Time for transformation

Candidate Modi, like Chief Minister Modi, has given India enough indications that he has a formula for revival

To realise the enormity of the mess the next Union Government is destined to inherit, let us return to a summer verdict 10 years ago. In 2004, immediately after it became evident that the National Democratic Alliance (NDA) led by the Bharatiya Janata Party (BJP), against the run of play, had lost its re-election bid, Indian stock markets went into a nose-dive. Ten years on, with the benefit of hindsight, one can safely say that the bourses were prescient.

They knew something that all of us didn’t. The Congress-led United Progressive Alliance (UPA), after 10 years at the Centre, should be glad that it is unlikely to return to power. If it did, it would inherit a legacy that would be a millstone round its neck. This is in sharp contrast to what it had inherited from the previous NDA Government in 2004.

Almost every economic indicator has turned adverse. In the 10-year period, growth nearly halved from 8.1 per cent to 4.9 per cent, inflation more than doubled from 3.8 per cent to 9.5 per cent, and food inflation rose nearly 10 times from 1.3 per cent to 12.8 per cent. Job creation while the economy averaged almost 8 per cent was negligible: averaging 2 million jobs a year, even as additions to the working population averaged 12 million annually. Not only were not enough jobs being created to absorb additions to the labour force, the unemployment backlog has reached frightening proportions. It could threaten social chaos.

Similarly, the country’s coffers have been virtually cleaned out, adding to the worry of the next Government. The thorough neglect of public finance management over the last 10 years has meant that the country is carrying a huge debt overhang. Not only did it fail to plan for a rainy day, it has also spent wantonly on its misguided entitlement programmes, not to speak of the Rs 60,000 crore pre-election farm loan waiver of 2008-09. If it was a household budget, then the UPA regime would have pushed the country into a classic debt trap.

This sorry state of India’s public finances did not stop Finance Minister P Chidambaram from grandstanding during the vote-on-account he presented in February, claiming that he had managed to hold the country’s fiscal deficit (or year’s debt to the uninitiated) to the promised 4.8 per cent of gross domestic product.

It was nothing but smoke and mirrors. The balancing of books was managed by postponing accounting for the spending undertaken by the Government in 2013-14. Chidambaram announced a rollover of the fuel subsidy of Rs 35,000 crore to 2014-15 and omitted to mention the actual expenditure under food and fertiliser subsidies, claiming it was what he had budgeted for at the beginning of the year. The actual number is anybody’s guess, but it will most certainly add to the fiscal woes of the incoming Finance Minister.

For the UPA, this gimmickry is nothing new. Previously, it had floated oil bonds, essentially a book entry, to take the actual subsidy payments off its books and once again claim fiscal correction—more importantly, understating the actual debt burden. Chidambaram may have given good soundbites on his impeccable fiscal record, but foreign investors—key stakeholders in the Indian economy—were far from impressed. Moody’s, the global credit rating agency, signalled unambiguously after the presentation of the interim budget this year that it was unimpressed. ‘Moody’s stable outlook on India’s Baa3 sovereign rating incorporates the macro-economic risks posed by the government’s high deficit and debt ratios as well as its recent efforts to control the fiscal deficit through ad hoc measures,’ its statement read.

Presumably, the UPA overlooked the simple maxim that Abraham Lincoln articulated more than a century ago: “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.”

If its failure to manage India’s macro -economy was not enough, the UPA has also come up short in its ability to push policy change. Like a dysfunctional family, it has pulled in different directions, often leading to delays in crucial clearances and in some instances the rejection of key infrastructure projects. Such was the activism of Environment Minister Jairam Ramesh that eventually the Prime Minister had to bow to public pressure and reallocate his portfolio.

If this was not enough, the bizarre move to amend tax laws retrospectively and target multinationals like Vodafone and Nokia has singularly damaged India’s ability to draw foriegn investment. Not only has it unsettled business in general, it has become a litmus test for India as an investment destination. Businesses have come to believe that there is no stability in India’s tax policy and that laws can be amended arbitrarily.

Things came to a head in the second tenure of the UPA after it was rocked by a series of scandals. Whether it was the 2G spectrum allocation scam or the allocation of captive coal blocks, the infractions were stunning examples of crony capitalism. It shook the Government to its foundations.

It is baffling that the UPA, which was led by Prime Minister Manmohan Singh—assisted by the ‘dream team’ of Chidambaram and Montek Singh Ahluwalia that managed the big push for economic reforms in 1991—failed so miserably. Especially since Singh possessed impeccable credentials: he served as chairman of the University Grants Commission, Governor of the Reserve Bank of India, advisor to the Prime Minister, deputy chairman of the Planning Commission, and also as the Centre’s Chief Economic Advisor.

The new government has its job cut out for it: to revive sentiment even as it focuses on a coherent medium-term agenda that will revive investment in the economy.

Candidate Narendra Modi, like CM Modi, has given India enough indications that he has a workable plan for revival. The Gujarat Model of development has already been endorsed by renowned economists such as Jagdish Bhagwati and Arvind Panagariya. In their book, India’s Tryst with Destiny, Bhagwati and Panagariya have argued that the ‘Gujarat Model’—shorthand for development that is primarily growth and private-entrepreneurship driven—has paid off in achieving the goal of poverty alleviation. In their book, they also debunk the myth of the rival ‘Kerala Model’, which for them embodies redistribution and State-driven development. The professors argue that it is actually the Gujarat Model that has delivered on development even in Kerala. Contrary to common claims, Kerala has been a rapidly-growing state in the post-Independence era, which is the reason it ranks fourth among India’s larger states, according to per-capita gross state product (GSP), and first according to per-capita expenditure, they say.

Gujarat, which had inherited low scores on social indicators, has shown impressive progress. The state’s literacy rate has risen from 22 per cent in 1951 to 69 per cent in 2001 and 79 per cent in 2011. Its infant mortality rate per thousand has fallen from 144 in 1971 to 60 in 2001 and 41 in 2011. With its relatively high per-capita income as well as a high growth rate, Gujarat continues to generate high and rapidly rising levels of revenue, which, when combined with its good governance, promise sustained, accelerated and all-around progress. The conventional argument is that the Gujarat Model cannot be replicated across the country. Wrong!

Candidate Modi, with his proven record in growth- oriented governance, has evoked great expectations. Coping with this national sentiment is going to be a challenge. Just as foreign investors must be reassured, so must the beleaguered domestic constituency reeling under the twin burdens of persistent inflation and joblessness.

Compared with the spurt in new jobs from 2000 to 2005, India saw the creation of fewer than 3 million jobs in the five years between 2005 and 2010. This slow pace of job creation is worrisome, say economists, because 12 million people are estimated to join the workforce every year in the country. They are also anxious that the manufacturing sector has failed to ‘absorb’ those moving away from agriculture. This means that without large-scale job creation, India’s demographic dividend would become a burden, or a ‘demographic bulge’, resulting in social unrest and chaos.

Clearly, the country needs a strong leadership that can promote, through solid measures, large-scale improvements in manufacturing. Greater investment in education and skilled labour are also needed in order to avert a demographic crisis—something the UPA has been dilly-dallying on.

The choice of Finance Minister would be critical. The temptation to opt for a technocrat would be irresistible. But what India needs is a politically savvy Finance Minister—pushing reform legislations like that for a Goods & Services Tax (GST) needs bipartisan support, and this can be achieved only by a politician who understands the nuances of political economy, someone who can strike a balance between the expediency of politics and the demands of the marketplace.

Assuming the right choice is made for India’s next Finance Minister, the immediate effort to attract foreign investors would be two-fold. Insiders say that a tribunal would be set up to address pending tax issues—including looking for a way out of the troubling morass of retrospective taxation—within a tight time frame of less than three months.

The next Finance Minister is expected to embark on a clear fiscal consolidation plan that is realistic and credible. What he should also do is grant proper autonomy to the Reserve Bank of India, which in the light of the massive debt overhang, has had no option but to progressively raise interest rates—and in the process price out investments in the economy—to squeeze demand and thereby seek to rein in inflation.

The high interest rate regime of the past few years has not only taken its toll on overall investment but has also begun to impact retail sales of cars, homes, consumer durables and so on. As a result, the consumer economy, which has been the broader economy’s bulwark for the last few years, has been severely jolted.

Through his manifesto and stump speeches, Modi has sent out a message that a dispensation led by him will unlock nearly Rs 10,000 crore worth of infrastructure projects caught up in issues involving clearances, land acquisition or legal disputes. The multiplier effect of such an action would be enormous; restarting cash flows to these projects, enabling promoters to resume servicing their outstanding debt, and therefore relieving the finances of commercial banks by reducing their non-performing assets.

In the energy sector, the new Government would do well to make it easier for thermal power plants to access domestic coal resources. At the moment, due to mismanagement of environmental clearances, there is a huge backlog of clearances for coal mining. While that will have to be resolved, something drastic needs to be done to ensure that environmental pollution levels are minimised by granting power plants access to cleaner coal. The next regime could also set up a dedicated rail corridor network from coal mines to thermal power plants and other bulk users.

The next Government, senior BJP leaders assure Open, will come up with a new policy to ensure an optimal energy mix. In the short term, it will encourage coal-based energy resources, but in the medium-to-long term, a new fiscal incentive package to promote solar, wind and biomass energy may be expected. It has to demonstrate to the rest of the world that India is serious about its commitment to a green world. It will strengthen the hand of the country’s negotiators at the global high table—where, at present, India is considered a laggard and often tagged with China as a major handicap to a global green pact.

Similarly, the new Government is expected to leverage India’s new satellite capability, and conclude, within three months, a project that would map the water resources across 650,000 villages in the country. It will immediately highlight the magnitude of the problem of scarce water resources, and thereby help policy planners prepare a blueprint to address the issue.

India of the moment is one of the most misgoverned countries in the world, and it adds to the urgency for change. Modi has shown that he is an administrator with an indefatigable can-do spirit. When the Tata Group faced insurmountable odds in West Bengal, forcing Tata Motors to leave the state where it was building a Nano car factory, Modi lost no time inviting the firm to Gujarat. He just sent a text message to Ratan Tata, the then chairman of the Tata Group: ‘Welcome to Gujarat’. The rest is history. Despite initial reluctance, Tata soon agreed to shift his already- built Nano plant from Singur to Sanand 2,000 km away in Gujarat. It was a high point in the trajectory of Modi’s image as an industry and investor-friendly leader. Tata later said that one would be foolish as a businessman not to invest in Gujarat. Modi sounded self-effacing when he accepted the compliment, saying he believed more in governance than government.

It is least surprising, therefore, that the Modi government in Gujarat has, since 2004, received more than 285 awards for good governance. Among them are seven Prime Minister’s awards, 82 conferred by various central government departments, and 172 by well-known national and international agencies for its performance in various development areas. The Gujarat government has won accolades for best water and sanitation management in rural areas, housing development for poor urban people, and for best practices in controlling maternal and infant mortality. Gujarat’s Urban Development and Urban Housing Department has bagged several federal government awards for its public transport initiatives such as the BRTS, solid waste management, and water supply projects. The Modi-led government has also won numerous awards from the UN and other international agencies.

The new Central Government, under Modi, can be expected to evolve an alternative governance structure. For too long India has pursued a top-down approach. The UPA talked a lot about panchayats and empowering them, but followed up with mere token gestures. The Congress, which always believed in the maxim that ‘information is power’, never allowed much transparency in governance. So a starting point for a new governance model would be to set up a committee on governance made up of well-performing collectors from across India. The first task will be to digitise all birth and death records across the country; it is already active in several states. BJP leaders say that this could be achieved in the first three months of forming a new government. Once in place, this massive database can be used to generate free birth and death certificates for people. It is a simple gesture, but something that will go a long way in restoring the faith of the people of this country in its administrative machinery.

The new government's foreign policy may not make any radical shifts, but there could be a new emphasis in the way India relates with the world. In his recent speeches, Modi has sent out clear signals that issues like Indo-Pak relations will not be dictated by members of Wagah’s candlelight brigade or the mushy sentimentalism of seminar rooms.

Modi has also indicated that his policy towards Pakistan will be assertive. He has said that the first step in building any meaningful relations with Pakistan has to involve Islamabad taking effective and demonstrable action against terror networks that operate from its soil. “Once that happens, there will be increased trust between the two neighbours, which will enable us to pursue a policy of dialogue to solve all outstanding issues. We will be frank and forthright in dealing with Pakistan,” he has said.

The coming days could also see a key role for state governments in the country’s foreign policy. Modi had suggested using cultural links as an important tool of soft power—something like establishing a fresh connect between Puducherry and France or Goa and Portgual. Experts have been pointing to Modi’s ‘5 Ts’—‘talent, tourism, technology, tradition and trade’—to drive home the point that his government’s focus will be on mutually beneficial relations. Modi has also categorically stated that economic diplomacy will be the backbone of his foreign policy. He has said that he knows only too well that as the world economy gets onto a recovery path, others will be keen to do business with India. Therefore, with him at the helm, the country can expect major breakthroughs in bilateral trade ties with other countries.

The policy can be expected to be blunt and there will be no place for unilateralism, unlike in the time of Manmohan Singh.

That the Prime Minister’s writ did not run— Manmohan Singh could not convince India that it was his way that prevailed in government—has been hurting governance in the country. The ‘dual control’ system under the UPA had seen jholaawallas in the National Advisory Council replace the Prime Minister’s Office as the focal point of decision-making.

Singh, who meekly accepted a power equation that put the Prime Minister’s authority second to that of the Congress president had opted for a low profile PMO; and the selection of TKA Nair, an official with a mediocre career record as his principal secretary, was just another sign of this.

After 16 May, the centre of gravity is expected to shift back to the Prime Minister’s Office. “The PMO has to be looked upon with respect. That itself will boost the public image of the Government,” says a BJP leader.

This assessment is not off the mark, as a powerful PMO is a reflection of a powerful PM. Indira Gandhi’s secretary PN Haksar guided her to sideline the Congress Syndicate, Rajiv Gandhi’s officials took every key government decision, Narasimha Rao’s principal secretary AN Verma ran the show in the early 1990s, and Brajesh Mishra enjoyed more power than the then Deputy Prime Minister LK Advani in the AB Vajpayee Government. “Remember, all big ticket schemes like national highways and telecom [projects] were steered by the Prime Minister’s Office during the Vajpayee regime. The PMO will once again become an all-powerful office,” says the BJP leader.

After a wasted decade, what India needs is a leader who can engage ideas and aspirations of the 21st century. An awakened India awaits active leadership.

governanceIndiaNarendra Modi