The strength of the electoral verdict is breathtaking and rare. First, the BJP does not have to “compromise” any of the 12-15 economically relevant ministries: just think of the railways, whose stagnation largely stems from being run by regional parties for most of the last two decades. Second, the NDA is just “one party” away from a two-thirds majority in the Lok Sabha, and will have majority in a joint session of Parliament, clearing the way for legislative changes. Last but most important, sweeping wins in states where the NDA is not in power suggest that in a year’s time, up to half of India’s population could have a chief minister and a prime minister from the same alliance. In a federal polity, this is a remarkable and rare alignment of stars, which opens up great prospects.
At the same time, any smart politician knows that the window of opportunity for reform is normally smaller than it seems, and meaningful change is never painless. It won’t be long before the euphoria of hope gives way to restlessness at the pace of change or, at least, gets diluted by the inevitable dissonance from the replacement of the old with the new. It will be change management on a gargantuan scale, and it won’t be easy, painless or quick.
What the new government starts with, therefore, becomes extremely important. To be sure, there are few, if any, “low hanging fruit”. Given the panic that set in starting 2012, the previous government has already done the relatively easy things: diesel price hikes, rail tariff increases, clearing most of the stuck projects, visa on arrival, among others.
What, then, should be the economic reform priorities for the new government? It would be simplistic and incorrect to expect a replication of Narendra Modi’s successes in Gujarat at the national level. This is not just because the jurisdictions of chief ministers and prime ministers are different: power distribution, urban infrastructure, irrigation, land acquisition and other areas where Gujarat really stands out are, after all, state subjects, and a PM can at best have an indirect impact on these. But more than that, the strength of the verdict and the office of prime minister offer bigger challenges and opportunities. We highlight five below.
Fifteen of the 18 sectors that the government opened up to private participation in 1991 have seen dramatic improvements: it is hard to imagine the economy today without private telecom companies, airlines or banks, for example. Of the three that remained government monopolies, that is, railways, defence production and nuclear energy, the stagnation of Indian Railways has been the most harmful.
Travelling by train is the only experience that has remained unchanged since my childhood: the need to book tickets months in advance, the dirty stations and overcrowded general compartments. The growth in the freight-carrying capacity of India’s rail networks has been disappointing, and high-speed trains remain a dream. Indian Railways needs to become more efficient, and the sector needs more private participation.
The second priority needs to be energy security. Modi’s speeches show him to be aware of the criticality of coal and renewable energy, given that the known reserves of oil and gas in India are insufficient to fuel strong economic growth. Coal is another sector where the government has a monopoly. Curiously, while most other mineral resources (for example, bauxite and iron ore) belong to states, the Centre controls coal. One of the major problems faced by Coal India is that it needs 30-40,000 acres of land every year to maintain its production. And state governments, who manage all land acquisition, have no skin in the game so they don’t help. Four of its mines shut down in February as they ran out of land.
The solution, in this author’s view, needs to be radical: break Coal India up, and let its subsidiaries be owned by the state governments where they operate (for example, Mahanadi Coalfields by Odisha). The states can then work with the company in increasing coal supply.
Of equal importance for energy security is inefficiency in power distribution. This is the reason that, despite per capita consumption being comparable to sub-Saharan Africa’s, India’s power demand has been declining for several months, and the utilisation of thermal power generation capacity is at a two-decade low. The reform of state electricity boards is a state subject, but the new government must incentivise states to resolve this problem.
The third critical reform is the goods and services tax: not only would it turn India into a truly unified and more efficient economy, it would also significantly ease the fiscal situation. As it needs a constitutional amendment, a two-thirds majority in both Houses of Parliament and the approval of at least half the state legislatures is required. Passage in the Lok Sabha should now be easier. While the NDA having only 26 per cent of the seats in the Rajya Sabha is a hurdle, that’s the type of challenge politicians thrive on. In any case, Rajya Sabha membership is a “lagging indicator” — as state governments change in a year or two, the NDA’s seat share should increase too.
The fourth target must be inflation, particularly as inflation in India is currently being driven by the informal economy, where the RBI has no control: its main tool, the repo rate, has no bearing on the cost of borrowing in the informal economy. Entrenched food inflation comes mainly from the labour-intensive parts of agriculture, like fruits, vegetables and animal products, particularly as yields are low and wastage high. Investment in food processing and in better storage facilities have disappointed so far, possibly because this too is a state subject.
The fifth and most urgent matter is under-capitalised government owned banks (PSU banks). These banks together provide almost three-fourths of all loans in India and if they were to slow down lending, it would be another headwind for economic growth. They need $8-10 billion in a year, and the government needs to make many tough choices — should it differentiate between the good PSU banks and the bad and thus avoid a moral hazard? Should it seek private capital?
Most of these changes are likely to take several years, and perhaps longer than stock markets and the wider public may have patience for. But happily, the results should be visible by 2019.
The writer is the India Equity Strategist for Credit Suisse