Restructuring the State

IN 2015, Prime Minister Narendra Modi raised an unprecedented aspiration when he asked, “Can we not dream of a $20 trillion economy?” In his 2021 Independence Day address, as India entered its 75th year of freedom, the prime minister spoke of the next 25 years as India’s “Amrit Kaal”, whose purpose was “to better the lives of citizens, lessen the development divide between villages and cities, reduce government interference in people’s lives, and have the latest technology so that we are not behind any country in the world”. Finance Minister Nirmala Sitharaman’s Budget speech also echoed the Amrit Kaal vision set out by the prime minister and supports the realisation of the vision through concrete policy choices and programme commitments in technology and infrastructure.

India’s defence sector has long ailed from two interrelated afflictions—insufficient capital expenditure, and a heavy reliance on defence equipment imports. Endemic corruption meant that governments would even desist from equipment modernisation. The cost of such political expediency and irresponsibility has been a chronic lack of readiness to manage all eventualities, including a possible two-front war with China and Pakistan. Under the present Government, the defence sector has seen a series of structural reforms, from the creation of the Chief of Defence Staff office to the corporatisation of the Ordnance Factory Board. In the Budget, Sitharaman took the reforms further by announcing that 25 per cent of India’s defence R&D budget, amounting to approximately ₹ 2,000 crore, would now be opened up for industry, academia and startups.

While this is a small beginning, it represents a paradigm shift in the way India will develop defence equipment, embracing private sector capabilities fully and investing risk capital with engineers and technologists outside of the government establishment for the first time. Additionally, 68 per cent of defence capital procurement (previously 58 per cent), or about ₹ 84,598 crore, would be from the domestic defence production industry. There would be substantial downstream benefits from both these decisions, as India builds new capacities in aerospace and defence which heretofore were the preserve of government bodies and public sector companies alone. The bold initiative of building a defence-tech-industrial ecosystem led by the private sector would not be possible unless driven by a clean, honest Government that has built high credibility and earned widespread public trust. Additionally, the Government announced the creation of thematic funds in sunrise sectors, such as deep technology, climate action, pharmaceuticals and agri-technology that would be managed by private fund managers and would further support the country’s growing domestic private equity and venture capital industry.

The coming together of the defence sector, which was largely cut off from the private sector for nearly the entire post-Independence period, and the technology industries, which, while newly prominent on the corporate landscape, have quickly become its principal change agent, will generate several positive spillover effects and prove to be shapeshifting for economic growth. Early benefits of the defence-tech-industrial ecosystem for national security can already be seen in the way high-tech drone and artificial intelligence startups are working with security forces and contributing new capabilities to India’s arsenal.

Broad-based 5G network penetration will unlock new opportunities for hardware and software makers. They will have access to India’s vast consumer market, already among the world’s most rapidly expanding technology startup ecosystems

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Along with committing to the rollout of optical fibre internet connectivity to all villages by 2025, the finance minister also affirmed that 5th generation (5G) telecom services, which will provide ultra-high-speed data combined with low latency, would be launched in India this year. Several leading economies, including the US, China, South Korea and the UK, have already launched 5G services—so India is already behind the curve. The telecom industry has gone through a series of upheavals, with several companies going bankrupt or shutting down, and finally saw long overdue reforms that reduced commercial uncertainty for the surviving businesses. This turmoil likely delayed India’s 5G rollout. The advent of 5G creates opportunities for new hardware players to emerge and promises to enable a new category of software services and virtual experiences, given responsiveness and data speed that would be several times faster. With the India Stack-powered Unified Payment Interface (UPI) established as an unqualified success, India is already at the forefront of digital payments globally.

As India attempts to drive digitalisation across health, agriculture, education and retail through private entrepreneurship—alongside government initiatives, such as the National Digital Health Mission, Agri Stack, Digital Ecosystem for Skilling and Livelihood, and the Open Network Digital Commerce that would collate and supply the primitives for businesses, just the way UPI did for payments—achieving swift and broad-based 5G network penetration will unlock altogether new opportunities for hardware and software-makers alike. Unlike in earlier cycles, both electronics hardware manufacturing and software services industries are growing rapidly in India, and in the next phase these businesses will have access to a growing suite of digital public goods as well as India’s vast and unified consumer market, already among the world’s most rapidly expanding technology startup ecosystems on parameters such as growth in funding, emergence of unicorns and creation of new ventures.

In a 2013 speech, then-Gujarat Chief Minister Modi had emphasised the power of technology to transform governance. He described government as the process of rulemaking and defining outlays, and governance as the delivery of public services measured by outcomes. As we close in on nearly a decade of Modi as prime minister, the Government has pushed to rearchitect the state and to restructure the economy—through efforts like the indirect tax reform, bankruptcy code, Aadhaar-powered direct benefit transfer (DBT) and other signature initiatives—in service of the vision of providing India with new rules and tangible results.

Two of the early actions had set the tone and direction of where Modi wanted to take India—first, dissolving the Planning Commission and replacing it with NITI Aayog, and second, the thrust given to the Pradhan Mantri Jan Dhan Yojana. The former brought a structural change in government by ending the fund allocation powers of political appointees over elected chief ministers, and along with the dissolution of the extra-constitutional National Advisory Council (NAC), the policymaking authority of the Cabinet and the Prime Minister’s Office, defiled under Congress-UPA Governments, was restored. The Jan Dhan Yojana would go on to become the first letter of the now-famous JAM (Jan Dhan-Aadhaar-Mobile) trinity that has unrecognisably transformed welfare delivery and citizen services by enabling DBT into the recipient’s account, and it is technology that underpins the JAM trinity, as today it includes practically the entire population of the country and is the backbone of fast, seamless, targeted welfare delivery. The DBT platform has been a superpower for India through the pandemic—even as some advanced economies struggled to deliver welfare benefits in the form of printed cheques, India transferred cash and benefits of over ₹ 10 lakh crore over two years electronically, straight to the recipient’s bank accounts.

It is useful to remember a bit of history to see how far India has come over the last eight years. In the lead-up to the 2014 General Election, a yearning for change had emerged from the environment of despondency and hopelessness engulfing India. Inflation was raging, corruption scandals galore had dented public confidence in the political class, investors had become sceptical of the India story, and India Inc was seen in a poor light, having been in cahoots with the Government through many of the scandals and precipitating a banking sector crisis visible on the horizon. When Modi took office, the new Government had multiple crises to handle—from arresting a raft of economic challenges to rebuilding public confidence, all the while meeting the high expectations of voters, was a monumental task. In the last eight years, technology has emerged not just as an indispensable tool of governance across domains but it is now both the growth engine for the economy and a powerful catalyst to shake up incumbents across industries, motivating them to take more risks. Alongside technology, infrastructure creation has received relentless focus and it is inarguably the one area where the Modi Government has excelled, exceeding even an optimist’s expectations.

AS THE SECOND critical driver of India’s path to a $20 trillion economy through Amrit Kaal, infrastructure and logistics require continued investment and comprehensive upgrade. While great strides have been made, with highly successful outcomes in highway construction, air connectivity, railways modernisation as well as port development, India has long ways to go. India needs to invest upfront so that infrastructure capacity across the country increases before the demand for it fully emerges, and that is what the Budget envisions by aligning the seven key areas of the PM Gati Shakti Plan—namely, roads, railways, airports, ports, mass transit, waterways and logistics infrastructure—with the related areas of the ₹ 1.97 lakh crore National Infrastructure Pipeline. To take one example, by ending the practice of the separate Railways Budget and giving the responsibility of running the railways ministry to able technocrats, the railways received the commercial focus and capital investment they sorely required. Between 2014 and 2022, the capital expenditure by the railways increased fivefold, and the electrification of the entire rail network will be completed by December 2023. The chief minister who had quipped in 2013 that if private cars can run on public roads, why can’t private trains run on government-owned rail tracks is also striving to make that happen as prime minister, with efforts on to have private businesses operate trains.

India needs to invest upfront in infrastructure capacity. That is what the budget envisions by aligning the seven key areas of the PM Gati Shakti plan—roads, railways, airports, ports, mass transit, waterways and logistics infrastructure

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The finance minister announced that effective capital expenditure would be ₹ 10.68 lakh crore, or 4.1 per cent of GDP, and with the fiscal deficit projected at 6.4 per cent, the Government is wisely betting on growth rather than tightening its belt too quickly. It should be borne in mind that quality of spending matters as much as the quantum of spending—and India is investing in the creation of productivity-enhancing physical infrastructure as well as high-impact social infrastructure programmes such as the Jal Jeevan Mission, which is on track to bring piped water to all households by 2024. The effect of programmes such as Jal Jeevan and PM Ujjwala Yojana should also be analysed from the perspective of the time saving they enable at the household level—one person in the household, typically a woman, is saved from the daily drudgery of chores like collecting firewood and water just to provide the most basic facilities for the rest of the family.

The Budget has provided a clear statement of intent by putting technology and infrastructure at the forefront for Amrit Kaal. It is policy and technology that are the principal drivers of change in an industry, thus affecting firms on aggregate. As industries change, so does the economy, where India has been trying to bring a balance between agriculture, manufacturing and the services sectors.

Much has been done to shore up competitiveness in manufacturing—among other efforts, the Economic Survey noted that 17 states had drafted rules for the labour law reforms passed by Parliament in 2020. While contact-intensive services industries are still reeling under the pandemic’s impact, the Government provided a boost to the IT services sector by overhauling rules for BPO service providers, enabling BPO providers to operate under more relaxed rules that permit remote working. This is contributing to a mushrooming of such jobs in tier-2 and tier-3 towns.

Agriculture, which has been the most resilient to the pandemic-induced economic crisis, remains the least reformed, as the crucial farm law reforms were unfortunately withdrawn under agitational pressure. A segment where over 40 per cent of the labour force is dependent continues to enjoy tax-free income—this is an arrangement that is not sustainable and must be changed. While the Constitution doesn’t permit the Union Government to apply a tax on agricultural income, states can do so.

At the very least, farmers earning above a certain threshold should be made to pay taxes. Related to this is the long-pending issue of direct tax reforms, which was once again not addressed by the finance minister. India needs comprehensive changes in direct taxation to fix anomalies in how capital assets are taxed. The rates for the highest bracket are also very high—and this is a consequence of a farrago of exclusions and exemptions granted over the years to different categories, thus transferring the responsibility onto the top income group. Direct taxes need a GST-style structural change to broaden the tax base and widen the tax net, including as many individuals and entities as possible.

While privatisation found no mention in the Budget, there has been enough action with the sale of Air India and Neelachal Ispat to generate confidence that the new policy committed to, whereby the Government would maintain only a “bare minimum presence” in selected strategic sectors and privatise all other Central public sector enterprises (PSEs), will be implemented wholly. While Union Government PSEs are analysed carefully for their performance or lack thereof, scrutiny should also be done for the state government-owned PSEs, many of which are veritable black holes of waste and corruption. Where Air India was pilloried for racking up ₹ 20 crore per day in losses, state PSEs have cumulatively incinerated on average ₹ 215 crore per day. In the spirit of federalism, states should follow the Union Government in ending this colossal abuse of public money.

It seems clear that the intent of the Government is to deemphasise the Budget as the forum for making all important policy announcements, and it has done so successfully. The transparency with which the accounts are being presented is welcome for analysts and economists, once again building public trust in the Government’s intent and integrity. The Budget should now be seen as one of many policy statements made in the year by the Government. The discipline and focus with which the Government has worked bears out another observation made by Modi in his 2013 speech—he had jocularly said that India would be much better off if government leaders said “No” more often and bureaucrats said “Yes” more often. In the last eight years, by and large the prime minister and his Government have resisted populist pressures and lobbying by interest groups, sticking to an economic strategy. At the same time, the prime minister has managed to get buy-in from bureaucrats to execute on big-ticket programmes and projects, thus bringing new rules for the New India while delivering results that are affecting the lived reality of all Indians, especially the poor. If India can persist on this path, restructuring the economy with an eye on competitiveness and rearchitecting the state to focus only on select core functions, we may achieve the prime minister’s target of a $20 trillion economy well before the close of Amrit Kaal and the centenary of independence.

About The Author

Rajeev Mantri

Rajeev Mantri is Managing Director, Navam Capital and co-founder, India Enterprise Council. He is co-author of A New Idea of India: Individual Rights in a Civilisational State

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