Catching up on the Economic Agenda!

Social Media is an ongoing battlefield for the IT Cells of political parties. There, you routinely find claims and counter claims by BJP and the Congress, which get forwarded and go viral.  Among the regular updates from the BJP side, the ones which are popular are those where Narendra Modi era (Post 2014) and Manmohan Singh era (2004-2014) are compared which show how the country has progressed rapidly in the last 7 years whether it is Highways construction, Rural Electrification, Toilet construction, Clean water supply etc. etc. However, one thing on which the BJP IT cell is put on the back foot by the Congress is the Economic growth. This is a graphic which is popular among the Congress supporters and rightly so where in comparison, the Singh era shows higher average GDP growth than the Modi era, so far.

I am certain that if there is one thing Modi as a person, who likes to leave behind a legacy in whatever he does, would like to correct, it would be this. Frankly, I had high hopes from this government in its first term on its economic agenda. I thought that with a clear majority, it will pursue bold and long pending reforms with a much higher vigour than the reformist Vajpayee Government which was always bogged down by coalition pressures.  It turned out that, but for the introduction of GST (a landmark and very important reform, in my opinion) and Demonetisation (in which the costs outweighed the benefits), the 1st term was lack lustre and was more or less on “Maintenance mode” as far as pursuing a bold economic agenda was concerned.

It is my opinion that lawyers do not make good Finance ministers. P.Chidambaram, a fine lawyer, who is regarded as one of the most reformist Finance ministers the country had, always use to come up with one nit picking thing in his every budget, which cast a dark shadow on all the other good reforms he came up with. We all know what happened with Pranab Mukherjee, another Finance minister with a legal background. His retrospective taxation idea much against the wishes of even the economist Prime Minister Singh, punctured the “India Story” then and our economy went into a tailspin. So, that’s what happened with the Modi Sarkar in its first term. Arun Jaitley, another fine legal eagle was picked as the finance minister but, even during his regime the retrospective taxation was not rolled back! With no much economic traction, the 1st term of Modi ended on a disappointing low economic growth path.

In 2019, when Nirmala Sitharaman was made the Finance minister in a very surprise move (not Piyush Goyal who was touted as the favourite), expectations were quite low. But, I had mentioned that time, that she could surprise the critics at the end of the day. I felt that considering her background and her studious nature, she can be expected to meticulously follow the agenda as laid out in the manifesto. Not just that, but also follow through methodically in terms of execution.  You can see that this is what is happening now.  In her 1st budget in 2019, when corporate taxes were cut – a bold economic move to boost private investments and sentiment, it appeared that the Modi Government in its second term had got its intentions right in pursuing its economic agenda to boost growth which faltered in the 1st term.

 

The pandemic though, which hit all economies hard including India in Feb/Mar 2020 put a spoke all further bold moves. Economic management during a pandemic is a double edged sword. The government needs to focus on lives on one hand and livelihood on the other and that too when its income is crippled.  But, I thought that the team managing the economy in this government weathered the Covid storm very well and managed to tide over the crisis very well, under the circumstances.

In the midst of the pandemic last year and perhaps even now, top economists of the likes of Dr. Abhijit Banerjee, Dr. Raghuram Rajan and Dr. Kaushik Basu have been of the opinion that the Central government should not worry about fiscal deficit, agency ratings and all. Among other things like increased spending on health, they maintained that it should just do cash transfers through DBT mode to the needy. However, the government took a more cautious and calibrated approach of support by providing free ration to the needy, extending loan support to businesses etc. instead of cash transfers.  This has been a clash of ideas between the economists in the government and economists commentating from outside.  Frankly, I felt that what our government did is a better approach for a country like India.

Unlike the West, in India, people are more conservative financially. So, when a person gets free cash during a pandemic his first instincts will be to save it for spending on essential goods rather than on non-essential stuff to boost demand. Secondly, thanks to the lock down, there were supply restrictions. It is not logical that people will spend money just because they have been provided with cash support. So, the Government’s calibrated approach of providing free rations to the needy serves the purpose of protecting livelihoods during the pandemic. The salaried upper middle class and above were anyway not so affected as they were getting the salaries and even they spent only on essential stuff basically due to lockdown restrictions. So, the argument that Direct cash transfer would have boosted demand in the times of a pandemic doesn’t seem logical at all.  If not all, a few economists like Swaminathan Aiyar finally admitted that this approach worked better for India.

It is in this context of understanding the thought process of this government on handling economic issues during the pandemic that I bumped on this video. In this speech, Sanjeev Sanyal, Economist and Principal Adviser in the Ministry of Finance, articulates brilliantly the approach of the government in managing the pandemic from an economic stand point. If you haven’t watched it, please do so.  It answers quite a few questions which are routinely thrown at this government at the way it has been responding to the pandemic.  Its clear from the speech that there is a “method” in the thinking of the government while there is “madness” in the newsrooms that feed us information.  I wish that the government articulates the thinking behind their decisions more regularly for the benefit of all.

Now if you see the last few months, it is clear that the government is dead serious in reviving the economic growth. Some of the decisions since March have been bold and commendable. The rolling back finally of the retrospective taxation is one.  The Asset Monetisation program is another.  Taking a call to relieve the stress on the balance sheets of the banks by forming a “Bad Bank” is also another one.  Again, addressing sector specific long pending issues like in Telecom is yet another.  So, there has been a slew of bold decisions recently that gives a hope that in this term, with the pandemic hopefully behind us, the Modi Sarkar is pushing aggressively on its economic agenda.

As an economy, I believe we are at an interesting and crucial point. The pandemic is ebbing (or so we believe). Vaccination is progressing at a rapid pace. Economic activity is getting back to normal. These should bring the economy soon to pre-Covid levels. Now, if the bold reforms that have been unleashed this year has the desired effect, the growth only can be higher from here. For the Modi Sarkar which is finally catching up on the economic agenda, it will be a lasting legacy to demonstrate a higher average economic growth than the Singh era. And for the IT cell of the ruling party, few memes less to counter!

Budget -21, Reform push and Time to Market!

There have been budgets in the past which have sort of quickly moved away from the headlines. And there have been budgets which remained in the headlines but for all wrong reasons. This year’s budget, incidentally the 8th one from the Modi Sarkar presented by Nirmala Sitharaman has managed to hog the limelight for all the “right” reasons. The pun here is well intended.

Talking of the reaction to this government’s previous budgets, it’s always been muted and for obvious reasons. Ever since Narendra Modi became the Prime Minister way back in 2014 that too with a clear majority, the expectation has been that he will bite the bullet on many of the much needed, long pending reforms. Honestly, the previous budgets of the Modi Sarkar were mostly incremental budgets with some increased allocations here, some improved programs there and so on. “What’s the Big Idea”? ‘Where are the Big bang reforms?” were some questions hurled by the commentariat post every budget. It has been my observation that under Modi, the budgets have just become an annual statement of allocations and outlays while Big Ideas whether it was the Swachh Bharat Abhiyan or the Ujjwala Yojana et al were launched outside of the budget. But in this year’s budget, there has been a welcome change to announcing some “Big Ideas”.

The positive vibes around this year’s budget can be attributed to the announcement of few big ideas which have been reformist in nature, while keeping the budget free of any “bad news”. One is the announcement of the setting up of an Asset Reconstruction Company (ARC) which is a euphemism for a “Bad Bank”. Second, is the statement of intent on “privatisation” of two Public Sector Undertaking Banks and one General Insurance company. So far, governments have been taking umbrage under the term – Disinvestment without putting out the word “Privatisation” so openly.

Not just the budget, but the announcement has been followed up by speeches in the parliament and other forums by those who matter in the government, on the seriousness of the intent. In fact, as per news reports, Niti Aayog has recommended to cut the number of state owned Public Sector Undertakings (PSUs) to just 24 from over 300 that exist today. If this programme takes off, it will make Modi a reformist of “Thatcherian” proportions. If you recall, Margaret Thatcher way back in 1979, on assuming power systematically embarked on a reform program to revive the British economy. She deregulated markets, cut tax rates, removed exchange controls and consigned militant trade unions to oblivion. But, it is the privatisation of State owned corporations like British Steel, British Petroleum, British Telecom and British Airways that stays as her enduring legacy till today. So, what Thatcher achieved in the early 80’s in the United Kingdom is what Modi is embarking to do in India after forty years. That brings to the next point of this post which is the important piece of “Time to Market”.

In business, Time to Market is nothing but the time taken by a company to launch a product or a service from the date of firming up on an idea.  For companies, this is an important issue in new product introductions.  In businesses that are highly competitive or for that matter any business, you cannot afford to have a long Time to Market.  That would run the risk of your competitor getting ahead or consumer preferences changing that makes the idea less relevant or even redundant.  I believe that even in the matter of reforms for a government, a short Time to Market is critical. And as a country, our track record on that front is unenviable so far.

In the context of reform push, I believe there are three stages namely – Idea, Intent and Implementation. First, the idea is just floated in a budget speech or on important occasion/forum. Then the Intent is demonstrated when the idea is given a proper shape, laws are formulated if there is a need and resources are allocated.  Implementation is when finally the reform becomes a reality and is rolled out. So, in India if you see the history of Time to Market on important reforms, it doesn’t pose a pretty picture.

For example, take the case of a reform like Aadhaar. The idea and need for a unique citizens identity card was floated way back in 2001 by an Empanelled Group Of Ministers (EGOM) chaired by the then Home Minister L.K. Advani during the Vajpayee led NDA regime. It was only in 2009, when the intent was demonstrated by the UPA government led by Manmohan Singh with the announcement in the budget and then following it up with the set up if UIDAI (Unique Identification Authority of India) under the leadership of Nandan Nilekani. And finally, the first Aadhaar card was issued to a citizen in September 2010. So, from the idea to the launch it took a good 9 years. In the case of GST, from the time of the floating of the idea way back in 2000 to showing the intent in the budget in year 2005 to finally launching GST in India in 2017, it took seventeen years.

In the case of the policy of allowing 100% Foreign Direct Investment in retail however, from the stage of the Idea to Intent to Implementation, the landscape of retail has changed. India doesn’t still allow 100% FDI in multi brand retail. This was seen as an important reform in attracting FDI and employment generation a decade ago. But now with the advent of E-Commerce where 100% FDI is allowed in the marketplace model, 100% FDI in Multi-brand retail is no longer seen as a constraint. In other developing countries like Thailand foreign direct investment in retail gave a huge boost to the economy. But India missed that boom because of the dogma around FDI in multi brand retail which stretched the Time to Market on that reform.

Ergo my point is, if the reforms which have been announced in this budget have to make an impact, short Time to Market is critical. Having floated the Idea of a Bad Bank, it is important to follow up quickly with the formation of the ARC and eventually roll it out within this year itself so that the PSU banks can be freed of the stressed loans and they can get back to lending with more ease. Similarly, in the case of privatisation of PSU Banks, the idea has been floating for a while now. But this is the first time, the government has expressed its formal intent via the budget speech. The road to privatisation is not going to be easy at all with trade unions already gearing to pick up the gauntlet with the government. I though believe just as the mass VRS issue in PSUs like MTNL and BSNL etc. went through in spite of stiff resistance from trade unions, this time, the government may be able to pull it off with a few hiccups. Or so I hope.  Also, while the stock markets are on a high this year, the government can manage to get better valuations.

In the run up to the 2014 Lok Sabha elections, Modi repeatedly talked of “Less Government, More Governance” and “Government has no business to be in business” – thoughts which signalled a clear Rightward tilt on the economic philosophy front. However, till this budget speech, we didn’t see much of action towards withdrawing the government from running many businesses. This budget from that sense is critical in signalling the government’s intent towards moving away from running inconsequential businesses, which is a good sign. And, if the intent is translated into action in a reasonably short Time to Market, then it will be Narendra Modi’s lasting legacy in changing the economic course of this country.

Post Script: If Aandolanjivis are those who make a living out of protests, what about taxing them? And what would be the Time to Market for this idea? 😁

Howdy Economy?

“Howdy” is in the air in India these days! With Prime Minister Narendra Modi set to address the global Indian audience from the NRI platform at Houston, which has been branded as “Howdy Modi”, this American slang has got into the Indian vocabulary!  But, in India, ever since the 1st Quarter poor GDP results were out, the commentariat has been asking just one question “Howdy Economy?” Because, Indian economy is believed to be in ICU where the Chief Doctor was not giving much attention!

In India, the time tested tradition has been to undertake reforms when there is a crisis. Economist and Author Shankkar Aiyyar explains this beautifully in his book – “Accidental India” with back stories behind every single historic economic initiative of post independent India. The bottom line being, we take such drastic steps only when push comes to shove!

It looks like the latest decision of the government to slash corporate taxes drastically in one go from 30% to 22% is one such initiative which will have a lasting positive impact on the economy but which was taken when the answer to Howdy Economy question was very, very feeble. Naysayers notwithstanding, simplifying the tax structure, eliminating the myriad exemptions and having a reasonable low rate is a welcome move. It will make the industry competitive, make it more profitable, attract both foreign and domestic investments thereby have a trickle-down effect on the economy.

I saw some commentary that, this is more of a long term treatment and not an answer to the short term woes. Indeed yes. There is no silver bullet that can get the economy growing at 8% and more. It needs a combination of measures that are short term and long term. My belief is that, irrespective of the condition of the economy, a simple and low corporate tax structure was anyway required to grow the economy from the 8% levels we were couple of years ago, to 10%. With the economy struggling at 5% levels, the crisis like situation galvanised the government into action. Finally, the progressive reduction in corporate tax from 30% to 25% which was promised by the then Finance Minister Arun Jaitley in the 2015 budget has been executed by his protégé Nirmala Sitharaman. She has done it in one stroke and has gone a step further reducing the rate to 22%.

While the reduction in corporate taxes is a supply side reform, steps are required in the demand side as well. With the transition to the GST regime, the government has less flexibility to announce stimulus like in the past where excise duty or Sales tax cuts used to be announced to boost demand and consumption. In the present GST regime, the GST council has to take a call on the same and make those adjustments. Some of the announcements on GST rate reduction on hotel tariffs are in this direction.

With the reduction of corporate taxes, there is a loud clamour for reduction on the personal taxes front. Experts keep saying that this will put more money in the pockets of the salaried class which will make them spend more. I am not too sure of this. In the past, whenever there has been some personal income tax slab changes and effective rate reduction, we hardly came to know of the savings or reduction. And I don’t think anyone then consciously went to spend the money saved! Of course, it is more of a mood lifter and gives a feel good effect to the salaried class. Beyond that, I am not sure if a personal income tax rate reduction will boost the consumption in the short run which is what experts claim!  Nevertheless, as I have opined in the past, simplification and reduction of tax rates is essential.  This will also remove the peeve that there is now too much gap between the corporate and personal income tax rates!

One positive signal from the last few weeks is that the Government is listening.  In today’s world, any government of the day can choose to ignore the mainstream media. However, it cannot afford to ignore popular opinion which manifests in social media. As someone said, in India, we have as many economists as we have cricket experts! But the good part is, thanks to social media, apart from the secluded voice of the commentariat, there is an opening for “People like us” to give our opinions.

Ever since the tax cut announcements, there has been much discussion and debate as to whether it is right, whether it is sufficient, whether it is too little – too late, if it is pandering to corporates and so on. And if things can turn around quickly? With the festive season coming up in India, it is all about signalling and lifting the spirits and mood. When there is bad news which usually reaches us through the media, even if we are not directly connected to it, we all start talking about it, isn’t it? I refer to this as the economy suffering from “Headlines syndrome”! So similarly, when there is positive cheer emanating from even a single but important decision like this, it has a ripple effect. So, I hope this corporate tax cut move leads to such positive ripple effect in the coming days! And the answer to “Howdy Economy?” becomes loud and cheerful in the coming days!

Postscript:  In my earlier posts, I had said,

As a purely short term stimulus, any capacity building in manufacturing industry by way of new factories, expansion of plants,.. should be provided with tax relief”

And

With respect to taxation, “In simple terms, the mantra should be lower tax rates with no or very few genuine exemptions

Glad both these found resonance with the government and have been implemented!