Transcript Modi`s Mid-Tenure Assessment and Prognosis R. Jagannathan

The Modi Govt Scorecard
At Half-Time
Successes, failures, and work-in-progress
The Modi Paradox
• The government has done well in areas that are difficult (legislation and
reforms), and fared poorly in areas that are easy (budgets)
• Budgets are totally in FM’s control, but we produced two flop budgets, with
traction only from Third Budget
• Incoming govts usually have leeway with first budget, when you can make
deep changes and there is little fallout. But Modi govt did the opposite –
no major change in first budget, and weak second budget
• Corporate tax cut to 25 % promised in second budget missing so far
• In contrast, with the exception of the Land Bill fiasco, all major legislations
have been passed. Truly a big achievement for a govt with so much political
opposition
The Successes - Legislative
• Passage of Coal, Minerals and Insurance Bills
• Bankruptcy Code
• Aadhaar expansion
• Real Estate Bill
• Over 1,200 archaic laws repealed
• Apprentices Act
• Debt Recovery Act
• The Goods & Services Tax Constitutional Amendment
The Successes – Reforms & Policies
• The Jan Dhan inclusive banking project
• Subsidies reforms – steady shift to Direct Benefits Transfers
• Planning Commission replaced by Niti Aayog; 12th plan last plan
• Petrol, diesel now fully deregulated, following market trends
• Union budget to undergo big changes in 2017
• Railway budget to be subsumed in General budget
• Plan and non-plan distinctions to go; only capital and revenue
• Budget may be presented in January and passed by March
• Public investments in roads and railways leading investment recovery
Visible results
• Successful coal and spectrum auctions held in 2015
• LPG corruption eliminated through DBT; kerosene next
• Huge jump in FDI inflows into India, overtaking China in 2015
• Portfolio flows stable and positive; market confidence revived
• Domestic investments now flowing regularly into equity through SIPs
• Rupee held stable by RBI for nearly two years
• Inflation largely under 5-6 percent despite two bad monsoons
• Twin deficits under strong control, CAD and fiscal deficit
• Black money in retreat at Centre, thanks to zero-tolerance at top
Visible results
• Power sector reviving after Uday makeover and CIL performance
improvement
• Major digitisation of economy, including rapid expansion in ecommerce;
Reliance Jio a game-changer
• Renewable energy, especially solar, taking off; 5,000 mw last January, likely
18,000 mw solar capacity by end-2017; Plan for 175 GW in renewable
energy by 2022
• LED bulbs programme a huge success; 25 crore bulbs to be distributed at
low cost in 2016-17
• 10 million LPG users have given up subsidies – about 6 percent of total
users
The coming financial revolution
• With Jan Dhan-Aadhaar-Mobile, India will soon have the most
advanced payments system in the world
• With UPI app, Bharat Bill Payments, and India stack of UIDAI, in 5
years India will move fast towards cashless economy – less need for
cheques, ATMs, branches, cards, etc – money transfers by mobile
• This will revolutionise the banking universe – assuming the cyber
security issues are resolved to make them failsafe
• This development will impact the entire financial services industry –
as fund selling, investments, and other issues will become less costly.
Will facilitate small-ticket loans and investments from rural areas
Lack of progress, little movement
• Opening up for national agricultural market is too slow
• Lack of factor market reforms in land and labour
• Electoral reforms, especially state funding
• Administrative reform of IAS
• Expenditure reform
• Judiciary, police and legal system reform
Work-in-progress – where we don’t know
• Mudra Bank – Rs 1.8 lakh crore to be disbursed, but we don’t know if
it has gone to the right people, or some of it will become bad loans
• StandUp India: Loans to women and SC/ST entrepreneurs
• StartUp India: Doubts if govt can really promote startups
• Skill India: No visibility on what skills are being imparted and how
they are benefiting the unemployed to get jobs
• No efforts to fix bad laws like RTE and RTF
• Crop insurance scheme – low premium and high coverage. To be
assessed only after first major crop damage/failure
Failures or low-success initiatives
• Swachch Bharat not visible, except in toilet-building; States and local
bodies have to own the initiative if it is to succeed
• Banks still weak; slow govt realisation of rot
• Corporate balance-sheet recession still not over
• Jobs growth very weak, with GDP-jobs elasticity falling
• Real estate, construction, infra, all job creators, still not near recovery
• Overall economic recovery still weak, with fresh investment low
• Govt still to fix its economic data, with GDP, IIP, WPI still not credible
• Privatisation off to ultra-slow start since PM not seen to be keen
• Exports engine is failing; govt efforts not showing results
Successes and Failures – Political and social
• 2014: Won Haryana, Jharkhand, and made major gains in
Maharashtra and J&K
• 2015: BJP badly mauled in Delhi and Bihar elections
• 2016: Assam won, major gains in Kerala; but no impact in West
Bengal and Tamil Nadu
• 2017: Polls predict loss for Akali-BJP coalition in Punjab, but UP still
likely to be a cliff-hanger. Big test in Gujarat towards end-2017
• 2018: Big test will come in MP, Rajasthan and Chhattisgarh assembly
elections. No reason to expect too adverse a result in any of these
states
Successes and Failures – Foreign policy
• Foreign policy undergoes an active phase under Modi
• Relationship with US, Japan and Vietnam core of new strategy
• India now part of MTCR – Missile Technology Control Regime, but NSG
entry still barred by China
• Non-alignment abandoned in favour of strategic alignment
• Ties with China and Pakistan still prickly and difficult
• Nepal and Bangladesh on even keel, despite occasional ups and downs
• India’s global profile using diaspora never better than now
• Change in strategic posture towards PoK and Balochistan a new variable
• Biggest failure: Lack of strategy to China-Pakistan terror strategy in J&K
Failures – Political and Social
• Ties with partners deteriorating – Shiv Sena in Maharashtra, and TDP in
Andhra Pradesh, and possibly PDP in J&K
• Violence in Jammu & Kashmir for more than 2 months is denting Modi’s
internal image, with opposition taking advantage
• Perception of anti-Dalit stance of party – Rohith Vemula affair, Una beating
of Dalits – may cost party in UP elections
• Beef politics and cow vigilantism also sullying Modi’s development agenda
• Party yet to overcome anti-minority image, especially after beef violence,
including Dadri incident
• Old partners in 2014 coalition may undergo change by 2019
Modi’s mid-term scorecard
should be around 6/10
Most of things that could have been done at executive and legislative
levels have been done; future success and 2019 elections will depend
on implementation of initiatives already unveiled. The second half of
Modi’s tenure should thus be about execution, execution, execution
India’s Politics – What has changed
• Since 2014, BJP has replaced Congress as the main pole in Indian politics;
unlikely to change any time soon
• The main opposition to the BJP is regional parties – which means BJP has
one or two major opponents in key states in north, west and east
• BJP is weak in southern India, but is the main rival to Congress in one major
southern state - Karnataka. It is also weak in West Bengal
• PM Modi is more popular than his party; this means in a national election
this will help the party do better, but not necessarily in state elections
• In 2019, the BJP is likely to return to power under Modi, but with a reduced
mandate, and hence may have to head a coalition. But a final assessment
depends on how the economy shapes up in next two years
India’s Politics – What Modi is trying to do
• PM Modi is trying to shift the BJP to the centre of Indian politics, with a
small commitment to avoid dole-based policies. Centre-mildly Right
• If he gets another term, Modi will make the BJP less Hindutva-oriented and
more like the Republican (US), Conservative (UK) or Christian Democratic
parties in Europe
• His party grew from Hindu roots, and the linkages to Hindu social
organisations like RSS is strong. It will take time to weaken this linkage,
which is both an advantage and disadvantage to BJP
• PM Modi’s is covering his Left flanks by opting for inclusive policies of
empowerment, building on what Congress left behind (Aadhaar, DBT, etc)
• Corruption and cronyism in this govt are coming down, but corruption-free
systems are not yet in place; they have not been institutionalised fully
Indian Politics – Some underlying themes
• Indian politics is dominated by strong individuals and families. This is what
has worked in a country where rule of law is weak and strong individuals
and draconian laws are seen as essential for delivery
• The voter base has been fragmented, and is fragmenting further. Barring 45 states, almost all states and central govts have seen coalitions
• In India’s first-past-post system, you need only 30-35 percent of the vote
for a majority; thus politics revolves around providing benefits to some
communities and not the whole of society. Private doles preferred to public
goods like law and order, good education/health
• India can best be described as a state-nation, not a European style Nationstate. We are a union of states, not a nation divided into states
The Indian economy’s trajectory
• India is growing at over 7.5 percent and could touch 8 percent in
2016-17 due to a good monsoon and agricultural buoyancy.
• This figure probably overstates growth as the new GDP calculation
has been questioned by many economists. Real GDP under old
method may be under 7% - good, but not as good as believed earlier
• The main flaws may be in the Ministry of Company Affairs’ corporate
database with 500,000 companies, which may not have “clean” data
• The other problem may lie in the GDP deflator; India uses a
combination of CPI and WPI (wholesale prices) to arrive at real GDP.
We still don’t have a producer price index to arrive at real GDP
The Indian economy’s trajectory
• Growth will be driven by consumption, not investment, in the next few
quarters as companies are still fixing their debt problems
• Consumption will get a fillip as government releases Rs 100,000 crore
(about $15 bn) as pay arrears to government staff
• Inflation will stay in the 4-6 percent range this year due to a good
monsoon, especially if petroleum products stay moderated
• Govt’s fiscal deficit will come under new pressure due to pay commission
payouts, and fiscal roadmap may be revised to a more flexible targeting in
future
• But overall trajectory of economy is positive, with corporate profits set to
rebound by early 2017
The economy’s trajectory
• Interest rates are sliding lower, as indicated by auction cutoffs and falling
inflation; deposit rates already falling; RBI could cut 50 bps by March 2017
• Real estate is a mess, thanks to weak demand and non-reformed markets;
corruption is hampering revival here
• India’s growth will be urban-led in future, with 32 percent already urban,
and another 20 percent near urban; urban growth will have to be led by
moderating land prices, currently bottled up by corrupt politicians
• States have to lead reforms in future, as there is not much Centre can do
beyond channelling resources. After 14th Fin Comm, 62 percent of revenues
already with states, and this will keep rising
Why growth is slow to pick up
• A key factor is reduction of black money avenues beyond real estate, which
is still unreformed and largely in state sector
• Weak banks are India’s Achilles’ Heel; they have to be capitalised quickly, or
they will hamper recovery
• Mauritius route is going to be closed from 1 April 2017; treaties will
Singapore and Cyprus also being renegotiated
• Once Benami transactions law comes into force and 30 Sep voluntary
disclosure ends, scope for black money in real economy and markets
reduces
• Apart from excess debt, reduction is black money economy is key factor
behind the slow pace of recovery; black money is not as easily available as
in the past for promoters to spark revival
Judiciary is a new risk in doing business
• Govt and the judiciary are in conflict
• The judiciary is clearly over-reaching, getting even into areas like
taxation and supervision of policing and investigations
• The lower judiciary is corrupt and even the upper judiciary is not
untainted with allegations of corruption and nepotism
• Due to this, the judiciary is also adopting populist sloganeering and
not sticking to mere interpretations of the law; often it is making the
law; this conflict does not augur well for the rule of law
• This conflict will get resolved, but will take time; so judicial activism in
commercial issues has to be factored in
Is GST going to work smoothly?
• The short answer is no. GST in India is as big a project as the EU, where
state sovereignty has been replaced with collective sovereignty. It will take
years to settle as was the case in EU. But we still had a Brexit, a near-Grexit.
• Given India’s prickly centre-state relationship, and sharp personal and
political rivalries, GST implementation will not be smooth in initial years
• GST got legislated due to a favourable set of circumstances – the poor
states bought into it, and more powerful states all shifted to BJP rule at a
time when the BJP took over Centre. This left Tamil Nadu as the only richstate dissenter. GST is thus an accident of political circumstances
• Politically, GST is a minefield; it is best to phase it in bit-by-bit rather than
try and implement it in one shot. Slow and steady is the only way to
implement it; having multiple rates and not just three is way to go
GST is a political minefield
• Many manufacturing industries believe GST will help them cut prices; I
would not bet on this, including cars
• It would be politically difficult to explain a cut in car or AC prices when
other essential services (mobiles, for eg) rise in price temporarily after GST
• One should not bet on a three-rate GST, or an 18 percent middle rate; we
may have more bands, and more exceptions at first
• Scope for centre-state tensions derailing GST in first two years is high, as
issues of compensation to states will come up.
• Even after GST, one can’t rule out additional state VAT in some states.
• The trader community will be miffed, and traders have been traditional BJP
supporters
Markets – some pointers
• Sentiment in Indian stocks will remain positive for next 12 months, unless
we get a US Fed shock. A 25 bps rise is factored in, but not anything more
• FII overdependence is coming down slowly, as both EPFO and SIPs are
providing funds for equity investment
• One should, however, expect a blip when Mauritius route closes and
round-tripping starts reducing after 1 April 2017
• Spectrum auction success will be important; success means India Inc will
increase debt; but government coffers will be better for ploughing back
into the economy as infrastructure investment; success will also speed up
consolidation in telecom
• IPO market seems to be slowly reviving – which means companies need
not be overdependent on banks for resources for investment
Thank You
20 September 2016