They say Rome wasn't built in a day. As India's economy shows signs of a sustainable, V-shaped recovery, it is a good time to revisit the structural challenges that the Narendra Modi government had received as a 'gift' from the United Progressive Alliance (UPA). Without that assessment, we may not see the larger picture or appreciate why the National Democratic Alliance (NDA) deserves unequivocal credit for scripting India's economic turnaround.
While judging a government's performance " especially macro-economic performance " we benchmark it against its predecessor or peers. In this case, we must also note that Congress-led UPA had handed the Bharatiya Janata Party (BJP) a deceptively bad script on exit. Modi had to jump through hoops and dig deep into his political capital to ring in structural changes. The short-term pain associated with these reforms scalded Modi, ate into his political capital and handed the Opposition a handy stick to beat him with.
The prime minister deserves praise for staying the course. The accelerated annual economic growth of 8.2 percent in the first quarter of 2019 fiscal is important, but equally so is the steady upward curve despite external and internal headwinds.
last five quarterly GDP growth trend (%) 5.6, 6.3, 7.0, 7.7, 8.2. impressive upward trend. difficult to sustain in remaining part of this year. pic.twitter.com/susVWw3FiU
" Ajit Ranade (@ajit_ranade) August 31, 2018
On the back of structural reforms aimed at formalising the economy, cleaning up the NPA mess, ending the era of crony capitalists and empowering the Reserve Bank of India (RBI) to clean up the banks " the upward trend in growth points to a possible kicking off of a virtuous cycle. This is expected to usher in a growth that is cleaner, not one fueled by toxic debts. The importance of this cannot be overstated.
The NDA government has received much flak from the media and the Opposition over the scooting away of inept and/or dishonest promoters such as Vijay Mallya or Nirav Modi. Congress president Rahul Gandhi has never lost an opportunity to slam the prime minister for 'allowing' crony capitalists to 'loot the country and scoot away'. He is presumably oblivious of the irony that his charges indict the Manmohan Singh government more than it does the Modi government.
While the NDA is certainly responsible for not bolting the door before the horses bolted, it is fair to note that these crooked captains made merry and pushed public sector banks into a massive non performing asset (NPA) crisis during the UPA years. How big an NPA crisis did the UPA preside over? And what impact did it have on the economy?
In a 2016 piece, Firstpost's Financial Editor Dinesh Unnikrishnan and Chief Data Analyst Kishor Kadam point out that "from Rs 53,917 crore, Indian banks' gross non-performing assets (GNPAs) in September 2008, the bad loans have grown to Rs 3,41,641 crore in September 2015. In other words, the total GNPAs of banks, as a percentage of the total loans, has grown from 2.11 percent to 5.08 percent."
In response to a Right to Information (RTI) filed by the Indian Express, "the RBI disclosed that while bad debts stood at Rs 15,551 crore for the financial year ending March 2012, they had shot up by over three times to Rs 52,542 crore by the end of March 2015." The report also points out that "29 state-owned banks wrote off a total of Rs 1.14 lakh crore of bad debts between financial years 2013 and 2015, much more than they had done in the preceding nine years."
In his blog, The Gold Standard, Singapore-based analyst V Anantha Nageswaran writes, "the economy was nearly dead when the present (Modi) government took office. It has been a struggle for it to breathe life into the economy left comatose by Dr Singh's (Manmohan Singh's) government¦ Indeed, much of India's present economic fragility is traceable to UPA's errors of omission and commission. Certainly, the public sector banks' Non-Performing Assets is a UPA legacy. That is just one of many legacies of his government that India could have done without¦" This gives credence to Modi's charge that the NPA was a UPA-era legacy, and that toxic legacy could be counted as a scam "bigger than the Commonwealth, 2G and coal scams."
The prime minister has been relentless in pressing this point. He raised the issue in the Lok Sabha during his reply to the motion of thanks on President's address, stressing that Congress gave "wrong figures" as NPAs were 82 percent and not 36 percent and "total advance made by banks rose from Rs 18 lakh crore to Rs 52 lakh crore."
On Saturday, while launching a payments bank of the postal department that professes to bring banking to the doorstep of every citizen by leveraging the postal department's 1.55 lakh offices and 3 lakh postmen, Modi claimed the "Congress had put the economy on a landmine." He flagged the figure of "Rs 52 lakh crore" loans in 2014, up from "Rs 18 lakh crore in 2008 given since Independence".
The prime minister blamed "'phone-a-loan scam' of the UPA government for the bad loans and asserted that every penny given at the behest of 'naamdars' (dynasts) would be recovered."
"Phone banking was not popular. But the naamdars did banking on phone and helped people get loans on phone calls. Whichever industrialist wanted a loan would get the naamdars dial the phone number of the bank¦ Our government has brought the banks of the country at the doorstep of the poor. Otherwise, five years ago, a situation was created that most of the money was reserved for people close to a particular family," said Modi.
In his paper Concentration, Collusion and Corruption in India's Banks that traces the "roots of bad debt crisis" in Indian Banks, Sumit K Majumdar of the University of Texas, Dallas, writes in the Economic & Political Weekly that the amount of bad debts that are written off as NPAs are unsustainable for Indian economy. He called it a "macroeconomic crisis" that for an economy worth $1.5 trillion, "the unrecoverable bad debts are around 12 percent" of its size. To the author, collusion was an important reason behind the piling up of debts.
He writes: "There might have been a quid pro quo between bankers, their appointing authorities in government, and banks' large corporate customers such that businesses would support the process of appointment of certain bankers to senior positions. These senior bankers would provide the unworthy customers large amounts as loans. These loans would have been provided in the full knowledge that they would go bad and add to the banks' bad debts."
So, while Rahul Gandhi accuses Modi for "crony capitalism", the Congress government appears more culpable on this accord. Through its omissions and commissions, the UPA dealt a body blow to Indian economy. To the flight of dishonest promoters, it could be argued as a counter-factual that they were forced to fly the coop when circumstances for arranging loans through "telephone banking" became difficult under the NDA.
The truth is, cleaning up the toxic-debt fueled economy left behind by the UPA has been one of Modi's biggest achievements. He deserves credit for going after the tycoons with single-minded determination.
Former World Bank consultant and Times of India columnist Swaminathan Anklesaria Aiyar notes: "The greatest Modi reform has been the IBC [Insolvency and Bankruptcy Code], providing for the exit of crooked or incompetent promoters from companies defaulting on huge loans to banks. For the first time, industrialists are losing control of some of the biggest companies in India. Essar had to sell Essar Oil and has lost control of Essar Steel. Jaypee had to sell its cement plants. A dozen of the biggest defaulters are headed for auction or liquidation, with hundreds more in the queue¦ This is anti-cronyism at last. The rich and powerful are finally being separated from the big businesses they have run badly." This reflects, as The Economist has noted, a change in the nature of Indian capitalism.
The London-based newspaper observes that "for decades, personal connections have provided a well-trodden path to success in Indian business." It goes on to say that one of the reasons why that system is under threat is "most tycoons have lost influence in Delhi, as politicians from Modi down realise the toxicity of being seen to be in cahoots with "bollygarchs". Some of India's grandest businessmen complain that they can no longer get in to meet the prime minister, who much prefers wooing foreign bosses instead. To increase transparency, some state assets are now auctioned online."
If the Indian economy has recorded an 8.2 percent growth for the first time in two years, the challenge lies in maintaining the trajectory. It is heartening to see that manufacturing, construction and agriculture sectors have contributed handsomely to the growth. It indicates that the transitory costs of demonetisation and GST are nearly over and the "elephant" as the IMF had forecast in April, "is ready to run". This revival wasn't unexpected and indeed had been predicted by saner commentators who haven't let political bias cloud their judgments.
Back in September 2017, when the twin shocks of demonetisation and GST had battered the economy and left the Opposition and a section of the media blaming Modi for "economic mismanagement", and even "crony capitalism", JP Morgan chief economist Sajjid Chinoy had pointed out that "the point of demonetisation/GST is to formalise the economy. This necessarily involves disrupting supply chains that run through the informal sector. The hope is that eventually these supply chains will be routed through the formal sector domestically. In the transition period, however, some disruption is inevitable, and is being filled by imports. For the economy as a whole, this is tantamount to an adverse supply shock."
That period of disruption seems to be ending. Modi has done a good job of not only putting the economy back on track but nurturing it back to health after the 'lost decade' of UPA years.