a cost, namely that there is now no political leader who can really think of or act for the country as a whole. When a single party was dominant at the Centre, it was possible to design long range policies; now, when the government is constituted by a coalition of a dozen or more parties, each representing a specific sectarian interest—these based variously on caste, language, region, or religion—its policies are determinedly short-term, aimed at placating or satisfying one or other of those interests.”
Modi doesn’t have to go through all this. His government has absolute majority on its own and it can use this opportunity to push through economic reforms, which will be beneficial for India in the days and years to come.
The article originally appeared on www.FirstBiz.com on September 1, 2014
(Vivek Kaul is the author of the
Easy Money trilogy. He tweets @kaul_vivek)

Act now: Arun Jaitley needs to use his lucky streak to push through reforms


Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

Napoleon Bonaparte once said “I know he’s a good general, but is he lucky?”
Luck is an essential part of politics and lucky governments tend to do better than plain and simple skilful governments. As ex cricketer turned writer Ed Smith writes in
Luck—A Fresh Look At Fortune “Academic research supports the idea that voters often can’t tell the difference between lucky governments and skilful ones.” In fact, research carried out by Australian economist Andrew Leigh suggests that “it is more important to be a lucky government than an effective government”. Leigh studied nearly 268 elections between 1978 and 1999.
As Smith writes regarding this study “A government’s average rate of re-election is 57 per cent…Even superb economic management, outpacing world growth by 1 percentage point, only raises the Prime Minister or President’s likelihood of re-election from 57 per cent to 60 per cent. An economically competent government gets an electoral boost of 3 per cent; a lucky one gets a leg up of 7 per cent [i.e.]… the government’s re-election rate jumps to a 64 per cent likelihood.”
Hence, if a government has “luck” going for it, it is important that it does not throw it away and takes some decisions that help it over the long term.
Narendra Modi took over as the Prime Minister of India on May 26, 2014. Things were looking difficult on the economic front and a poor monsoon was being predicted.
The fiscal deficit of the Indian government as on May 31, 2014, stood at Rs 2,40,837 crore. This meant that during the first two months of the financial year (April 2014 to March 2015), the fiscal deficit had already reached 45.6% of the annual target. By June 30, 2014, the fiscal deficit for the first three months of the financial year had reached 56.1% of the annual target. Fiscal deficit is the difference between what a government earns and what it spends.
Typically the income of the government is back loaded, given that its earnings are the highest during the last three months of the financial year. But a large part of the expenditure of the government is more or less spread out through the financial year. Given this, the fiscal deficit typically tends to be high during the first few months of the year.
Nevertheless, even after taking this factor into account, a fiscal deficit of 56.1% of the annual target during the first three months of the year was a very high number. During the last financial year the number had stood at 48.4%. This was largely a reflection of the fiscal mess that the Congress led UPA government had left the country in.
Over and above this, the initial monsoon numbers were not very encouraging. The India Meteorological Department(IMD) in a press release dated July 11, 2014, pointed out that the“rainfall activity was deficient/scanty over the country as a whole” for the period between July 3 and July 9, 2014. This deficiency of rainfall was at 41% of the long period average.” This delay in rainfall had led to a 51% annual decline in the sowing of kharif crops.
These two factors which could have undermined the performance of the new Modi government greatly, have changed for the good in the recent past.
One of the major reasons for a high fiscal deficit has been the fact that oil marketing companies have been incurring huge “under-recoveries” on the sale of diesel, cooking gas and kerosene. The government in turn has had to compensate the OMCs for these “under-recoveries”. This pushed up the government expenditure and hence, the fiscal deficit.
The good news is that oil prices have been falling.
The international crude oil price of Indian Basket of oil as computed by Petroleum Planning and Analysis Cell (PPAC) fell to US$ 99.94 per barrel on 19.08.2014. Two months earlier on June 19, the price of the Indian basket of oil had touched $111.94 per barrel.
This fall in oil prices has ensured that
the under-recoveries of the OMCs for the financial year 2014-15 are projected to be Rs 91,665 crore while the figure was Rs 1,39,869 crore in the 2013-14. If this trend continues the government is likely to incur a lower expenditure for compensating the OMCs for their under-recoveries. And this will also have an impact on the fiscal deficit.
The government has also been lucky on the monsoon front. As the IMD said in a release dated August 15, 2014, “For the country as a whole, cumulative rainfall during this year’s monsoon has so far upto 13 August been 18% below the Long Period Average (LPA).” This is way lower than the deficiency in early July. A bad monsoon could have created several economic challenges for the government. Thankfully, the scenario did not turn out to be as bad it was initially expected to be. Hence, it is safe to conclude that the Modi government has indeed been very lucky on the economic front during its first 90 days.
Given this, the government should use this lucky streak to push in some reform on the pricing of petroleum products. With oil prices falling, this would be a good time to decontrol diesel prices. Over and above this , this would be a good time to limit subsidies on kerosene and cooking gas as well.
As has been suggested here earlier, this might be a good time to start raising cooking gas prices by Rs 10 per cylinder every month, in order to eliminate the subsidy on it, over a period of time.
What might further work for the Modi government is the fact that oil prices might continue to fall in the years to come. As Crisil Research points out in a report titled
Falling crude, LNG, coal prices huge positive for India dated August 2014 “Over the next five years, we expect global oil demand to increase by 4-4.5 m
illion barrels per day (mbpd).
However, crude oil supply is expected to increase by 8-10 mbpd. This, we believe, will bring down prices from current levels.”
This should help the government control its fiscal deficit. If the government is able to lower its fiscal deficit, it will have to borrow less and that will eventually lead to lower interest rates. If the government borrows less, there will be more money to lend to others. At lower interest rates consumers are more likely to borrow and spend. This will have a positive impact on economic growth.
The Modi government has luck going for it right now, but this may or may not last. Hence, it is important that it makes the best of it, and pushes in some decisions which will work well for the economy in the long run.

The article originally appeared on www.Firstbiz.com on August 22, 2014 
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Rail hike: India needs a bitter pill and Modi must not fall prey to ‘rollback’ culture


narendra_modiThe Narendra Modi government has come in for a lot of criticism for raising the railway fares. The criticism has been particularly acute in Mumbai, where the prices of suburban railway season tickets have doubled and in some cases even trebled. And this surely can’t mean acche din for the average Mumbaikar who travels by local trains daily and had voted overwhelmingly in the Lok Sabha elections for the BJP-Shiv Sena alliance.
Now there is talk about the government reconsidering the decision to increase railway season ticket prices. “The Railway Minister has assured us that the monthly season ticket decision will be reconsidered and a decision taken within 2-3 days,”
said BJP MP Kirit Somaya after meeting the railway minister Sadanand Gowda today (i.e. June 24, 2014). This might very well turn out to be the case given that assembly elections are scheduled in Maharashtra later this year.
The Modi government will have to take a spate of unpopular decisions over the next few months, if it hopes to do something about the stagnating economic environment. These decisions might include passing on the increase in the price of oil to the end consumers. T
he price of the Indian basket of crude oil stood at $111.86 per barrel on June 20, 2014. It had averaged at $106.72 per barrel between May 29 and June 11, 2014.
The price of oil has gone up rapidly in June 2014 because of a threat of a war in Iraq. India imports nearly four fifth of the oil it consumes. The government will have to allow the oil marketing companies to pass on this increase in price to the end consumers. If it does not do that then it will have to compensate the oil marketing companies for the “extra” under-recoveries they face on the sale of diesel, cooking gas and kerosene. This would lead to an increase in government expenditure and hence, the fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends. The government is already precariously placed on the fiscal deficit front. The move to allow the oil marketing companies to increase prices is unlikely to go down well with the middle class.
The government will also have to make sure that it does not increase the minimum support price of rice and wheat at the same rate as the Congress led UPA government had done in the past. This had been a major reason in fuelling food inflation. So, if the government is serious about controlling food inflation this is a step that it will have to take. This move is unlikely to go down well with farmers.
Over and above this, the government will have to go aggressive on selling stakes it holds in public sector companies. This will help the government in controlling the fiscal deficit. Any attempts to sell stakes in the companies it owns is unlikely to go down well with the trade unions and given that they are likely to protest.
The broader point is that various steps that the government is likely to take over the next few months, will be fairly unpopular in nature. And given this there will be pressure on it to “rollback” these moves. In fact, as has been in the case of the railway fare hike, the pressure to “rollback” will come not only from the opposition parties, but also from within the BJP. Nevertheless, these steps are required if the economic environment is to brought back into some shape.
Given this, the government can take some inspiration from Paul Volcker. Volcker was the Chairman of the Federal Reserve of the United States, the American central bank, between 1979 and 1987. When Volcker assumed office in August 1979, things were looking bad for the United States on the inflation front. The rate of inflation was at 12 percent.In fact, inflation had steadily been going up over the years. Between 1964 and 1968, inflation had averaged 2.6 percent per year. This had almost doubled to five percent over the next four years, that is, 1969 to 1973. And it had increased to eight percent, between 1973 and 1978. In the first nine months of 1979, it had averaged at 10.75 percent. Such high inflation during a period of peace had not been experienced before. Volcker was not going to sit around doing nothing and came out all guns blazing to kill inflation, which by March 1980 had touched a high of 15 percent. He kept increasing the interest rate till it had touched 20 percent by January 1981. This had an impact on the inflation, and it fell to below 10 percent in May and June 1981.
The prime lending rate or the rate at which banks lend to their best customers, had been greater than 20 percent for most of 1981Increasing interest rates did have a negative impact on economic growth and led to a recession. In 1982, the unemployment rate crossed 10 percent, the highest it had been since 1940 and nearly 12 million Americans lost their jobs. During the course of the same year, nearly 66,000 companies filed for bankruptcy, the highest since the Great Depression. And between 1981 and 1983 the economy lost $570 billion of output.
Of course, all this made Volcker a very unpopular man. As Neil Irwin writes in
The Alchemist—Inside the Secret World of Central Bankers “Automakers were…livid: High interest rates meant that consumers couldn’t afford to buy cars…They [i.e. the automakers] mailed Volcker keys to unsold vehicles. But farmers may have had it worst of all. During the late 1970s, many had taken out loans to buy more land on the assumption that crop prices would keep rising at an extraordinary clip. When food prices fell and interest rates rose, people across Middle America lost their farms. They protested by driving their tractors to Washington and circling the Federal Reserve’s grand marble headquarters.”
The politicians also protested. As Irwin writes ““We’re destroying the American Dream,” said Republican representative George Hansen of Idaho. A building-trades magazine accused Volcker of “premeditated and cold-blooded murder of millions of small businesses.””
But Volcker stayed put and finally managed to bring the inflation monster under control with the bitter pill that he administered. By July 1982, inflation had more than halved from its high of 15 percent in March 1980.The steps taken by Volcker ensured that the inflation fell to 3.2 percent by 1983. After this, the United States saw solid and almost non-stop economic growth till 2000, when the dotcom bubble burst.
Interestingly, Volcker may not have been very popular in the first few years of his tenure, but now he is among the few men in finance who continues to be well respected.
At certain points of time economies need to be administered the bitter pill if they are to be healed back to health again. India is in a similar position currently. Tough economic decisions will have to be made and these decisions will be unpopular. And given that there will be protests. When there are protests the easy way is to “rollback” whatever is being protested against. But that will only postpone the problem.
The Narendra Modi government of course cannot operate totally like Volcker. Volcker was not elected by the people and he did not have to explain what he did directly to the American citizens. He did have a lot of explaining to do to the American Congress though.
But what the Modi government can learn from Volcker is that at times it is important to administer the bitter pill to the economy and not get bogged down by the protests. The important point here is that the Modi government needs to communicate more and more in order to explain its decisions to the people. This can be done through the social media, ministers talking to the media and even putting out detailed press releases. Also, it should not fall prey to the “rollback” culture made so popular by the Congress.
The article originally appeared on www.firstbiz.com on June 25, 2014
(Vivek Kaul is a writer. He can be reached at
[email protected])