THE GROWTH SUTRA 2015

On the Road to Recovery with Arun Jaitley

Until seven months ago, heads of banks were familiar with a phone call from a certain Lutyens’ Delhi bunglow. The Congress grandee at the other end would ‘request’ in a polite tone that the bank disburse loans to a particular corporate group. Bankers would promptly oblige, having got used to such indiscreet recommendations from power wielders of the UPA Government at the behest of New Delhi’s totems of the time. Those were days when bankers, with their deep sense of resignation, would not protest when key positions in public sector banks were filled at the whims of the kin of the powerful who watched and remote-controlled a vital part of the Indian economy. The banking sector, as Manchester University’s Professor Kunal Sen points out, was “relatively untouched by previous economic reforms”.

When the Narendra Modi Government assumed power last May, the bureaucrats who owed allegiance to a regime that unabashedly promoted cronyism were still there, especially those in the Finance Ministry who would be heard asking, “What can this government do that the great doctor (former Prime Minister Manmohan Singh) couldn’t do in terms of putting the economy back on track?”

“The clean-up took some time,” says a BJP leader, referring to officials acting on behalf of “old vested interests”, as he puts it. He hastens to add that though some of them are gone, some are still around, an indication that these babus will soon get their marching orders. Officials close to the new NDA Government allege that the likes of KP Krishnan, a favourite of the erstwhile Finance Minister P Chidambaram, went to the extent of denting the image of the new Government through a whisper campaign suggesting that Finance Minister Arun Jaitley and RBI Governor Raghuram Rajan did not get along.

That campaign was a part success in making it seem that differences over lowering the RBI’s policy rate of interest—not unexpected between any government and central bank—had driven a wedge between Jaitley and Rajan, both of whom were upset with the concerted efforts by a group of officials to denigrate them and hurt the harmony of economic governance. The whispers were relentless all the same, and by October, Krishnan, additional secretary in the Department of Economic Affairs and a 1983 batch officer of the IAS’s Karnataka cadre, was transferred to the Department of Land Resources as additional secretary under the Union Ministry of Rural Development. Krishnan was replaced by Ajay Tyagi, former joint secretary in the Ministry of Environment, Forests and Climate Change, and there are now signs that some of Krishnan’s protégés may soon be shunted out of the Finance Ministry as part of what the BJP leader calls a “clean-up act”. “These officials within the Ministry were also behind the distortion of facts to suggest that Prime Minister Modi was upset with the Finance Minister for the slow pace of reforms,” claims the BJP leader, “These were vicious lies.”

REALITY CHECK

Contrary to claims made by sceptics, green shoots are already visible in the economy, thanks to the hard work of the Government over the past seven months, Arun Jaitley tells Open in an interview.

These months have been very challenging for the Finance Minister. For two consecutive years, India’s GDP growth was below 5 per cent. “Employment generation had declined, revenue buoyancy was low, and the country had become investment starved,” he says, adding that the Government is unequivocally committed to reforms.

While getting rid of irritants and pursuing a course correction was quite important to forge ahead, the Government is now hellbent on fast-tracking reforms that halted during the UPA-II regime. In the banking sector, for example, the Modi Government had to kick off the process by sacking heads of six public sector banks. The move came within months of the chairman of Syndicate Bank getting arrested on bribery charges. “Many of them were named to those posts through a sloppy selection procedure,” alleges an official of the Union Finance Ministry.

What excites economists like Kunal Sen about the current Government is that it is going ahead with long-overdue reforms in the governance of public-sector banks to professionalise their operations and grant them the autonomy needed to act as agents of economic efficiency rather than cronyist directives. “What is important is that there is a more efficient allocation of capital,” Sen notes. Which is why, following the recently concluded Gyan Sangam, a bankers retreat held in Pune, the Centre is toying with the idea of asking public sector banks to form a separate holding company that will hold the Government’s stake in these banks and their various subsidiaries. The ultimate aim of this is to free these banks of majority state ownership.

That is also why the Government doesn’t squirm one bit about the prospect of convening a joint session of Parliament to get reform-oriented bills passed in the face of stringent opposition to its moves in the Rajya Sabha, where non-BJP parties enjoy a majority. The composition of the Upper House of Parliament is expected to change drastically over the next two years with the BJP winning state after state in polls held after the Lok Sabha election that saw the BJP acquire a majority on its own in the Lower House, the first time any party has pulled off such a triumph since 1984.

THE FINANCE MINISTER AT WORK

Though Jaitley was indisposed due to ill health for weeks in 2014, he is now back in full form, working 14 hours or more every day, especially in the run-up to the next Union Budget, which Prime Minister Modi has said would be a “highly transformational” one. The Prime Minister has time and again reposed faith in his key lieutenant within the Government; Jaitley is the only leader who Modi consults on each and every issue, apart from BJP President Amit Shah, who has earned loads of praise for successive poll wins in state elections.

As with Jaitley, the Prime Minister isn’t impressed merely with the Finance Minister’s efforts to push banking reforms through, a sector where the Government wants to primarily do away with the 51-per cent minimum state ownership in public-sector banks so as to promote banking efficiency and expand their asset books on the strength of their own accruals, instead of expecting the Central coffers to pump in more and more money to allow extra growth in lending.

Modi leans on Jaitley for his floor-management capabilities in Parliament as well. The lawyer-politician is looked upon as a man who can steer the Government’s key functions, thanks to his credentials as a highly networked Delhiised politician who has the pulse of how the high-and-mighty make their moves. To be sure, Jaitley still keeps in close touch with the power elite in Lutyens’ Delhi and enjoys friendships with politicians and businessmen irrespective of their party affiliations and loyalties. Contrary to what his detractors peddle, Jaitley’s report card so far is excellent. It is under his watch that the Government has made so much headway in building a broad consensus among states to implement the Goods and Services Tax. While he personally met state finance ministers to allay their fears and convince them of the benefits of a uniform tax regime across India, he also deserves credit for spearheading the moves to raise the Foreign Direct Investment (FDI) limits in insurance, defence and railways. The guidelines for FDI in the real- estate sector have also been liberalised.

“The Finance Minister spends a lot of time on details, and he mentors other ministers in economic-related ministries. His opinions are valued over anyone else’s in the current Government, though I am aware of rumours spread by certain people that this is not so. His role in interacting with the RSS on key policy matters has always remained crucial,” says a Delhi-based BJP leader, “Jaitley’s connections with the RSS are as well known as those with powerful business tycoons and political figures.” A party thrown recently by his friend Ranjit Kumar to celebrate Jaitley’s birthday on 28 December saw the crème de la crème of Delhi in attendance.

“Mr Jaitley is so hardworking that he doesn’t find enough time to meet his former walking partners in Lodhi Garden,” says this leader, smiling. Jaitley does make it to that leafy park in Delhi, but only infrequently. These days he often prefers using the 2 km-long track within the compound of his beautiful 2 Krishna Menon Marg home for his brisk morning walk.

Jaitley has also been tasked with meeting the media more frequently. At a recent luncheon organised at his home, more than 1,000 journalists turned up.

SO FAR, SO GOOD

There is enough good news to go round, though there is a lot more expected of the NDA Government on reforms. A fact check shows that the Centre has put in place a mechanism to champion cooperative federalism through the creation of a successor to the Planning Commission. Called the NITI Aayog, this new entity would focus on policy advice instead of five-year plans and other vestigial remains of the outdated command- and-control system of economic governance.

The Government recently appointed Columbia University’s Professor Arvind Panagariya as the NITI Aayog’s vice-chairman (see page 28). States like Tamil Nadu have welcomed it because chief ministers used to dislike being told how and where to spend Central funds, something that the Planning Commission zealously did over the past six decades or more. As Chief Minister of Gujarat, Modi had been a vocal critic of the sweeping powers of the Commission. So it came as no surprise when Modi, in his first Independence Day speech, declared that, “We will replace the Planning Commission with a new institution having a new design and structure, a new body, a new soul, new thinking, new direction.”

Meanwhile, the Government has had to take the ordinance route to enact laws, inviting criticism from the opposition for resorting to what it calls an ‘Ordinance Raj’ (legislation through executive decree). Through an ordinance officially issued by the President, the NDA amended the complicated procedures of India’s Land Acquisition law. The revised law, the Government says, facilitates development but balances it with higher compensation, relief and rehabilitation measures for displaced farmers. The opposition, including the Congress party, has accused the Government of being in a hurry to help the corporate sector. Ironically, faced with an opposition boycott in the Lok Sabha, the previous Congress- led Government, too, had had a set of ordinances issued, incurring the wrath of the BJP, then in the opposition, for bypassing Parliament.

Nonetheless, the new Government has the political will and stamina to convene a joint session of Parliament if the proposed reform initiatives aimed at enhancing investment in infrastructure and manufacturing are to be turned into laws. The Modi Government can do with ease what the Manmohan Singh dispensation could not, given the latter’s dependence for House support on parties with divergent political views. Since the Lok Sabha has far more members, a joint session of Parliament would weigh in the NDA’s favour.

The NDA Government, which has introduced a law promising to facilitate a ‘transparent and non-discretionary method of allocation of coal blocks’ to enable commercial mining and thus exploit the potential of the sector by cutting costs, may, however, have to wait a while before it is able to convene a joint session. Ordinances, which are temporary laws issued by the President on the Union Cabinet’s advice when Parliament is not in session, cease to operate either if Parliament fails to approve these in six months of its re-assembly or if resolutions of disapproval are passed by both the Upper and Lower House. Since the opposition has not rejected the bills to amend insurance and coal mining laws, the bills can be introduced in a joint session only six months later. Article 108(1) of the Constitution permits the calling of a joint session of Parliament when a bill is rejected by either house, or when both Houses have finally turned down the amendments to be made to a bill, or when more than six months elapse from the date of the reception of the bill by the other house without it being passed by it.

FAST FORWARD

Global financial services experts say that the full benefits of the Government’s decision to deregulate diesel prices and facilitate the opening up of the hydrocarbon sector to private investment is yet to reflect in the bottomlines of Indian companies and the fiscal health of the country. Michael Kurtz, chief Asia strategist, Nomura, said in an interview to CNBC-TV 18 recently that he is highly optimistic on India in 2015, as much of the good news is yet to play out. He sees India’s current account deficit situation improving vastly because of the sudden decline in crude oil and commodity prices. However, he cautions that stimulus packages in China could drive up commodity prices over the medium term. He also expects the RBI to cut its benchmark interest rate by half a percentage point this year. Lower oil prices will certainly lead to a fall in manufacturing costs and cut the Government’s subsidy burden (See graphic: ‘Stimulants and Spoilers’ on the top).

In line with the Government’s expectations of a renewed momentum in the manufacturing sector, a gradual recovery is underway for the Indian economy, with the country expected to clock a GDP growth rate of 5.5 per cent this fiscal year (ending 31 March) and 6.6 per cent in 2015-16, says a Nomura report authored by Sonal Varma. This recovery, the report says, is likely to be supported by an easing of inflationary pressures and the Centre’s measures by way of economic reforms. JP Morgan’s Toshi Jain and Sajjid Z Chinoy have also said in a note that stronger demand and lower input prices bode well for India’s corporate sector. The HSBC Purchase Managers’ Index (PMI) for Indian manufacturing rose to a two-year high in December, led by a rise in new domestic and export orders, while output growth in six core infrastructure industries rose 6.7 per cent year-on-year in November— which suggests a likely rebound in industrial production late last year, according to the Japanese brokerage firm. The HSBC PMI measures the performance of the manufacturing sector and is derived from a survey of purchase activity by 500 manufacturers.

For its part, the Government takes pride in the impact of its raft of measures. These include replacing the model of cooking gas subsidies with a direct cash transfer system so that deserving consumers get the benefit and subsidy leakages are plugged. Accurately aimed subsidies would mean financial inclusion, led now by the Pradhan Mantri Jan Dhan Yojana, for which over 100 million accounts have been opened for have-nots in need of help. The launch of flagship programmes such as the Swachh Bharat Abhiyan, Digital India and Skilled India, meanwhile, have enhanced the country’s image. Taxpayers have welcomed the Centre’s raising of the income tax limit and its new incentives on both savings and housing investment, even as tax rebates for manufacturers have come in aid of a sector that was in a slump. Jaitley mentions the reformist efforts of states such as Rajasthan, which has reformed its labour laws to usher in an era of work efficiency.

What will help both producers and consumers this year is a cut in interest rates, high levels of which end up squeezing the EMI-paying consumer besides dampening corporate investment. Now that inflation is being held in check, a lowering of rates could aid in the revival of the economy’s investment cycle—though this is unlikely to be instant and may take a while longer.

Yet, rays of hope are visible. The NDA’s commitment to a business-friendly environment is clear; and its raft of ordinances is a signal that it will not let political gamesmanship stall governance. After all, India as an emerging market is a good bet for global investors, and it is time the country offered a good investment climate as well. Despite hiccups, Indian stock indices are buoyant.

Now that India’s development priorities have shifted from poverty alleviation to combating inequality, resulting in a recalibration of the national mindset, and aspirations have replaced entitlements, it is not very hard for the NDA to politically hardsell decisions that do not have populist overtones.

None other than Amartya Sen, a trenchant critic of Modi, had to concede recently that the Prime Minister has offered Indians hope. The Government must make the most of it. It has the political will and that’s a cause for optimism.

Arun Jaitleydevelopmenteconomygrowth rateinflationRaghuram RajanRBI