Everybody’s Looking For A Happy Ending, But This Is Just The Beginning
The Prime Minister has made a solid beginning in his first year in office. It is now time and opportunity for him to demonstrate that well begun is indeed half done.
When Modi’s government took office a year back, the overarching expectation was of a distinct need of change. The core voters as well as the swing addition had in mind a radically different image of the future with respect to the current scenario. As the first year of Modi government unraveled, there is an increasing realization that change meant vastly different things to different segments of India.
Economic growth; archaic laws; macro, big-ticket corruption; micro, street level corruption; jailing corrupt opposition politicians; rewriting history textbooks; winning every state and municipal election; reforming judiciary,;building a Ram Mandir; creating a pliant media; repairing the road one takes to office everyday – the list of expectations from various quarters keeps on increasing by the day.
Fundamentally, all changes – in politics, business or real life – can be classified in three buckets:
1) Incremental, where the end state is known and not very different from the starting point;
2) Mutational, where the end state is known, is significantly different from the starting point and hence the process of change can be reasonably managed;
3) Transformational, where the end state evolves, is radically different from the starting point and results in significant behavioral change for the system and the people associated.
The evaluation of a government at the first anniversary mark, in an operating ecosystem as complex as India, should certainly distinguish between government interventions which correspond to each type of change. And while it is fine to do a simple “x out of 10” score for incremental changes, there has to be a more qualitative, judgment-based approach for measures and steps for mutational and transformational changes – changes which will shape up over time, with a potentially high impact.
A Year of Foundations
The main feature of the first year of Modi government was to kick-start several of the long term bets across a range of areas, but primarily those linked to economy, defense and foreign policy. In that sense, this first year has been a year of doing the groundwork and creating the scaffolding for shaping policies over the rest of the term.
Despite the weight of expectations borne out of his high decibel, high promise 2014 campaign, PM Modi has chosen to front load the tweaks and the irritants, probably with the hope that if the scaffolding results in a strong building, there will be electoral dividends to reap at the back end of the five year term. There are a few themes which have found favor in terms of laying these foundations. Each of these themes has potential to be a transformational change in its own right.
Financial Inclusion and Safety Nets
In the first year, the Modi government has bet heavily on extending the benefits and convenience of organized finance to a cross-section of hitherto unbanked sections of India. The focus has been on easier access to consumer banking products including savings accounts, debit cards, small payments and small credit. Additionally, the government has taken the first steps towards a social security net, with the aim of benefitting the unorganized sectors of the economy.
The Pradhan Mantri Jan Dhan Yojana (JDY) will be a cornerstone of financial inclusion and delivery in the years to come. Direct transfer of all benefits, identified against a renewed Aadhar backbone is here to stay. Plugging subsidy leakages, eliminating middlemen and reconstituting subsidy value chain with shifting point of disbursements closer to the underlying asset usage will over time hugely improve efficiency of any subsidization program. The transfer structure will also allow governments to dynamically add or leave beneficiaries when parameters of subsidy payments change.
Promoting social security started with Budget 2014 grants for Varishtha Pension Bima Yojana (VPBY), which provides monthly pension between ₹500 and ₹5,000 to senior citizens. Budget 2015 extended this in a big way via two new schemes. Pradhan Mantri Suraksha Bima Yojana (PMSBY) covering accidents and resultant death and disability and Pradhan Mantri Jeevan Jyoti Yojana (PMJJY) covering life insurances operate at a meager annual premium of ₹12 and ₹330 respectively. Both schemes provide for ₹2 lakh insurance over and have seen great traction in the first month of the launch.
As part of financial inclusion, the government is also promoting small savings – which eventually form the backbone of a strong economy. Kisan Vikas Patra (KVP) was re-launched in November 2014 to fund new infrastructure projects without offering tax benefits. The message was clear. Buy a financial instrument for its yield. The Sukanya Samridhi Yojana launched in March 2015 allows parents to save towards future needs of their girl child, with fixed rate of interest until the child turns 21 years. The Atal Pension Yojana (APY) which will go live in June 2015 will encourage unorganized sector workers to save towards a defined contribution pension system. Given that unorganized sector accounts for the bulk of Indian employment, this scheme has the potential to amass a huge war chest over time.
On the credit side too, the government is extending benefits of access – which most of the times is the bigger issue rather than the cost of credit – to various segments. The MUDRA Bank which will be formed post Budget 2015 announcement will target small and medium enterprises. Prof. R. Vaidyanathan wrote about the benefits in his Swarajya article here. This bank will help reduce systemic financial distortions and reduce the role of moneylenders and unscrupulous middlemen, whose role and behavior aggravates not just financial stress but also social stress in the Indian hinterland.
Power Sector Reforms with Trickle Down Benefits to Industry and Agriculture
The Modi government has focused in a big way on power sector reforms in the first year. Today, more than 20% of the Indian population does not have access to electricity. Without reliable and continuous electricity, no other sector of the economy can flourish. Indian power infrastructure is old and creaking, with transmission and distribution losses as high as 50-60% in some states. The government has given top priority to stopping this waste of immense resources co-existing with rampant shortages over the last year.
The Coal ordinance and the subsequent passing of the new Coal Act paved the way to reduce the stress in the power generation sector. When this government took over, several power plants were on the verge of shutting down operations with no coal inventory. A year later – in reality, just over 7 months after Supreme Court cancelled the UPA era allocation of coal blocks – almost every plant in the country has a 2-3 week visibility on the coal linkages.
The government has also made huge investments – ₹43,000 crores in Deendayal Upadhyay Gram Jyoti Yojana and ₹32,000 in Integrated Power Development Scheme – to improve the rural as well as urban power transmission structure respectively. This investment will look at standardization of transmission, separating agricultural feeders and promoting metering.
This dual focus on the supply as well as demand side is being supported by a huge push for renewable energy generation. The government has set an ambitious target of 160 GW+ of renewable installed capacity by 2022 and several measures are being taken to promote solar as well as wind energy.
Government ministers as well as BJP leaders have already started talking about 24 x 7 supply of electricity by 2019 in less than hushed tones. Previously, I have written for Swarajya, two articles covering the opportunities and challenges in this area in greater detail.
Centre-State Federalism and Promoting State Participation
PM Modi was the Gujarat Chief Minister for almost 13 years and several of his senior Cabinet colleagues have also been Chief Ministers in the past – Rajnath Singh (UP), Sushma Swaraj (Delhi), Manohar Parrikkar (Goa), and Uma Bharti (MP). With their experience of managing centre-state relationships, it was only natural the government looked at the interests of states closely and in the right earnest.
Accepting the recommendations of the 14th Finance Commission, the government is henceforth going to share a much greater proportion of central taxes with the states. A 31.2% jump – 10 percentage points from 32 to 42 – will see states get ₹178,000 crore more in current fiscal year to spend on areas of their priority. This financial largesse is in addition to the proceeds of coal block auction, which in their partially completed form have produced more than ₹200,000 crore to be used at states’ discretion. These auctions – coupled with the auctions to be undertaken by each states post the enactment of Mines and Minerals Regulation Act – can significantly reduce the state deficits and help take the stress out from the states’ balance sheets.
At the launch of NITI Aayog, the PM invited all chief ministers for consultations on the future roadmap for the commission, and to define the role of the commission in policy making and efficiency measurement. For a key reform measure like GST, the government has been trying to get key states onboard – going beyond the politics of numbers needed to get the legislation enacted. Even the launch of several flagship schemes on financial inclusion has taken place in non-NDA ruled states, signaling the governments intent to leave politics aside for key changes.
The implementation of several constructs like Swachha Bharat, power reforms and Smart Cities will eventually stay with the state governments. If states do take greater control of their destiny by moving away from centrally sponsored schemes, it will open up great room for fiscal discipline as well as responsible local politics over a period of time.
Cleaning up Defense Procurements
Over the last 30 years or so, defense procurements have been the biggest source of institutionalized, large-scale corruption in India. Over the last year, the government has moved fast towards eliminating the chain of middlemen and shady transactions, assuming greater control of large deals. Additionally, the government has also reduced the ingrained policy paralysis of decision making, promoting more government to government (G2G) negotiations and transactions.
In the first few months itself, the government made small but positive changes on the procurement side. In June 2014, the defense license list was reduced by 60% allowing more items to fall under individual sectoral FDI caps, and e-procurement was made mandatory for any purchase over ₹10 lakhs to increase transparency. In October 2014, the government removed stipulation of annual capacity in the industrial license for defense items, while clearing 33 proposals for defense manufacturing which were stuck for a long time. In December 2014, defense manufacturing equipment licenses of 35 companies were cleared.
In 2015, the government has focused on G2G deals. The showcase example of this was the purchase of 36 ready-to-fly Rafale fighter jets from France with a big 25% discount over the initial price offer to plug operational challenges for the Air Force. Earlier this month, India approved purchase of 200 Russian Kamov helicopters.
Trade Interests Driven Foreign Policy
PM Modi has copped a lot of criticism for traveling abroad extensively in the first year of office. He has been to 19 countries spending 53 days outside India. Bulk of Indian foreign policy interventions have been around trade relationships and the government has demonstrated the intent to leave contentious issues aside in favor of more business.
The agreement on the nuclear deal with the US, chasing uranium supplies in Canada, Australia and Mongolia, attracting manufacturing investments from China, Germany, Japan and South Korea, purchasing aircrafts from France, making a small start with defense export to Seychelles and re-energizing the Indian diaspora across several countries – the largest remittance supplying block in the world – all the moves have trade and commerce underpinning. Several countries have signed memorandums of understanding on a range of investments to be made in India in coming years. Even if a fraction of it actually materializes, it will be a key jumpstart to the ambitious ‘Make In India’ program, which is still taking shape.
In the process of engaging the world, PM Modi has faced personal criticism, Internet memes and media jokes. He has however decided to frontload his foreign policy outreach initiatives, with a clear aim to increase foreign investments. If these personal connects with a range of world leaders are successful, India can hope to reap the dividends at the tail end of this government’s five year term.
Key Success Factors
So the million dollar question is – will this range of mutational and transformational changes work? Success of transformation programs depends on various factors. It will be important for PM Modi and his key ministers to address these challenges and stay ahead of them, rather than get defensive about every small roadblock or partial failure.
Firstly, the government should create a clear business case on each such transformational program and communicate it better with the stakeholders. Do states realize the benefits they can reap from Make In India if they changed their labour laws? Is it possible to create a competition of sorts among states to attract more renewable energy investments? The execution of transformation ideas requires clear definition of returns on investment and a need to challenge skepticism from key participants in the program.
Secondly, there has to be better execution scale and coordination among various ministries, committees and regulatory bodies. That this is achievable has been amply demonstrated in India’s humanitarian interventions in Yemen and Nepal. What needs to be proved, is that in the context of day to day business without the grimness of tragedies and war, it is possible. There has been criticism of reliance on an ill-equipped bureaucracy. Voters won’t take this as a valid excuse for failure to execute transformational programs.
Lastly, the government has to create a sustainable body of skills and change the culture within its own departments and ministries to ensure that these programs run and scale on their own. No government can launch the same schemes or interventions year after year. New problem areas will always crop up taking management time and attention. Bodies like NITI Aayog have to work on war footing to put the enabling infrastructure in place, which allows automation, control and scalability, allowing the top government functionaries to move to the new big thing rapidly.
PM Modi should look back at the first anniversary with more hits than misses, with more smiles than regrets. The next challenge will be to tie in various programs – including the incremental ones – and find that currently missing force multiplier, which is necessary to accelerate the presently flat economic growth. The first year of Modi government was the year of starts. “The beginning is the most important part of the work”, said Plato in The Republic. It is now time and opportunity for PM Modi to demonstrate that well begun is indeed half done.