Saturday 24 August 2019

PM Modi, transform economic gloom to boom (Sunday Guardian)

By M D Nalapat

He should form a ‘Desh Bhakti’ corporation that would float equity to citizens.

On 15 August 2019, Prime Minister Narendra Modi warned officials in the government to treat “wealth creators” with respect rather than in a hostile manner. This shift in attitude has come not a day too soon. It was Jawaharlal Nehru who as PM drastically reduced the salaries of top officials serving the Government of India, even while he substantially increased the discretionary power of officials. Nehru followed the example of the Soviet Union and made much of economic activity the monopoly of the state. At the same time, basic rights, such as property or the freedom to travel abroad using a passport, were drastically curtailed. Getting an Indian passport for those not well connected was an ordeal, thereby ensuring that the migration to the UK, the US and other locations in the 1950s and 1960s from India was substantially below the levels of settlers from Pakistan, where the acquiring of passports was far easier. By the 1970s, curbs began to be placed on migration by economically advanced countries, and it was not until the 1990s that the granting of passports began to be less of a headache for the citizen. Nehru, Indira Gandhi and V.P. Singh believed in the colonial dictum that the private citizen in India was not to be trusted but controlled, restricted and wherever possible, punished. It was not an accident that the economy started to stably accelerate after Prime Minister Narasimha Rao, in the early 1990s, dismantled several of the controls that had made countless officials and politicians wealthy. As PM, A.B. Vajpayee continued with Rao’s policy. BJP Finance Ministers Yashwant Sinha and Jaswant Singh discouraged officials from using coercive measures against corporate and individual taxpayers, a practice not followed by their successors in the Modi government, who stuck to the Chidambaram rulebook on tax raids and harassment. During Rao-Vajpayee, the economy began to approach double digit expansion. Alas, the Sonia-Manmohan combine elected in 2004 harnessed P. Chidambaram and Kapil Sibal to pass laws and regulations designed to return to officials the vast British-era power they once had over citizens. While India changed significantly after the Modi government got sworn in on 26 May 2014, such a transformation failed to take effect in North Block, where both the Home and Finance Ministries functioned much the way they had in pre-Modi days. In fact, the discretionary power of officials actually increased, together with the fact that several of them were the same as had connived with UPA-era politicians and businesspersons to loot banks and in other ways to game the system. Obviously, such officials would not want their former masters to be punished for their transgressions, for fear that their own role (and cash share) in them would get noticed. Small wonder therefore that not a single UPA-era VVIP was outed by the agencies during Modi’s 1.0.
By the end of the first term of Prime Minister Modi, department upon department, agency upon agency, within North Block regained the Nehru-Indira powers of arrest they once had. The fact that so many officials could knock on doors armed with arrest warrants resulted in a sharp increase in the bribes demanded for allowing the target individual to escape incarceration and punitive financial damages, of course until the next bribe taker came along. When the powers given to officials dealing with economic matters was less (as was the situation before Sibal-Chidambaram), most businesspersons could afford to pay the bribes demanded as well as the tax, and yet survive. By 2018, a stage was reached where the taxes demanded (including through GST rates that were by far the highest in the world) as well as the vastly increased bribe amounts still demanded by officials armed with punitive powers and discretion were so high that the costs and risks of conducting business in an era where even a clerical or a computer error could lead to jail were too high for many to continue to operate. Enterprise after enterprise of various types and sizes has shut down during the past three years rather than their owners risk coming into the crosshairs of the neo-Nehruvian regulatory construct restarted under PM Manmohan Singh and continued by North Block. Had every official been as honest and hardworking as Narendra Modi personally is, even a system based on harsh punishments may have worked. However, in a system where many officials down the line continue to be corrupt and/or incompetent, the implementation of vastly expanded coercive regulations has led to the slowdown that the economy is now experiencing, a slowdown that could lead to an economic collapse unless coercive action gets replaced with corrective measures. In economic distress, first investment declines. This is followed by a steep fall in borrowings, followed soon after by a fall in spending. The economy is at the third stage, that of a fall in spending, and is close to free fall. Prime Minster Modi’s warning to officials is therefore timely and necessary. Those officials who mismanaged DeMo or designed GST rates of such complexity and steepness that economic activity got severely affected need to be made to understand that what failed in the Soviet Union is unlikely to succeed in India, and that Modi’s dictum of “Minimum Government” is not a slogan but a directive derived from his years as a transformational Chief Minister of Gujarat.
Prime Minister Modi is a great motivator. He should form a “Desh Bhakti” corporation that would float equity to citizens, who could each subscribe to the extent she or he wishes. The shares would be listed but would have a lock-in period of five years. From the sixth to the tenth year, the investment made by each citizen in the equity of the “Desh Bhakti” corporation can be set off against taxes in five equal instalments. Should the economy do well, this “national patriot” company too will do well, as will investors cashing out through sale of shares after five years. The new company would expend the equity secured solely in measures that would boost the economy, such as infrastructure spending. Those investing in this noble enterprise of PM Modi should be treated with respect by officials rather than be harassed. The $10 billion that the government is planning to get through external bonds can be used for re-capitalising the banking system, even while action gets taken against major depredators who have mastered the art of bankrupting their companies for enriching themselves personally. At the same time, restrictions on consumer cash transactions in those outlets and sectors where GST is collected should be removed, so that the money available gets into circulation rather than remains hoarded. Through such a relaxation, taxes will get collected over successive round of expenditure, thereby fuelling economic prosperity. PM Modi has shown that he is capable of measures of breathtaking boldness. These are what are needed to change the trajectory of the Indian economy from North Block-induced gloom to PMO-induced boom.

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