For a government led by Prime Minister Narendra Modi sensitive to charges of corporate favouritism, acquiring substantive shareholding in a private company is a leap of faith. Buried in the fine print of the telecom package was this provision that lets the government do exactly that.
Even in the United States, in the wake of the financial meltdown in 2008, emergency legislation was enacted to undertake a $700-billion Troubled Assets Relief Program or TARP to bail out private banks and institutions. A TARP-like move — as in the telecom relief package — requires more than just conviction in Indian economy, which like politics, is prone to binaries of a different kind: “pro-corporate” and “pro-poor.”
Indeed, most economic decisions taken in the last two months — from a law to bury retrospective taxation to a government guarantee for a bad bank — required a political call to be taken at the level of the Prime Minister. Significantly, almost all these moves were discussed time and again in the past but were jettisoned given the challenges involved and the risks of moral hazard.
Post-pandemic, though, the Prime Minister’s push has been to focus on reviving the economy and expending his political capital to that effect, said an official. “The decisiveness now marks a sharp attitudinal change at the leadership level,” one of the most senior bureaucrats in the government told The Indian Express.
Another source, who advises the government on policy issues, said the objective behind the concerted action over the last two months is to reverse the negative sentiment that has gripped the corporate sector due to the pandemic and the recession last year.
“India, unlike the US, can’t print currency – it has limited fiscal space. But what it can do, and is doing, is to identify and remove bottlenecks, infuse positive sentiments, and build risk appetite back so that companies start investing, and banks start lending.”
Speaking at Idea Exchange at The Indian Express last week, Finance Secretary TV Somanathan mapped this as part of a strategy since late 2020. “There was a broad strategy towards building a stronger Indian economy with an emphasis on core domestic manufacturing — building the capabilities that we don’t have and preserving the capabilities that we have. There is a consistency… It’s a continuum of things that form a cogent strategy,” he said.
Less than three weeks ago, Modi said the economy was recovering faster than the pace at which it contracted during the pandemic. “When big economies were defensive, we were undertaking reforms. When global supply chains were being disrupted, we introduced the PLI scheme taking note of the external environment,” he said during the bhoomi pujan of Sardardham Phase II in Gujarat.
But the “attitudinal change” which the government official spoke about is more perceptible in recent months than during the pandemic period until the end of the brutal second wave which peaked in April-May this year.
As late as January 2021, following intense protests by farmers in Punjab and Haryana, and slogans like ‘hum do, hamare do’ gaining some traction, the government put on hold the farm laws for 18 months, effectively putting them in deep freeze. It was very similar to the dumping of the land acquisition law in February 2015 spooked by the suit boot ki sarkaar jibe.
It is in this backdrop that the telecom package gains significance. An official, who did not wish to be named, said that the interest dues of Vodafone India Ltd will enable the government to pick up a substantial 30 per cent stake in the third largest private telecom company.
While protecting its dues and the consumers from the adverse impact of a duopoly, the government may also end up making significant capital gains.
Similarly, introducing an amendment to the Income-Tax Act for doing away with the retrospective tax of 2012, Modi had to defend his own government’s inaction for seven years since it came to power in 2014.
While it was certainly regressive and made foreign investors wary of policy certainty in India, it dealt with the sovereign’s right to tax. Arun Jaitley, while in Opposition as well as the Finance Minister, had criticised it but chose to live with it. In fact, in his 2017 memoir, Pranab Mukherjee, who introduced the retro tax, wondered why every finance minister in the previous five years maintained the same stance.
Even the bad bank proposal was first mooted by Arvind Panagariya when he was the first Vice-Chairman of Niti Aayog. Before his appointment, he had drawn Modi’s attention to the banking sector crisis, and actively advocated the setting up of a bad bank with the government contributing to its equity.
Arvind Subramanian, as Chief Economic Advisor during Jaitley’s term, made presentations to the Prime Minister and his key officers. But the moral hazard question raised within the PMO derailed any movement.
In some ways, the government has distanced itself – asking state-owned banks to pick up 51% equity in the bad bank and setting up an asset management company to handle the bad loans. But the moral hazard question remains, for which the only answer right now, is that big corporates have probably learnt a lesson with some industrialists being jailed, some being pursued, and the evolution of the Insolvency and Bankruptcy Code.