Reform The Reformer

article

Have the Modi-Jaitley duo thought through their economic policies? It doesn’t appear so whether it is the coal block auctions or proposed ‘reforms’ in other sectors ranging from civil aviation to national highways. Add to that continuing tax uncertainty which hasn’t impressed foreign investors.BY- Alam Srinivas

At a recent meeting between Finance Minister Arun Jaitley and the global business community in Hong Kong, the latter wanted to know the reasons for the slow pace of reforms under NDA-2. Another question was about the ongoing ‘tax uncertainty’ related to crucial cases like those of Vodafone and Cairns. The queries reflected the sentiment among investors, who remained unconvinced about the efficacy of the Narendra Modi government.

Despite the claims by Modi, Jaitley & Co that they have unveiled a slew of policies to make it easier for business to do business in India, business leaders believe that while they have ‘talked their talk’ they haven’t ‘walked their talk’. Commerce Minister Nirmala Sitharaman hinted at the same. She said that until now the regime had carried out the “unglamorous work of removing dead wood” to promote investments and put India on a high-growth trajectory.

To be fair to Modi, some of the problem with reforms relate to the stance taken by the opposition parties in Parliament, the fact that India faced a critical low growth-high inflation situation when it took over in May 2014, and the huge expectations amongst all the often-conflicting stakeholders like the masses, business community, stock investors, rating agencies, among others. Therefore, it was almost impossible to simultaneously deal with these issues.

But there is also a realization that the Modi-Jaitley duo hadn’t thought through policies to their logical ends, it has acted with short-term, rather than strategic objectives, the BJP promised too much during its election campaign, and reforms have meant varying, even contradictory, things to the various cabinet ministers. The fact remains that in the past 16 months, real reforms got enmeshed with seeming-reforms, as also with non-reforms.

REAL REFORMS, UNREAL RESULTS

The grand auction of coal blocks, which added Rs 400,000 crore to the exchequer from private and public allocations, were touted as a huge success. Everyone within the government, including Modi, claimed that it proved NDA-2’s commitment to transparency. A few months later, several analysts feel that the auctions may lead to crucial problems over the next 1-2 years. By 2017, the regime may have to bend over backwards to give major sops to the winning bidders.

Several reasons can lead to a situation where there is no choice except to incentivize the block owners at a later date. First, most of them have overbid. They will realize that given the cost of coal, their power tariffs will zoom. If the buyers like the cash-strapped and loss-making state electricity boards, put their hands up and say that they cannot afford the prices, the power producers can only rush to the policy makers to ask for financial benefits.

Second, many of the winners have got coal blocks that are hundreds and thousands of miles away from their user plants. Since the coal blocks are meant for captive uses, the cost of power will go up because of the high transportation costs of the fuel. Third, the auction amount has to be paid in equal installments over the next 30 years. Thus, the net present value or the current value of the money paid 10-20-30 years later, is much lower than Rs 400,000 crore.

In telecom, the government stepped in several times to bail out the mobile players. After the initial licence auctions in the 1990s, many players overbid and the entire industry had to be given financial and other incentives to help the mobile operators. During the 2000s, the help came in the form of low spectrum costs as several governments allocated spectrum on first-come first-served basis at 2001 prices. All these led to an era of crony capitalism.

ONLY LOOK LIKE REFORMS

After the coal auctions, which the regime felt was a stunning success, open sale seemed to be the way forward in every sector. Recently, there were news reports that the government may auction domestic and foreign air routes. In the case of local routes, the thinking is that the less-profitable or unviable short-haul ones or those connecting the smaller cities and towns will be sold to the highest bidder, only if they agreed to charge Rs. 2,000-3,000 per passenger.

On overseas routes, the logic is that the various bilateral, i.e. routes connecting an international destination in another nation, will be auctioned instead of allotment through bilateral negotiations. Both these decisions are fraught with problems. If the idea vis-a-vis the local routes is to keep the fares low and within a permissible limit, then why auction them. And if you can do this in aviation, why didn’t you do it in the coal sector and put a cap on power tariffs?

When it comes to international routes, the practice has been to negotiate them bilaterally with specific countries. The introduction of the element of auction can result in diplomatic issues, especially in the case of hugely profitable routes. In addition, it will spell doom for the state-owned Air India which, at least on paper, gets a favourable response. And if you do want Air India to be competitive with the private players, and bid for the routes in auctions, then why not give it financial and operational autonomy first instead of running it to the ground?

Similarly, Nitin Gadkari, the minister for roads and highways, has come with an innovative idea to force contractors to spend 1% of the project cost to plant trees along the roads they build to pave way for a greener India. Theoretically it sounds a great idea, but what is likely to happen is that all the future bidders are likely to pad up their costs by 1%. In the end, it doesn’t translate into reforms or development, but an economic knock to the nation and taxpayers.

Another reform measure that NDA-2 is proud of is gold monetization, which aims to unlock the value of the huge quantity of gold stashed away by Indians and reduce the future demand for the yellow metal. But as BarunMitra, Founder, Liberty Institute, explains, such schemes were tried before, and proved to be a flop. The reason, he says, is that Indians buy gold because of sentimental or investment purposes. The bulk of it for the former, as is the case when gold is given as dowry. This demand is unlikely to reduce because of monetization schemes.

REFORMS THAT NEVER WERE

There are a few policies that are more in the nature of non-reforms or false reforms. Jaitley’s aim to hike public spending, especially by state-owned entities, falls into this category. Within months after becoming the finance minister, he realized that despite the grandiose ‘Make in India’ scheme and other initiatives, a take-off in private investment will have a lag period. It can happen only after 2-3 years. Therefore, he shifted his focus to public spending to kick-start growth.

As figures have proved, the expenditure by the public sector wasn’t too encouraging in 2014-15. It will need to grow at around 30% in 2015-16 to reach the 2013-14 levels. Clearly, Jaitley will have to twist the arms of the public sector chiefs to force them to spend more. However, this will be a travesty of reforms in an environment where the state-owned firms don’t have the autonomy to take financial decisions. And what’s the cost that the nation will pay over the next few years?

One can argue in the same vein when it comes to tax reforms. Ever since he became the finance minister, Jaitley has categorically said that he will get rid of the ‘Tax terrorism” environment created by his predecessors. He will rationalize and stabilize the tax regime in a manner that will be appreciated by investors. But what he has done in his two Budgets and over the past 16 months is to merely announce regular sops for the business community.

The government announced that if a corporate entity has won a tax case in a lower court, even an appellate one, the tax department will not contest the decision. First, this makes a joke out of any individual or institution’s fundamental right to contest a judgment in a higher court. Second, it takes away the taxpayers’ right to recover tax dues that may be payable. Third, it smells of a crony capitalist era, where the government steps aside to benefit a select few.

Recently, NDA-2 said that foreign investors, even those based in tax havens like Mauritius, will not need to retrospectively pay the minimum alternate tax on their India profits. This was entirely due to lobbying by investors, who were served tax notices for the past several years. This begs the question: will the government do the same for domestic businesses which were slapped with similar notices? Or is there a tax distinction between locals and foreigners?

The point is that as long as the government cannot spot the differences between real reforms, fake reforms and half-baked reforms, it will continue to shoot in the dark. It will continue to bank on its instinct that it will hit bull’s eye in the majority of cases. However, this is not the way things pan out in real life. A policy has to be studied, analyzed and interpreted before it is announced. Right now, we have a case of a government that’s in a hurry to show results. This is great except when it blunders its way around the policy maze, and repeatedly hits dead ends.

Despite the claims by Modi, Jaitley & Co that they have unveiled a slew of policies to make it easier for business to do business in India, business leaders believe that while they have ‘talked their talk’ they haven’t ‘walked their talk’’

Summary

  • The government seems in a tremendous hurry to get things moving on the economy/business front to show they mean business
  • But the end result leaves a lot to be desired and confirms the impression that the government’s focus is on the short term
  • The coal block auctions may have netted huge revenues for the government but it has serious long term implications
  • Proposed reforms in civil aviation or national highways could be problematic, leaving more problems in their wake
  • On-Compulsory-Wait

    On Compulsory Wait

    Andhra Pradesh Chief Minister Nara Chandrababu Naidu is spitting fire these days. Ever since he assumed charge for the second time as the chief minist...

    Sloth-and-Siddaramaiah

    Sloth & Siddaramaiah

    His is the classic case of the outsider who became an insider, and then went on to be anointed chief minister to resurrect the party’s fortunes. Bu...

    Behind-The-Hidden-Veto

    Behind The Hidden Veto

    A search for India China on the web will throw up a wide range of stories, some positive, others which could leave any reader in India with a sense o...

    Stateless-To-Citizen

    Stateless To Citizen

    After recent rains, the Bengal countryside is a lush green carpet, fields of newly planted rice interspersed with freshly harvested tobacco, potatoes ...

     
    Government-Makes-A-Difference

    Government Makes A Difference

    Goa has always been about sun, sea, sand, shacks on the beach, beer by the barrel or as much cashew feni as you can swallow. In other words, as a tou...

    The-Way-Forward

    The Way Forward

    Defence Minister Manohar Parrikar set tongues wagging after hinting, in a recent statement, about hanging up his boots once he turns 60 (which is next...

    Armed-Forces-Shortchanged

    Armed Forces Shortchanged

    While commenting on the norms for governance, the Chairman of the 7th Central Pay Commission quoted from the Gita: “YathoDharmah,TathoJayah” meani...

    Making-Black-Money-Cool

    Making Black Money Cool

    Many experts dubbed the recent amnesty scheme on foreign money stashed abroad by Indians as a flop show. The government took the moral high ground; it...

    magzine-cover
    ads