Modi’s 80:20 Truth: Five Things He Needs To Get Done For Re-Election In 2019

We are well past the midway point where, no matter what Narendra Modi does, delivery of results is not going to happen before the next general elections in 2019. It is, therefore, important for Modi to prioritise what needs to be done so that the results are visible at least by end-2018.

One of the paradoxes in evaluating Modi’s performance so far is that there is little to criticise in terms of what has been attempted, but we are still left with the feeling that he hasn’t done enough.

The sheer volume of policy initiatives and legislative actions completed would put almost any previous administration to shame. The fight against tax evasion and black money has been consistent and relentless; the power sector has been rescued through the UDAY Scheme; the system of auctioning scarce resources is robust and largely beyond reproach; the opening up of foreign direct investment in multiple fields has made India the world’s top investment destination; the budget has been reformed in multiple ways; subsidies are being streamlined and shifted towards cash; financial inclusion has never been better; a bankruptcy code worthy of the first world is in place; Mudra loans are being given to improve the scope for self-employment; digital payments are gathering steam; the greatest tax reform ever attempted (the goods and services tax, or GST) is just a few days away from implementation.. And this is not even an exhaustive list.

And yet, one has to admit that the government has left a lot undone. In part this is because the gap between what was promised and what has been delivered seems wide, but it is also the result of an initiative overload where the government’s efforts have been spread thinly over too many schemes. There has been a clear failure to separate initiatives that can deliver more bang for the buck from those which are merely nice to have.

Quite simply, Modi has failed to apply the 80:20 rule, where 80 per cent of the efforts have been wasted on things that don’t matter as much when focus on the remaining 20 per cent that would have delivered in spades.

But this is as good a time as any to apply the rule, since general elections are less than two years away. Everything now attempted must deliver, both politically and economically.

Here are five things that Modi should prioritise.

First, the GST. This initiative is simply too big to be allowed to fail, with largely negative consequences for the polity and government finances if it is botched up in implementation. GST needs a full-time minister, and a core action team comprising key officials involved with its execution, including points-persons to liaise with states and businessmen. Problems and glitches will happen almost every day, and these need instant resolution. It is difficult to see how Finance Minister Arun Jaitley, with an additional Defence Ministry to handle, can give the kind of time to handle GST on a full-time basis. At the very least, the defence portfolio needs to be given to someone else, and his own ministry needs a special minister and a couple of secretaries handling only GST.

GST is an initiative that can go wrong anytime, and it is something Modi cannot afford to muck up. He has to control the narrative, the direction, the political and fiscal fallout of the decision, and the day-to-day fixing of problems as they surface. We have rushed headlong into what is potentially a political and economic landmine – and this means agility is the only way to control the damage, when it occurs. The goal should be to get GST working smoothly by March 2018. Any slippage beyond that will be politically and economically fraught.

Second, banks. Bad loans currently exceed Rs 7 lakh crore, and many public sector banks are tottering. Failure to fix these problems when these were well known even in 2014 has meant that this politically difficult task has been left for the final two years of the Modi government. It can blow up in the government’s face anytime. The Banks Board Bureau under Vinod Rai has been a washout, and if the failure is because the government did not empower it enough, then Rai should have been clear on this.

The task of fixing bad loans involves three things: one is to identify cases fit for bankruptcy and insolvency and recover what can be recovered; the second is to reschedule loans and rates for businesses that can still be viable (this, banks seem capable of doing themselves); and the third is to recapitalise banks as loans get settled and banks are forced to take sharp haircuts. Settling bad loans or moving borrowers towards the bankruptcy courts will destroy banks’ core capital. The Reserve Bank of India (RBI) recently listed 12 companies with almost unrecoverable bad loans to be readied for insolvency proceedings. This is a forward movement of sorts, but the process of getting so many banks to agree and also pushing the National Company Law Tribunal to act fast needs government to bash heads together behind the scenes. Ultimately, only the government can force its own banks and the other agencies under its jurisdiction to act quickly to get bad loan issues resolved.

In the next two years, as the process gets underway, banks will probably need anything from Rs 50,000-100,000 crore of fresh capital, and most of it may have to come from the government.

Third, jobs. Jobs are not going to grow in the formal sector, since entrepreneurs prefer to automate in the absence of labour law reforms. There are only two or three sectors that can create a huge number of non-farm jobs in the short run: real estate and construction and infrastructure. In terms of focus, this is exactly what Modi is doing – with public spending in infrastructure rising steadily, and lower and middle-class housing getting huge sops, including interest subventions.

But there is one big roadblock: vested interests in states. It is no secret that state and city-level politicians hold substantial chunks of real estate in benami names or even without any formal forms of ownership. So they have a vested interest in bottling up the supply of cheap land by refusing to ease vertical building laws, and by allowing more land to be available for development.

Can Modi do anything to ease supplies of land in states? Yes, and here he has to use his powers ruthlessly, assuming he wants to create jobs. While he needs to urge all chief ministers to make land available for affordable housing and infrastructure, it is with his own Bharatiya Janata Party (BJP) governments that he needs to talk toughest. The BJP now rules most of the big states, including Maharashtra, Gujarat, Uttar Pradesh, Madhya Pradesh, Chhattisgarh, Rajasthan and Haryana. Some of its more forward-looking allies like Chandrababu Naidu may also be willing to help out. If Modi can get his BJP states to push urbanisation and home building on a gigantic scale by freeing up large supplies of urban land for housing and rural land for infrastructure, we will see the first shoots of big recovery and jobs growth by the end of next year. If not, he is going to face the same question Atal Behari Vajpayee was asked in 2004: where is India Shining? Where are the achche din he himself promised?

Fourth, farms. The ongoing agitations for loan waivers should be the final warning note to Modi that he needs to fix the farm sector quickly. While it may already be too late to avoid calls for more loan waivers, since it is his own party that is at the forefront of this demand in many states, the focus must be to stop the haemorrhage from completely upending the fiscal balance.

Can this be done? Not easy, especially in the short run. But in the medium term, farms need huge investments, and over the next year-and-a-half the best Modi can do is to get policies framed for implementation in his second term. Hence the political attractiveness of ruinous farm loan waivers for his party.

In the short-term, only one thing is fiscally sensible – and it is infinitely better than waiving loans. It is to make crop insurance universal at a nominal cost, or even free, for all land up to two hectares. Eighty-five percent of farmers fall in this bracket. If compensation for flood and drought or pestilence is instantly credited to farmers’ accounts, and driven by what can be observed from space, it will be worth the cost. And politically attractive at relatively low cost.

Fifth, subsidies. The Modi government has done well to extend subsidy reforms using Aadhaar. LPG and kerosene are well underway; the big effort needed is on food and fertiliser. If every Indian eligible for a food subsidy can be given a loaded debit card (something like a Sodexo coupon) that can be used only for food purchases, the food subsidy can be digitised and cleaned up. If fertiliser subsidy can be paid out directly to small and marginal farmers through a Kisan debit card that is loaded every year with cash, fertiliser pricing can be freed.

The shifting of food and fertiliser subsidies to cash cards will be the first tentative steps towards universalisation of a basic income scheme, though at this stage it will only be a targeted cash subsidy scheme.

Modi does not have the time to do too much over the next 18 months, and so he has to focus and prioritise. If he can get the above five things done, he has a better chance at getting re-elected.