Do Saal Modi Sarkar: Hits & Misses

Modi government is set to complete almost half of its five-year tenure. The government celebrated its second anniversary on 26 May 2016. Modi swept into power in 2014 on two major promises—resurrecting the ailing economy and weeding out corruption. The Congress-led UPA government was mired in a series of corruption scandals. Modi has managed to keep off such
controversies. Gursharan Dhanjal peeks into Modi’s journey thus far.

01 July, 2016 Governance
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Outlining his government’s achievements, Prime Minister Narendra Modi recently said: “We have achieved major gains in macro-economic stability. A durable reduction in inflation, steady fiscal consolidation, a comfortable balance of payments position and build-up of foreign exchange reserves are the highlights.”

On 12 March 2016, at a conference organised jointly by the Ministry of Finance and the International Monetary Fund (IMF) in New Delhi, he added: “In a difficult external environment and despite a second successive year of weak rainfall, we have increased our growth rate to 7.6 per cent, the highest among major economies in the world.” On the economic front, as the Prime Minister claims, there is improvement on all the major macro-economic indicators. When the new government took charge, the GDP growth was low, inflation was high, industrial production was going down and business and investor confidence was dampened. Today, India is the world’s fastest growing economy and the most dynamic among the big emerging markets. With Gross Domestic Product (GDP) expansion to 7.5 per cent in 2015, India outpaced China for the first time in at least 15 years, according to the World Bank data. China’s economic growth slowed to 6.9 per cent in 2015. Most economists and analysts today term India as a rare bright spot in the current global economic turmoil.

“India stands at a crucial moment in its history—with an unprecedented opportunity for transformation. Important reforms are underway. Think, for example, of ‘Make in India’ and ‘Digital India’. With promise of more reforms to come, India’s star shines bright,” IMF Managing Director Christine Lagarde said recently.

Finance Minister Arun Jaitley said, acceleration in growth in the past two-years is even more significant as the country had suffered monsoon shortfall during both these years. During the last three years of UPA government average GDP growth stood at 6.3 per cent.

Modi government has introduced a series of programmes to accelerate growth and modernise the Asia’s third largest economy. Make in India is aimed to boost manufacturing; Digital India seeks to transform India into a connected economy by offering one-stop shop for government services; Swachh Bharat mission aims to make India clean; while Jan Dhan scheme is targeted at financial inclusion. With an objective to transform the urban landscape the government has introduced the schemes like Smart Cities, Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Housing for All.

Urban Development Minister M Venkaiah Naidu summarises the major initiatives taken by the government as MISIDICI, where MI stands for Make in India; SI for Skill India; DI for Digital India and CI for Clean India (Swachh Bharat). Naidu said these initiatives are transformational in nature and aimed at improving the living standards of the people at the bottom of the pyramid.

“Reform does not mean something very big. Some of us do not understand what is reform… Changes everywhere, empowering every Indian to live with dignity, ensure social security, that is the purpose of the reform,” Naidu, who is also Parliamentary Affairs Minister, said at the 43rd Skoch Summit at New Delhi.

Most of these schemes are transformational in nature and its real impact would be seen only in medium to long-term. However, critics say the government is injecting too much jumlebaazi (catchphrase or world paly) in the form of such schemes. This is creating hype and raising unrealistic expectations. Discourse on black money has given further rise to skepticism on such schemes.

Black Money

Addressing a rally on 7 November 2013, in the run-up to the general elections, Modi, the then Chief Minister of Gujarat and BJP prime ministerial candidate, had said every poor people could get Rs 15-20 lakh, if black money stashed in foreign banks is brought back to the country. Clarifying the statement, Bharatiya Janata Party (BJP) President Amit Shah said, it was just a political jumla (idiomatic expression or catch phrase) made during the election campaign. Opposition leaders often use this to target Modi and question his intent on other promises and schemes.

The debate today on black money is misplaced. Modi’s statement that every poor citizen could get Rs 15-20 lakh must be alluding to the alleged amount of unaccounted money. This could be termed as a simplification of the numbers rather than calling it a promise. For example, to simplify the country’s debt burden, it is often put in the form of per capita debt burden. Per capita debt burden rose to Rs 44,095 in 2014-15 from Rs 41,129 in 2013-14. Does it mean that every citizen is going to pay Rs 44,095 to somebody? Of course, not! Similarly, whatever the money the government manages to recover, it will have to be spent and invested by the government. Therefore, it is irrelevant to focus the debate on Rs 15 lakh to be deposited in the bank accounts of every citizen!

Modi government has taken several initiatives to unearth black money and curb corruption. Setting up a Special Investigation Team (SIT) to look into the black money issue was amongst the first lot of decisions. To provide a one-time compliance window to declare assets held abroad and pay due taxes and penalty on the value of assets declared, a new law is enacted in July 2015 named The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The defaulters who declare the amount under the law were liable to pay tax at the rate of 30 per cent and a like amount of 30 per cent by way of penalty on the value of assets declared, by 31 December 2015. The amount received by way of tax and penalty upto 31 December 2015 is Rs 2,428.4 crore, according to data released by the Finance Ministry.

In the General Budget 2016-17, Finance Minister Arun Jaitley proposed a limited period compliance window for domestic taxpayers to declare undisclosed income or income represented in the form of any asset and clear up their past tax transgressions. This includes paying tax at 30 per cent and surcharge at 7.5 per cent and penalty at 7.5 per cent, which is a total of 45 per cent of the undisclosed income. Other steps taken by the government on black money include strengthening and streamlining the information collection and enforcement mechanism through extensive use of information technology; joining the global efforts to combat cross-border tax evasion and tax fraud and to promote international tax compliance, including supporting the implementation of a uniform global standard on Automatic Exchange of Information on a fully reciprocal basis facilitating exchange of information regarding persons hiding their money in offshore financial centres and tax havens; renegotiation of Double Taxation Avoidance Agreements with several countries; proactively engaging with foreign governments for exchange of information under the provisions of DTAAs/TIEAs/Multilateral Convention; exploring non-government sources to obtain information regarding undisclosed foreign assets; and, effectively utilising the information received from treaty partners to combat tax evasion and avoidance.

The government promptly set up a Special Investigation Team under the chairmanship of Justice (retired) M B Shah to thoroughly investigate the list appeared in media report termed as “Panama Papers”. The report named nearly 500 prominent Indians who have allegedly stashed money in tax haven, Panama.

No doubt, black money has generated huge amount of political debate and created curiosity and anger among the masses. On both fronts, the government will have to act swiftly and decisively. The first one is about recovering the illicit amount and second, probably the more important, to make the system robust to prevent such practice in future.

Radical reforms needed to ensure 24×7 power supply

As Chief Minister of Gujarat, Narendra Modi transformed power sector in the state. He not only ensured 24×7 power supply to all, but also kept the tariffs at moderate level. This became possible because of massive reforms in distribution system that eliminated theft and wastage of power and also increase in generation capacity. When Modi took charge as Chief Minister of Gujarat, the state faced huge power deficit. Within a decade, the state transformed into a power surplus state. Peak hour power deficit in Gujarat stood at 25 per cent in 2004. This has come down to zero. Transformation in power sector has been the key aspect of the “Gujarat Model of Development.”

Now Narendra Modi, as Prime Minister, has promised to replicate the success story of Gujarat at the national level. The government has set a target to ensure uninterrupted supply of power to all by 2019. To replicate the success story of Gujarat, the government must aggressively push forward the reforms in the sector.

Distribution
The weakest link in India’s power sector value chain is distribution. Power distribution companies (DISCOMs) across the country are facing huge financial crunch. They have accumulated Rs 3.8 lakh crore losses and have debt outstanding of Rs 4.3 lakh crore as on March 2015.

With a view to improve the financial health of the power distribution companies, the government has introduced a scheme called Ujwal DISCOM Assurance Yojana or UDAY. The idea is to provide a sustainable permanent solution to the problem, which is ailing the industry for years.

“It is a bottom-up approach, not a top-down approach. The states will be assisted and hand-held to bring down the cost of power by improving their distribution, transmission and sub transmission network, reducing the cost of power through coal rationalisation and also bringing down the interest cost substantially,” said Piyush Goyal, Union Minister of State (IC) for Power, Coal and Renewable Energy. The Minister also claimed that the debt-restructuring plan for DISCOMs would eventually lead to a saving of Rs 1.8 lakh crore annually.

The scheme seeks to improve the health of DISCOMs through four-pronged initiatives—improving operational efficiencies, reducing power costs, decreasing interest cost of DISCOMs and enforcing financial discipline on DISCOMs through alignment with
state finances.

The scheme is optional for all states. Although it is a good initiative to reform the sector, the bigger challenge is to get onboard the states, which are ruled by opposition parties. So far, only 10 states have joined the scheme. Unless all the states are taken onboard a comprehensive reform will be a difficult task.

Capacity Addition
There has been a record increase in power generation capacity in the last two years. Achievements have surpassed the targets. In the financial year 2014-15, against the target of 17,830.3 MW generation capacity of 22,566.30 MW was achieved. This was the highest ever, capacity addition in a single year (126.6 per cent of target), registering a growth of 26 per cent over the capacity addition in 2013-14.

For the Twelfth Five Year Plan period, a target of 88,537 MW, excluding 30,000 MW of Renewal Energy Source, was fixed
for capacity addition. Against this, cumulative capacity addition of
84,990.7 MW has been achieved as on 31 March 2016.

Demand-Supply Gap
In India, the demand for electricity has always been more than the supply. If government figures are to be believed, this gap has narrowed in the past two years. The power shortage came down to 2.1 per cent in the financial year 2015-16, the lowest ever. This stood at 8.5 per cent in 2011-12. Peak shortage came down from 10.6 per cent in 2011-12 to 3.2 per cent in 2015-16. This is also the lowest, as per the data available with Power Ministry.

On 29 December 2015, for the first time no congestion was observed in the power grid. On that day, single price of Rs 2.3 per kWh of electricity was recorded for the country, as per the data provided by the country’s major power exchange Indian Energy Exchange Limited (IEX).

Although, there is good growth in electricity generation, but low demand-supply gap also highlights weakness in the economy. State electricity boards are facing huge financial problems and thus lack the means to buy electricity from generation units. Moreover, industrial activities remain subdued which is largely responsible for low demand.

Rural Electrification
In his address to the nation on 15 August 2015, Prime Minister announced that all villages would be electrified within next 1000 days. There were 18,452 un-electrified villages in the country as on 1 April 2015. The target is to electrify all villages in the country by 1 May 2018. There are 597,464 census villages in India. The strategy for electrification of un-electrified villages in a mission mode consists of squeezed implementation schedule of 12 months with 12 Stage milestones for village electrification monitoring with defined timelines.

Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) is a flagship scheme targeted at ensuring uninterrupted power supply in rural India. The scheme focuses on feeder separation (rural households and agricultural) and strengthening of sub-transmission and distribution infrastructure including metering at all levels in rural areas. This will help in providing round the clock power to rural households and adequate power to agricultural consumers. The earlier scheme for rural electrification, viz, Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) has been subsumed in the new scheme as its rural electrification component.

Way Forward
Power is a critical infrastructure. The country’s economic growth is heavily dependent on the performance of power sector. The success of most of the programmes like Make in India or Digital India depends on the availability and quality of power.

Power sector faces challenges on multiple fronts. This include delays in land acquisition, environment and forest issues, rehabilitation and resettlement issues, natural calamities, law and order problems, local issues, contractual problems, delay in material supply, geological uncertainties, extreme weather conditions, difficult terrain and poor accessibility, funds constraints, force majeure risk, inter-state issues, Right of Way (ROW) problem for transmission lines etc.

There have been some good reform initiatives in power sector. Ujwal DISCOM Assurance Yojana can potentially transform the distribution system and bring the much needed reform in the sector. However, the success will depend on how swiftly and seriously states implement the scheme. Assurance of coal linkages has brought life back to power generation units that were either idle without fuel for months or running much below their capacity.

Economic Growth

India’s economic growth is projected to accelerate to 7.6 per cent in the financial year 2015-16 from 7.2 per cent recorded in the previous fiscal, as per the advance estimates of the national income released by the Central Statistics Office (CSO).

Critics say the buoyancy in the economy is largely due to a change in the account method and it is not reflected at the ground. The government has introduced a new series of measuring national accounts with base year 2011-12. The old series had 2004-05 as the base year. Apart from the base year, the methodology for calculating the GDP has changed. The new accounting system is based on Gross Value Added (GVA) as against the old methodology of calculating the GDP based on economic output. Under the new system GDP = GVA + taxes on products – subsidies on products.

The figures have dramatically changed under the new series. Under the new method, the GDP growth for the fiscal 2013-14 is pegged at 6.9 per cent, while under the old series it was estimated at 4.7 per cent. For the financial year 2012-13, the GDP growth figure is revised upwards at 5.1 per cent under the new series from 4.5 per cent estimated under the old series. Clearly, the change in the base year has significant impact on the figures. The other important factor contributing to the growth is a sharp drop in crude oil prices. This has helped curbed inflation and thus made the growth numbers better.

But, is it just the change in accounting methods and good luck with oil and other commodity prices that have helped look growth figures better? The Prime Minister disagrees. He said such ideas are floated to belittle the government’s achievements. He said, “The fact is that India’s economic success is the hard-won result of prudence, sound policy and effective management.”No doubt, low oil price has helped the Indian economy and a change in the base year has a significant impact on the numbers. At the same time, the government’s efforts have also played a significant role. Even if we factor in the base year, the GDP growth figure has improved significantly in the past four years from 5.1 per cent in 2012-13 to 7.6 per cent in 2015-16.

GDP growth in 2015-16 is led by a significant improvement in manufacturing sector. Manufacturing sector growth is expected to surge to 9.5 per cent in fiscal 2015-16 from 5.5 per cent in 2014-15. Some experts have questioned this figure saying higher growth is shown mainly due to the change in methodology.

However, Minister of State for Commerce and Industry Nirmala Sitharaman said manufacturing activities in the country was actually picking up and questioning the numbers was not a healthy trend. “I think in this country, there can be a lot of discussion about the methodology, the process of getting the numbers and there is no harm in discussing. But of course, ultimately if there is no doubt after the due discussions, we have to settle somewhere and start believing rather than keep the discussions going on,” Sitharaman said. “At the end of the day, you are not able to sit and work on numbers because you question everything,” she added.

Farm sector growth continues to remain sluggish due to shortfall in monsoon rainfall. Agriculture sector growth is pegged at 1.1 per cent in the financial year ended March 2016 despite 23 per cent shortfall in monsoon rainfall. The farm sector had posted a negative growth of 0.2 per cent in 2014-15. Services sector growth remains strong. The sectors which are likely to register growth rate of over 7 per cent in 2015-16 are financial, real estate and professional services, trade, hotels, transport, communication and services related to broadcasting, as well as manufacturing.

The country’s GDP has touched $2 trillion mark. Real GDP at constant (2011-12) prices in the year 2015-16 is likely to attain a level of Rs 113.51 lakh crore ($2 trillion), as against the First Revised Estimate of GDP for the year 2014-15 of Rs 105.52 lakh crore.

The per capita income in real terms (at 2011-12 prices) during 2015-16 is likely to increase to Rs 77,431 as compared to Rs 72,889 for the year 2014-15. The growth rate in per capita income is estimated at 6.2 per cent during 2015-16, as against 5.8 per cent in the previous year, according to the CSO data.

According to the IMF, India’s GDP expanded by 7.3 per cent in 2015-16 and projected to grow by 7.5 per cent in 2016-17. The IMF has put the 2014-15 growth figure at 7.3 per cent. India’s growth rate is more than double the global average. The world economy grew by 3.4 per cent in 2016 and is projected to grow by 3.6 per cent in 2017.

As per the World Bank data (Global Economic Prospect report) India’s GDP is expected to expand by 7.8 per cent in 2016 and 7.9 per cent in the next two years. This makes India the fastest growing major economy in the world. In all these years India will outpace China.

Inflation

Uncontrollable rise in general price level or high inflation, was a big issue during the UPA regime. It is seen as a major factor behind the humiliating defeat of the Congress-led alliance. Modi has succeeded in stabilising the price level.

Retail inflation based on the Consumer Price Index (CPI), which was in double-digit during most part of the UPA-II government, has stabilised in the range of 5-6 per cent.

Now the government has adopted a monetary policy framework to focus on flexible inflation targeting. This brings Reserve Bank of India (RBI) at par with the central banks of the advanced economies like the US Federal Reserve and the European Central Bank. The Ministry of Finance signed a historic agreement with RBI in February 2015, under which the central bank will have to maintain retail inflation in the range of 2-6 per cent. As per the terms of the agreement signed by RBI Governor Raghuram Rajan and Finance Secretary Rajiv Mehrishi on 20 February 2015, the RBI will have to give an explanation to the government if retail inflation rises above 6 per cent for three consecutive quarters for the financial year 2015-16 and all subsequent years or less than 2 per cent for three consecutive quarters in 2016-17 and all subsequent years.

If the RBI fails to meet the target it shall set out in a report to the Central Government: (i) the reasons for its failure to achieve the target; (ii) remedial action proposed to be taken by the Reserve Bank; and, (iii) an estimate of the time-period within which the target would be achieved pursuant to timely implementation of proposed remedial actions, according to the agreement on ‘Monetary Policy Framework between the Government of India and the RBI.’

Further, the framework had set a target to bring down the retail inflation to 6 per cent by January 2016. The target for financial year 2016-17 and all subsequent years shall be 4 per cent with a band of +/- 2 per cent.

The retail inflation is well within the target. The CPI-based inflation has declined sharply since the new government came into power. In May 2014, when Modi took charge retail inflation was recorded at 8.28 per cent. It fell to a record low of 3.78 per cent in July 2015. Although, it rose in the subsequent months, it mostly remained in the range of 5-6 per cent. It was recorded at 5.18 per cent in February 2016.

Decline in the Wholesale Price Index (WPI) inflation is even sharper. The WPI inflation, which was over 6 per cent in 2013-14, declined consistently on the back of a sharp fall in global commodities prices. It is in the negative territory since November 2014. The WPI inflation was recorded at minus 0.91 per cent in February 2016, remaining in the negative zone for the 16th straight month.

Ease-of-Doing Business

India’s rank in the World Bank’s Ease of Doing Business improved by 12 spot to 130 in around one year of Modi government rule. The latest annual report, which had 1 June 2015 as cut-off date for data collection, placed India at 130th position, a significant improvement from previous year when it was placed at 142nd position. The 2015 ranking report was released on 28 October 2015.

According to Finance Minister Arun Jaitley, India’s ranking should improve further significantly as several of the initiatives taken by the government are not factored in the report.

“India’s position should have moved significantly higher. I understand that all steps have not been factored in since the World Bank criteria has a cut-off date and it also waits for announcements to translate into action before they can be factored,” Jaitley said while reacting on the World Bank report. “Quicker decision-making, faster policy changes, eliminating corruption at the top and smoother clearances have played a significant role,” he said. The government has simplified and rationalised the existing rules and increased the use of information technology to make governance more efficient and effective. Ministries and state governments have been advised to simplify and rationalise the regulatory environment through business process re-engineering and use of information technology. Other measures include integration of 20 services on e-biz portal to function as single window portal for obtaining government clearances, integration of the process of incorporation of the company and application for Director’s Identification Number (DIN), removal of requirements of minimum paid-up capital and common seal of companies, simplification of the procedure for Industrial License (IL) and Industrial Entrepreneur’s Memorandum (IEM), excluding a number of parts/components from the purview of Industrial Licensing and issue of security manual for license defence industry to obviate the requirement of affidavit from applicant.

FDI policy has been further liberalised. Up to 49 per cent FDI is now allowed in defence sector. For Railway infrastructure it is raised up to 100 per cent and for insurance and pension it is increased up to 49 per cent. The investment limit requiring prior permission from Foreign Investment Promotion Board (FIPB)/Cabinet Committee of Economic Affairs has been increased from Rs 1,200 crore to Rs 3,000 crore. The definition of investment by Non Resident Indians (NRIs), Person of Indian Origin (PIOs) and Overseas Citizen of India (OCIs) in FDI policy has been revised. Further, except for defence and private sector banking for which specific conditions apply, composite caps on foreign investment have been recently allowed so that uniformity and simplicity are brought in across the sectors in FDI policy for attracting foreign investment.

India is the most favourable place for investment, according to a survey conducted by Ernst & Young among 505 CEOs globally. Almost 32 per cent of the executives said India was their favoured market for investment. China came as a distant second with 15 per cent of the executives favouring it. “There is no doubt that interest in India has increased. Investors increasingly see the potential and understand the fundamentals,” Ernst & Young said in the survey report.

Railways on transformation track

Indian Railways is often referred as the “lifeline of the nation.” It is one of the largest employer and plays a critical role in the economy. Highlighting the importance and his government’s commitment for Indian Railways, Prime Minister Narendra Modi once said: “Railways, perhaps along with Post Office system, are the only two institutions in India with a deep network, which if tapped judiciously, can create substantial improvements in the hinterland. Railways was always considered only as a mode of transport in our country, we want to see Railways as the backbone of India’s economic development.”

The size and scale is gigantic. The Indian Railways is the third largest rail network in the world with 66,000 route kilometer stretch covering more than 8,000 stations. It runs 12,000 trains to carry over 23 million passengers daily—equivalent to moving the entire population of Australia. It runs more than 7,000 freight trains per day carrying about 3 million tonnes of freight.

Quality of service delivery and capacity augmentation had suffered in the recent years due to lack of investments, either in customer service or safety. The NDA government that came into power in May 2014 gave high priority to the sector. A number of initiatives have been taken to expand the network and improve customer service and safety. Moreover, the government seeks to introduce new culture in Railways with the help of new technologies.

Railways Vision 2020
The new government has come out with Railways Vision 2020 to meet long-held desires of the common man. Such desires include reserved accommodation on trains being available on demand, time tabled freight trains with credible service commitments, high-end technology to significantly improve safety record, elimination of all unmanned level crossings, punctuality increased to almost 95 per cent, increased average speed of freight trains to 50 kmph and Mail/Express trains to 80 kmph, semi high speed trains running along the golden quadrilateral and zero direct discharge of human waste. The Railways Vision 2020 spelt out in Railway Budget 2016-17 seeks to provide a system free from capacity constraints, a system that is efficient and predictable, a system that is sparkling and pristine, where the people of the country feel at ease, where there is plenty of choice in every sphere of activity and the ease-of-doing business pervades the entire railway ecosystem.

Bullet Train
The first bullet train will run between Mumbai and Ahmedabad. It will be 508 km line and estimated to cost `97,636 crore. The feasibility study

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