The making of a new India?

I recently read an Economist article headlined “India’s prime minister is not as much of a reformer as he seems”. Coming from a reputed international newsmagazine, it was a bit surprising that such an impactful headline, was not followed up with depth or detail to make the point stick.

From an economic standpoint, almost every ill - near bankruptcy of large PSU banks, poor tax compliance, massive bureaucracy in state sales tax (to a point that almost every state collected just about enough sales tax to pay the wages of the taxmen - yes, does it not surprise you?) that delivered zero meaningful revenue to the state, are a throwback of the past. Whether it was due to 63 years of Congress rule, 2 years of Janata Party rule, or 5 years of the previous BJP rule is not relevant; this, and every previous government inherited a plethora of problems that were/are extremely tough to untangle. It is a fact that every government of the past, especially the one with Janardhan Poojary as a minister, used government-owned banks as its personal ATM to announce and implement poorly thought-out welfare and subsidy schemes. More recently, banks colluded amongst themselves and with powerful people, to lend to people and businesses for dubious reasons. The chickens have finally come home to roost.

The opposition, predictably, and several learned individuals, many for good reason, have come out strongly and stridently, against some of the big economic decisions of the present government. They argue that the original idea and intent of GST has been maimed, that demonetisation is an unmitigated disaster, and that Aadhar as the primary document of identification is both flawed and unconstituitional. Above all, implementation of each of these initiatives leaves a lot to be desired.

Let me now draw your attention to each of them. First, lets discuss implementation. We Indians must acknowledge our one big weakness - we are poor implementors. As a nation, we have a terrible, terrible track record implementing anything - especially infrastructure projects - within time, budget, and quality norms. Project management is definitely not this nation’s forte. Our bridges and dams dont get built on time, or without large cost overruns, our capital markets have not been robust enough to stop scamsters Harshad Mehta, Telgi, Sharada, and the likes, from repeatedly defrauding us, our roadways are generally poorly built, our power projects end up delivering poor quality power at exorbitant prices to both businesses and homes …. there are a hundred more examples of bad implementation that I can quote, without pausing for breath. Let’s face it - we DO NOT execute projects well. So it is no surprise that GST and demonetization has had glitches...if past records are anything to go by, I am beyond 100% certain that ANY INDIAN GOVERNMENT, of any party would have done poorly with these projects. Now this may sound like a weak comeback; it possibly is. But the larger point I am making is not to measure these big structural changes of the present government, with efficiency of implementation. Instead, measure them on the appropriateness of these changes, or with the methods employed to reach stated goals. The questions we must ask ourselves are - does India need a unified tax regime? Does India need to put an end to the ever-enlarging parallel economy? Does India need to provide every citizen with an identify, a la social security number like the USA? And if they most surely do, should these initiatives take priority over other more urgent issues – increasing employment to the swelling ranks of the unemployed, or providing food and shelter to all, especially to the marginalized sections of our society.

I believe that this government, to start with, sees providing food, shelter, and employment as its' primary goals, and considers Aadhar, GST, and demonetisation as rapid transformational tools to make those goals a reality. Tools that reduce cost, drive efficiency, and diminish the impact of the parallel economy. These initiatives launched by the government are structural in nature, and whose impact may not be seen in quarter-to-quarter GDP numbers, but will surely be seen, one way or the other, over the next several years or decades to come.

So this brings us to the next point – is this government fundamentally any different from any of the previous governments? Is it like every government of the past, promising sea change, and unbelievable outcomes, eventually delivering very little? Yes, to an extent, it is like every other government of the past - it is big on rhetoric, and the PMs regular, soaring speeches directly to the people are full of facts and figures of significant accomplishments, some true, but many burnished for effect. Truth however be told - this government has not been distracted thus far by stories of corruption & scam perpetrated by its ministers and their minions; this I believe has helped them focus on the job at hand, and so in three years, has done significantly better on the economic front, than any   government of the past during its full term. This assertion however flies in the face of data that is staring at us - GDP has dipped quarter on quarter, employment numbers lend no cheer, and corruption in our day-to-day lives has definitely not diminished. So, given this backdrop, let us look at performance vis-a-vis the three big pillars of economic change this government implemented - demonetisation, GST rollout, and Aadhar rollout.

Demonetisation was sold to us as a way to eradicate counterfeit currency (primary used by terrorists), reduce the circulation of black money, and build a digital India that relied less on paper currency. Other reasons espoused later included bringing more people under the tax net, cleaning up the political funding system, etc.  Whether demonetization was the way to unravel dirty deals, black money, offshore stashing of wealth, tax compliance, terrorism funding, fake currency rackets, etc. is something I am certainly not qualified to answer. But to imagine that demonetization will start yielding results on November 10, 2016, two days after the announcement of annulment of old currencies is asking a bit much. 

Yes, demonetisation did cause terrible distress to the economy, and twelve months later, the effect of that decision is still visible, especially in the hinterlands. But what it has done though, possibly unwittingly and ironically, is restore people’s faith in its leader, in his sincerity, and in his willingness to take tough decisions to cleanse the system of terrible rot. People have largely put up with the inconvenience of demonetization, with the hope that there will be genuine financial inclusion over the long run. And 365 days later, I believe trust in this government has not eroded on this specific count. Time alone will tell though, whether this project will yield the benefits it was sold on – unearthing of black money, increase in tax compliance and the establishment of a broader tax net, speedier adoption of digital financial transactions, and lesser stress on the banking system. We already see some positive signs – digital transactions are setting new month-on-month records, and tax compliance has started going up. This is a hard and long path, and we need to measure this over maybe over three to five years, to evaluate success, and pass judgment. Till then, the jury will be out.

GST is a slightly different game though. The idea of a single market was intended to allow businesses trade more easily across borders without cumbersome paperwork, or continuous greasing of palms of government officials, resulting in faster throughput, and a larger tax collection. This was the stated goal more than a decade ago, of the government then in power, and that was the reason this idea of a common market, and uniform tax system was mooted in the first place. We can argue that the current version of GST is different from the version presented by the Indian National Congress party originally. But we all know that when a bill is eventually passed into law, it goes through several rounds of iteration, with an intent to arrive at compromises that will help the bill through. This is what happened here too. But for the fact that the INC wanted the tax ceiling (of 17% or 18%) enshrined in law (as opposed to leaving it to the GST Council to determine the cap), there was precious little that was fundamentally different between the two versions of the bills.

Enshrining a tax % cap into the statute books is possibly a good idea; it makes it that much more difficult for future governments to frivolously alter the cap, forcing greater fiscal responsibility. If history is an indicator of the future, there is no assurance future governments will. We don’t have to look far to see how parties get around this – when the Indian constitution was adopted in 1950, the law on reservations was supposed to be in effect for only ten years. Over time, reservation as a equally-opportunity tool has been replaced as a tool to further vote-bank politics. Today, reservation has not only been expanded to include progressively large numbers of vociferous and numerically strong sub-groups, its life too has been extended every decade for a further decade, making the whole intent and implementation of reservation, a sham of all shams. Every party is guilty of perpetrating this crime on its people, and no party or government in power has the political will to repeal it, or replace it with a more equitable law.

GST therefore will turn out to be beneficial for greater economic activity. As the glitches in the GSTN system get eliminated, and makes life for businesses easier, and as the GST Council rationalises the graded tax system, and as people find that costs have either not gone up (retail price has indeed gone up right now, contrary to what the government claimed before rollout) or has increased marginally, the benefits will start becoming visible. If elimination of those needless hours at octroi checkpoints, and the end of needless excise raids are indication of better things to come, then we have a winner in this program.

From an economic standpoint, I believe this government is changing the structure of the Indian economy. This change however is tough, and fraught with risks. Unlike USA, where bureacracy is not inherited by an incoming administration, our bureaucracy is a vestige of every previous government, and is an institution in itself. While it is supposed to be subservient to the government in power, implementing its policies, it has become a large, self-propagating creature, that is answerable to none; in many instances, not even to the judiciary. There are of course winds of change in the bureaucracy at the centre; these changes are effected either under duress, or due to a few good men, or due to the huge pressure of social media that is essentially a reflection of the mood of the people. This bureaucracy at the state and lower levels however is resisting change. Consequently, benefits that are expected to flow from the centre, through the system of states, districts, zillas, villages, and eventually to the people, are not reaching them, only because powerful interests made up of local bureacracy, and local leaders, are likely to lose out, if they are sidestepped in the process. The centre realises this, and so sees digitisation, direct centre-people connect, and social media interactions as excellent ways of reaching both benefits and messages directly to the beneficiary of central government programs.

In all this change, there are a lot of losers; power brokers, license and favours-raj enterprises, middlemen have always been fat and powerful. As they face the new winds of change, they use money, reach, and gumption to challenge the new order, slow it down, and potentially reverse it. This lobby does not have a party but a common goal to discredit – such people are in every party, in every town and village, at every economic strata, and in every level of government. It is not easy to shut them down, or neutralise them. While the India National Congress party may be most strident and vociferous in condemning these changes, the BJP would be wise to realize that there are an equal number of BJP naysayers, who too would do everything within their might to thwart the success in their own party’s agenda.

Now to the subject of much recent debate - GDP growth, or lack thereof. I believe in today's changed scenario, GDP numbers is not the only measure of success. As a matter of fact, it may be the wrong measure to focus on. What one needs to instead focus on are possibly an entirely different set of measures – year-on-year tax compliance change, growth in SME registrations in the GST system (a large number of SMEs have always stayed below the ST radar), digital financial transaction growth – both in volume (penetration) and in value (frequency and systemic adoption), new business registrations, and foreign (non-capital market oriented) long-term capital inflows.

On the whole, I believe this government has started on the right note on the economic front. It may not have launched many, massively appealing, big schemes to get the economy going, but it has managed to focus on a few large ones, and given it the legs to run. What it may lack in vision, it compensates in execution. However, if there is one thing that can trip up this government, it is its social agenda.

The BJP has always been identified as a Hindu nationalist party. Vajpayee did his damndest to shake off that image, with his clear focus on inclusion. This government in its first twelve months undid all the good work of its earlier avatar. It either actively let loose, or gave voice to, a bunch of goons and no-gooders, who in the name of nationalism, resurrected jingoism as its theme. Anti cow slaughter, mandatory national anthem, “straightening up” dissenters and the fringe media, etc. have all become a big nuisance, that has the potential to drown out the good work the government is doing on the economic front. And the PM’s studied silence on the topic (or his infrequent utterances condemning such behavior) has so far not detered these lumpen elements from becoming a potential cancer.

If the BJP leadership seriously wishes to rule across the nation, and for a long time, it is duty-bound to unify the nation under one flag, across all communities and sections, and lead all of India to a bright tomorrow. This is the real challenge this government faces – its party is its own enemy. The sooner it realizes that, the better it is for itself, and for the nation. If Mr Modi manages to reign these right wingers in, we will no longer be a nation just on wheels as PM Modi wishes we were. We will be a nation on wings.