Modi’s Reformist Surge
At the precise midpoint of his second term, Prime Minister Narendra Modi is shifting gears. Reform is in the air. Modi spent much of his first term clearing up the economic debris left behind by ten years of UPA misgovernance and excess. Non Performing Assets (NPAs), long hidden in bank balance sheets, have been exhumed and are beginning to decline. Privatisation has finally taken off. Digitalisation of the economy has reached critical mass.
In October 2021, transactions worth over $100 billion were recorded on the Unified Payment Interface (UPI) system – a historic first. During a conversation with Reliance Industries Chairman Mukesh Ambani, Facebook founder Mark Zuckerberg lavished praise on UPI as a world-leading payment interface developed entirely indigenously in India. It is being adopted in dozens of countries worldwide.
Through much of his first prime ministerial term, Modi was admonished for not carrying out big-bang reforms. With hindsight, this appears to have been a well-crafted strategy. What Modi did was focus on executing foundational reforms. Demonetisation, for all the pain it caused, catalysed digitisation. The UPI was a direct beneficiary. Subsidies reach the poor more swiftly. Middlemen have largely been cut out.
The Goods and Services Tax (GST), though overly complex at inception, has formalised large swathes of the economy that so far existed in a penumbra. GST collections are now moving towards Rs 1.5 lakh crore a year. At Rs 18 lakh crore a year, this has opened up a new pathway towards record indirect tax collections. A benchmark figure of Rs 24 lakh crore a year, at an average collection rate of Rs 2 lakh crore a month, is not beyond reach over the next two years. That would transform India’s fiscal position.
Quietly too, a range of welfare schemes set up in 2014-19 have begun to deliver real results. In an insightful article in Business Standard on 3 November, 2021, R. Jagannathan, Editorial Director of Swarajya magazine, wrote: “Modi is a socio-political venture capitalist at work. From Swachh Bharat to Ujjwala to the latest Atmanirbhar Bharat, Modi has launched one new scheme almost every two months in his seven-and-a–half-year tenure. Swachh Bharat and Ujjwala were huge successes, apart from the reformative Jan Dhan-Aadhaar-Mobile trio, direct benefit transfers, and the bankruptcy code. In this term, GST will deliver with some tweaks, and for ordinary people Nal-Se-Jal will be hugely beneficial. Taken separately, Ujjwala, Saubhagya (providing last-mile power connections to the home), Swachh Bharat, Ayushman Bharat and Nal-Se-Jal are separate initiatives. Taken together, they empower the homemaker and improve health outcomes.
“Modi has formalised the Indian economy like no one else before him. With GST, the push for tax compliance, demonetisation, and the extension of social security benefits to many more workers (often on self-help), Indian business has taken a big leap towards formalisation. Micro and small companies, currently paying extortionate rates in the informal lending markets, will now get loans through the account aggregator initiative. But Mr Modi’s formalisation goes beyond firms and companies. The poor have been conscripted too. Between Jan Dhan, DBT and Unified Payments Interface, more Indians are now part of the formal financial sector than ever before. With the launch of the e-Shram portal for migrant labour, blue collar gig economy workers are being visibly formalised.”
The first half of Modi’s second term was captured by two events: one, a slew of controversial legislations on Jammu and Kashmir, the citizenship law and agricultural reform; and two, the Covid-19 pandemic. Dealing with both sets of challenges, the Modi government’s reform agenda seemed to be on pause. However, while dealing with the complex Covid-19 vaccination rollout, the farmers’ agitation, the difficult security situation in Kashmir, China’s aggression along the Line of Actual Control (LoAC) and the influx of Sikh and Hindu refugees from Taliban-ruled Afghanistan, the government managed to push ahead with its welfare schemes.
Now, as the pandemic abates, macro-economic reforms are back on the table. And yet, the full-throated reformist zeal needed in the second half of Modi’s second term has not found full voice. Privatisation of Air India was a good first step. But it is the public equity sale of Life Insurance Corporation (LIC), Bharat Petroleum and Hindustan Petroleum that will burnish the government’s credentials - and revenue. Consider LIC. The government holds 100 per cent of the insurer’s equity. The market capitalisation of LIC on listing is expected to be in the range of Rs 15 lakh crore. (By comparision, the market cap of Reliance Industries and Tata Consultancy Services are around Rs 17 lakh crore and Rs 13 lakh crore respectively.)
The LIC has total assets of over $510 billion (Rs 38 lakh crore). It has 290 million policy holders. The government plans to sell LIC’s equity in two tranches: around six per cent before March 2022, valued at around Rs 90,000 crore, and a New Fund Offer (NFO) in the next financial year of four per cent worth (depending on the listing price) another Rs 75,000-90,000 crore. The government’s remaining 90 per cent shareholding in LIC could therefore be worth anything up to Rs 20 lakh crore ($270 billion) if its listing price rises significantly over the next 12 months.
A successful public sale of LIC would energise the stock market, giving it a second wind as it awaits with muted trepidation the US Federal Reserve’s $15 billion monthly asset taper programme. It would also pave the way for the privatisation of Bharat Petroleum and Hindustan Petroleum. Both have valuable legacy assets. While it speeds up its third generation reformist agenda, the Modi government is obviously mindful of the seven key assembly elections due in 2022: Uttar Pradesh, Uttarakhand, Himachal Pradesh, Punjab, Goa, Manipur and Gujarat. The reduction in excise duty on petrol and diesel and the cut in basic duty on edible oils is aimed squarely at appeasing public anger over creeping inflation. Has the government left it too late? Modi has a knack of turning adversity into opportunity. By putting the onus on Opposition-ruled states to cut VAT on petrol and diesel, the Prime Minister has laid a carefully built trap. It could snap shut and deprive the Opposition of its principal pre-election weapon: fuel-based inflation.
Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is Founder of Sterling Newspapers, which was acquired by the Indian Express group
