Originally Published 2017-08-09 09:14:38 Published on Aug 09, 2017
Good politics must also be good economics. Acting irresponsibly is not politically rational — there is an appetite now amongst voters for hard reform.
Hard reforms vital, NDA needs to shun populism

Former Prime Minister Manmohan Singh, the previous Prime Minister of the UPA government, recently released a book titled India Transformed — 25 years of Economic Reform, edited by Rakesh Mohan, at the appropriately historic Nehru Memorial Library. After the obligatory photo-op, Dr. Singh turned to Finance Minister Arun Jaitley and with a beatific smile, handed the book over to him, as if symbolically handing over trusteeship of the economy to the three-year-old NDA government, for safekeeping and walked off, disregarding the speech he was scheduled to deliver.

It was indeed a poignant moment and well chosen, for the economic baton to be handed over. The high-decibel criticism by Left-oriented, liberal public intellectuals of the economic vacuity of the BJP government’s economic policies continues. But the fact is that we are now at a cusp, an inflexion point. In all likelihood, we shall do substantially better on inclusive growth. This may sound incredulous at a time when growth, industrial investment and exports have fallen from the earlier upward looking trend line. But a dip in the industrial investment and growth rate are natural short-term consequences of the BJP having finally walked the talk on corruption.

Over the first three years, the NDA merely pressed the accelerator harder on the positive legacy of the UPA — rural unemployment support, fast-forwarding Aadhar, digitisation of commerce and banking, financial inclusion, space technology competitiveness, making electricity surplus, making access to telecommunications even more affordable, better transport and urban infrastructure, disinvestment of minority shares of state-owned entities, ensuring fiscal stability and progressively higher financial devolution to sub-national governments, including local governments.

But also over the very same three-year period, the negative legacy of the UPA has been stemmed. The biggest achievement is in fast forwarding of programmes without the viral outbreak of corruption scandals.

More positively, a three-pronged action plan is in place to make public systems resilient to corruption.

  • Getting the GST is the biggest legislative and operational achievement to dampen corruption and enhance value addition by integrating the national market. Glitches remain due to poor drafting of rules which burden the small, honest taxpayer. Many such are the obsessive dedication to maximising revenue, even at the expense of simplicity. As usual the pain is being most felt by those least able to bear it — ragpickers — at the bottom of the urban food chain, whose daily income have halved because the intermediary “kabadis” are playing safe on the likely forward tax liabilities on plastics and glass or small individual consultants or homeowners, who live in one state but get work or rent from another.
  • The frontal attack on crony capitalism — identifying the borrowers who have defaulted on Rs 12 trillion owed to banks, getting the Bankruptcy Act operational and signal public sector banks that there will be no more “Mundra scam (1950s)” type telephone calls from the government. That sensible lending shall be rewarded and inept or corrupt lending punished.
  • The proposed use of “big data”, including data from social media, to zoom in on potential tax evasion and crime. Taken together, these actions lay the systemic capacity for reducing corruption.

The BJP government has now gone far beyond just a strategy to consolidate the gains from past initiatives.

First, the unleashing of genuine privatisation (offloading of majority shares in a state-owned entity) as proposed in the long-delayed case of Air India is the winner. It sends the signal that India is open to efficiency enhancing financial restructuring. That it intends to free up existing public capital to create new public goods — jobs, physical infrastructure, improved social services, like health and education, whilst fresh private capital gets infused into the commercially viable supply of private goods — air and rail travel, steel, metals, petroleum and electricity.

Second, financial sector restructuring to make state-owned banks commercially viable. Uday Kotak, of the Kotak Mahindra Bank, overstretches when he advocates the exit of defunct public banks and the entry of more private banks. But clearly, incremental privatisation of the banking sector capacity as done earlier for electricity generation will pressure state-owned banks to become competitive and shall circumscribe the ability of the government to use them like an ATM for populist goodies.

Third, the strong action proposed for making collusive default on bank loans a criminal act is commendable. It brandishes a big stick for potential defaulters. The intention is virtuous. But experience shows that criminals, specially rich ones, find it easier to evade the law than poor innocents. To avoid this perverse outcome, criminal powers should not be delegated outside the judiciary. The record of tax tribunals and quasi-judicial agencies is not sanguine enough to empower them with criminal powers in addition to their economic mandates.

There is no option except to reform the judiciary through incentives and structural changes in judicial governance. This is a tough nut to crack, but shortcuts will give rise to the miscarriage of justice, vigilantism, and massive public resentment — specially in the middle class, which will be the most impacted in cases related to property and small business.

Lastly, the finance minister’s determination to maintain macro-economic stability has been amply demonstrated. This resolve must not weaken even during the run up to the 2019 general election. This will be the biggest economic win if achieved. The report of the N.K. Singh Fiscal Responsibility and Budget Management Committee 2017 embeds too much flexibility to provide credible guidance for the future. Fiscal fundamentalism is better.

Good politics must also be good economics. Acting irresponsibly is not politically rational. There is an appetite now amongst voters for hard reform. This, by itself, is a tribute to the credibility of the NDA government. A populist pre-election budget would be seen by the voters as an early admission of defeat. That is not the winner’s way.


This commentary originally appeared in The Asian Age.

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Sanjeev Ahluwalia

Sanjeev Ahluwalia

Sanjeev S. Ahluwalia has core skills in institutional analysis, energy and economic regulation and public financial management backed by eight years of project management experience ...

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