Modi2.0:hasthestateturnedfromdoertoenabler?
In a series of steps, the Narendra Modi government is attempting to bolster economic growth by charting a new direction. This time it may perhaps work much better. In its new avatar, the government has turned into an enabler from being a doer earlier (which led to poor outcomes). Not all its new initiatives will work, but what is different this time is the approach of incentivising businesses (at least large businesses) to grow. Since it is obvious that efficient businesses alone create jobs and prosperity, one can look forward to higher growth rates if Modi 2.0 continues on the path of government as an enabler.
When Narendra Modi became prime minister in 2014, many hoped that 10 years of patchy reforms, confused policies, crony capitalism, and rampant corruption under the Congress-led coalition government would be replaced by a rule-based regime, which would cut red taxes and red tape, and encourage entrepreneurship. The most important thing that India needed was to create more jobs and it was expected that the responsibility of creating job would be that of the private sector, with the government acting as the enabler. After all, Mr Modi’s catchy pre-election slogans were “minimum government, maximum governance” and “government has no business to be in business”.
Surprisingly, Mr Modi walked the same road of “government as the doer”. He changed the names of welfare schemes launched by previous governments, expanded them, and gave us a flurry of new yojanas and ideas (such as Start Up
India, Stand up India, Clean India…). The government did little to enable the real job-creators. Borrowing a Congress idea, it launched a loan mela called MUDRA. Demonetisation was designed to burnish Mr Modi’s anti-corruption image but disrupted businesses badly, so did the ham-handed implementation of the goods and services tax regime. For five years at least, continuing hurdles of doing business, taxtortion, extortive oil prices, and high dependence on babus and big State have kept the enterprise system stifled, even as maximum government reached new heights.
Running in the same direction (the government knows best and can fix things with money and schemes) produced the same poor economic outcome. Gross domestic product for the September 2019 quarter slipped to 4.5 per cent, the lowest since 2013, even with a new formula to boost the figure by two percentage points over the previous method. Manufacturing was at a 15month low, exports dropped, and government banks were saddled with huge bad loans. Then in September 2019, in a big bold move or a knee-jerk reaction, the government announced a massive tax rate cut, slashing the base corporate tax rate to 22 per cent from 30 per cent, and to 15 per cent from 25 per cent for new manufacturing companies. Then came the pandemic and the economy was in the doldrums. Around the same time, there began a parallel course of action, with the government finally emerging as an enabler. Production-linked incentives: In March 2020, the government announced a PLI scheme for mobile phones to curb the rush of Chinese imports. The PLI idea has since been extended to 13 sectors in all, adding up to over ~1.97 trillion of incentives. Some of these will work if the government listens to honest feedback from businesses and correct its course to eliminate unrealistic conditions — it could lead to import cuts and job creation. My limited point here is that the government is at last acting as an enabler and incentivising businesses instead of doing things itself. Quick response to dumping: In sector after sector, the government has responded quickly to dumping by foreign companies, mainly the Chinese. It started with steel some years ago, admittedly due to the political influence of a big steel company but has since covered numerous product groups such as chemicals, pharmaceuticals, plastics, solar glass, aluminium products, and yarn.
Schemes involving the private sector: As part of renewable energy policy, the government wants to increase ethanol content in petrol from around 8 per cent now to 20 per cent by 2025 (which is indeed overambitious). Since ethanol is derived from sugar and grain, this scheme ensures the off-take of ethanol at very remunerative prices and could have multiple benefits. For the sugar industry, it may reduce business volatility and ensure steady profits; for the farmers, it may ensure prompt payments from sugar mills, which, in turn, could improve performance, and the government could achieve a cut in crude oil imports and pollution. The ethanol-blending plan includes ethanol from damaged food grains as well, potentially creating a separate chain of benefits. A third leg of the bioenergy policy— compressed biogas from agricultural residue — is at an experimental stage now, but has similar potential. While PLI is new, the biofuels policy, which has been around since 2018, has been put on steroids now.
As I said, some parts of these policies will fail, but hopefully they signify a change in the right direction. Businessmen say this is reflected in their dealings with the government. While the prime minister had ignored the private sector (for job creation) for six years, he is openly supportive today. “The culture of abusing the private sector no longer accepted,” (not sure who was abusing whom), he had said, although the public humiliation of the Tatas and Infosys contradicts this. “Can babus do everything? What type of capability have we acquired by handing over the country to babus,” he had asked, sparking hopes of changed thinking.
Let me repeat, we are seeing only a change of direction. Inefficient government is everywhere, sucking the blood out of economic life. There is no reform of the public sector while corruption and lack of accountability of public sector banks remain unchanged. The telecom settlement happened because there was no way out and the Cairn settlement happened because of the international embarrassment of an attachment order. We have a long way to go before the enterprise system is allowed to function fairly but perhaps we have at least changed our direction, at least partially.