An upper hand in the Upper House

Now that the dust has settled on the Bharatiya Janata Party’s historic victory in Uttar Pradesh, let’s get down to the big question: how close does it get the ruling National Democratic Alliance to a Rajya Sabha majority, and when? The government’s minority status in the RS has slowed and even halted important elements of its legislative agenda, such as the GST and land acquisition amendments. An upper house majority would greatly strengthen its ability to pass bills, but it could also embolden the Sangh Parivar to push its core ideological issues such as a uniform civil code, eliminating Article 370 and perhaps even transforming India into a “Hindu Rashtra”.

Here’s what the Rajya Sabha currently looks like:

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UP is clearly the prize in the RS: it contributes 31 of the upper house’s 245 seats, of which ten will have elections in 2018 and another ten in 2020. With a supermajority in the UP state assembly, the BJP is likely to win seven new seats from UP in each round (it already has three RS MPs in UP).

Adding up all the states, the NDA will gain a total of 18 seats in 2017 and 2018 (including two grabbed from the Congress Party in Goa and Manipur), while the Congress Party and its allies’ tally will drop by a similar amount.

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Those are meaningful shifts in seats, but not enough to give the NDA control of the upper house, where it will remain short by about 30 seats (as this blog anticipated in 2014). It will continue to require the support of regional parties like the Trinamool Congress, AIADMK and Samajwadi Party to pass bills through the RS.

Things improve for the NDA in 2019 and 2020. If we assume no major changes in the state elections held in 2018 and 2019 (a strong but unavoidable assumption since we can’t predict the future), the NDA approaches an RS majority only in 2020.

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The ruling coalition will still fall a few seats short, but should be able to corral support from a wide selection of regional parties to pass bills. The good news, at least for people wary of the BJP’s Hindutva agenda, is that the BJP will lack the power to change India’s constitution. But it should be able to push economic reform bills through both houses if its allies are supportive.

The bad news: the BJP has every intention – as revealed by Adityanath’s anointment as UP chief minister – to push ahead with hardline Hindutva. And if the environment is polarized enough, there is no guarantee that the BJP’s allies won’t cave to an aggressive right-wing assertion. Assuming, of course, that 2019 is in the bag for the BJP.

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Uttar Pradesh is the BJP’s to lose. Or is it?

As counting day on 11 March approaches, it seems as difficult as ever to gauge which way the political wind in Uttar Pradesh (UP) is blowing. Even before the campaign began, pre-election opinion polls offered little help, showing the Bharatiya Janata Party (BJP) and the Samajwadi Party (SP)-Congress alliance neck and neck, with the Bahujan Samaj Party (BSP) lagging.

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We know from elections in Delhi (2015), Bihar (2015) and West Bengal (2016) that a dead heat in pre-election polls is almost never a good predictor of the eventual outcome.

So what are the BJP’s chances of pulling off a win? If the starting point is the BJP’s historic 2014 victory, its lead seems unassailable. The BJP won 328 of 403 assembly segments, including 253 with more than 40% of the vote, and as Praveen Chakravarty states, for it to win fewer than 200 seats even if “two of the opposition parties get together, the BJP would still have to lose more than 10% of its voters”.

But if the baseline is the 2012 state election, the SP-Congress alliance begins to look formidable. As Karthik Sashidhar writes: “it will take a 7 percentage point swing from the 2012 elections to pull the Samajwadi Party-Congress alliance below the halfway mark”. While this sounds big, it is well within the realm of possibility: in 2014, the SP dropped seven percentage points from its 2012 tally, giving the BJP a sweep in that four-cornered contest.

So which is it? The opinion poll numbers suggest that 2014 is, in fact, the appropriate baseline: 33% represents a near doubling of the BJP vote in the past three state elections and a decisive break from UP’s two-party dominant system. Yet it is undeniable that the SP-Congress alliance has raised the threshold of votes any party needs to attain a majority, transforming the contest from a seeming BJP walkover to a tough fight.

One way to resolve this impasse is to look at UP by-elections. Since the 2014 general election, the state has had 18 assembly by-elections: 11 in 2014, two in 2015 and five in 2016. These constituencies are fairly representative of the state: they are distributed across UP, and their combined 2014 general election vote shares approximate how the whole state voted in 2014, albeit with a slight bias of 3-4 percentage points each towards the BJP and INC (see table below).

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And this is how those 18 constituencies’ votes moved, from 2012 to 2014 to the subsequent by-elections:

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Note that the BJP’s vote share fell about 11 percentage points in the by-elections, while that of the SP rose more than 24 percentage points. The BJP retained only three of the 14 assembly constituencies in which it had a lead in 2014, and lost 11 to the SP. That’s a sharp fall in votes compared with 2014.

There are two obvious caveats. One is that ruling parties tend to do very well in by-elections. Voters calculate that having a ruling party legislator is more beneficial for their constituency, and parties in power tend to win by-elections about 2/3rds of the time. The second is that the BSP does not generally contest by-elections, so the 2014-16 numbers aren’t strictly comparable to 2012 and 2014 when the BSP was in the fray.

But that’s also the bad news for the BJP. One reason it did very well in the general election is that many BSP voters – including Dalits and MBCs – preferred Modi in 2014. But in the subsequent by-elections, the BSP’s vote appears to have gravitated towards the SP rather than to the BJP. It’s possible that incumbent advantage, including control of the state’s law-and-order machinery, contributed to this shift, but the BJP will have to fight to retain its 2014 voting bloc.

Such big drops in vote share are not unheard of in the wake of “wave” elections, such as in 1984. In November that year, the INC won 51% of votes in Uttar Pradesh, only to slip three months later to 39% in the state election that followed. Even bigger dips have occurred: in 1987, the INC won 29% in Haryana, a sharp drop from the 55% it received in 1984.

Now 1984 was a long time ago, and the obvious counter-argument is that UP has seen many big political events since the by-elections that could put wind beneath the BJP’s wings. These include the army raid across the Line-of-Control, demonetisation, the civil war in the SP and the high-pitched election campaign in which the BJP has brought out its big guns. And voters could decide that the BJP deserves a chance to run UP after successive BSP and SP governments.

But the reality is that the BJP’s vote share has dropped substantially since its 2014 victory, and the SP-Congress alliance has built a vote chest that makes it imperative for the BJP to outperform. As it happens, in the 2015 Bihar election, by-election vote shifts overstated the ruling alliance’s vote share but captured the drop in the vote share of the BJP and its allies. The BJP should hope that it won’t be the same story in UP.

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India’s economic freedom plunge

For a government so devoted to rankings and ratings, India dropping 20 places to 143 in the 2017 Index of Economic Freedom must have been a bummer. If Prime Minister Narendra Modi felt it worthwhile to approvingly cite India’s 19-place improvement in the World Bank’s Logistics Performance Index, surely such a dramatic fall in economic freedom should send alarm bells ringing?

Compiled by the conservative Washington DC-based Heritage Foundation, the Index of Economic Freedom has an unambiguous free-market tilt. It ranks countries based on 12 factors:

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And on the face of it, India seems to have taken quite a hit:

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But the jittery libertarians can relax. India’s dip in the index is the result of a methodological change, not a big deterioration in economic freedom. Low scores in two new variables – “judicial effectiveness” and “fiscal health” – pushed India’s 2017 ranking down the list. If we compare 2017 with previous years on a like-for-like basis, India stands at 121, pretty much the same. The bad news? India has shown no improvement either, so Acche Din are as distant as ever.

Now you might say that these indices are arbitrary, opaque or irrelevant, and you would have a point. Heritage doesn’t tell us how these scores are calculated, and only five of the 12 variables are drawn from concrete data, as opposed to more subjective surveys by the World Economic Forum, the World Bank, Transparency International etc. The way the index is calculated, modest changes in one or two variables can send a country up or down five to 10 places.

Since many of these appear to be subjective measures (e.g. “property rights”, “judicial effectiveness”, “government integrity”), small rank changes could simply reflect random measurement error. Furthermore, it’s debatable whether saying that India ranks three spots higher than Brazil under “property rights” is truly meaningful.

There are conceptual issues too. If you give Sudan, Sierra Leone and the Democratic Republic of Congo top billing under “government spending” and code the welfare states of Finland, France and Denmark as low in this case, are you not implausibly suggesting that weak government capacity produces prosperity?

More broadly, a 2012 paper by economists Aleksander Kešeljević and Rok Spruk finds that country rankings can change once you account for endogeneity – the fact that richer countries will already tend to be freer economically – as well as for how various components of the index affect prosperity differently (e.g. fiscal and monetary variables have a bigger impact than rule-of-law variables).

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The point is, there’s no need to get hung up on such indices. They can be a periodic reminder of how far there is to go to liberalise the Indian economy, but they are also constrained by a specific ideological perspective. No one in India seriously disputes that it’s desirable to make it easier for firms to do business, but reasonable people can disgree whether the Mahatma Gandhi National Rural Employment Guarantee Act enhances or limits economic freedom.

And think about demonetisation. If it were to reduce corruption in a sustainable way (count me as a sceptic), it would certainly contribute to economic freedom. But it has also imposed a tax on all holders of currency (i.e. everyone), devastated India’s informal sector and facilitated Raid Raj by all-powerful income tax authorities. The irony is that India may be holding its position as far as the Heritage Foundation is concerned, but its economic freedom is moving in reverse gear.

 

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Jumla is the new black

It’s hard to tell whether demonetisation will turn out to be a bold hit or a costly miss, but it appears to many that the government has taken the black money bull by the horns. Announcing the withdrawal of ₹500 and ₹1,000 notes, Prime Minister Narendra Modi listed several steps that his government had taken so far in its war on black money:

Looks impressive, what’s not to like? Just that, once you discount the hype, it’s not very different from what’s been done by past governments, whether the United Progressive Alliance (UPA) or the United Front (UF).

Show me the money

Consider the figure of ₹1,25,000 crore collected over two-and-a-half years. The government hasn’t provided a break-up, but based on Finance Ministry replies to parliamentary questions, it includes the following:

  1. ₹65,250 ₹67,382 crore declared under the 2016 Income Disclosure Scheme (of which 45% will flow in as actual taxes)
  2. ₹21,354 crore of undisclosed income seized from individuals and businesses (under Section 132(4) of the Income Tax Act)
  3. ₹22,475 of additional income assessed from taxpayers by surveys (carried out under Section 133A of the Income Tax Act)
  4. ₹8,186 crore of undisclosed income held by Indians in accounts with HSBC Geneva, revealed by the French government in 2011
  5. Around ₹5,000 crore of offshore holdings by Indians that an International Consortium of Investigative Journalists investigation exposed in April 2013

All of which adds up to ₹1,22,265  ₹1,24,397 crore, close enough to our headline figure. But how remarkable is this effort?

The income disclosure scheme is a one-off (more about that later), but what about the black money brought into the open via searches, seizures and surveys? The chart below shows the record in previous years (source here):

Screen Shot 2016-12-09 at 11.59.37 PM.pngIsn’t that interesting. Using the same definitions used by the Modi government, it turns out that the quantum of black money exposed in the last two years of the UPA was more than ₹1,30,800 crore. That’s right – the UPA tracked down more black money than the Modi government did, and in a shorter time frame.

As always, there are caveats. Not all the money assessed under Section 133A should be strictly considered “black”; some of it consisted of income that taxpayers felt was not taxable for whatever reason, but the authorities disagreed. Still, if the Modi government wants to count all those funds under its “black money” haul, it cannot deny the UPA credit for a bigger haul.

Bring back the money

That’s fine, you might say, but hasn’t the Modi government adoped a much more comprehensive approach to black money than the scam-tainted UPA? It’s passed bills to bring back black money, succeeded with its income disclosure scheme and, as Modi himself stated, reached agreements with many foreign countries to provide tax information.

Let’s take these one-by-one.

The Modi government has indeed passed bills that raise the penalties for the concealment of foreign income and beef up the handling of benami properties, and we have to see what effect they have. But it’s not clear that income disclosure schemes even work, leaving aside the obvious unfairness of giving tax criminals a break while the rest of us cough up our cash. A similar scheme in 1997 resulted in close to half a million persons declaring ₹33,695 crores of previously undisclosed income, equal to ₹85,153 crore in current rupees and a third quarter higher than the Modi government’s bounty. I think we can all agree that it didn’t make much of a dent in India’s black money problem.

What about black money transferred outside of India, which the Washington DC-based Global Financial Integrity estimates averaged US$51 billion per year between 2004 and 2013 (some of which likely returned as foreign investment via “round tripping”)? In his demonetisation announcement, Modi referred to “agreements with many countries, including the USA…  to add provisions for sharing banking information” that could help make international tax evasion more difficult.

A process has been underway since the 2009 G20 summits in London and Pittsburgh to improve transparency in international financial transactions. This has translated into an effort to include banking information in both existing and proposed Double Taxation Avoidance Agreements (DTAA) that India has (currently with 95 countries), and to reach Tax Information Exchange Agreements with countries that India doesn’t have a DTAA with, mostly tax havens such as the Bahamas, British Virgin Islands etc.

The table below shows that the UPA accounts for much of the progress so far, although this could change over time; the Modi government is currently negotiating another 53 DTAAs.

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That doesn’t mean that the Modi government has been lagging: in May 2016 it finalised an important DTAA renegotiation with Mauritius, the island nation that has been the source of a third of all FDI inflows since April 2000, and is believed to be the main gateway for round-tripping. India will impose a capital gains tax of half the Indian rate on investments from Mauritius starting from April 2017, and the full rate from April 2019. A similar agreement with Singapore, the second largest source of FDI into India (16% of the total), is in the pipeline. The idea is to remove one incentive for round-tripping: saving on capital gains tax.

There is also a broader multilateral effort under the OECD umbrella to facilitate the automatic sharing of taxation-related information. It began with the Convention on Mutual Administrative Assistance in Tax Matters, that India joined in 2012 and now covers 106 countries and jurisdictions. India (under the UPA) became one of 47 countries to sign the Declaration on Automatic Exchange of Information in Tax Matters in May 2014, which led to the establishment of the OECD-led Global Forum on Transparency and Exchange of Information for Tax Purposes that is now at the core of international data sharing. In June 2015, the Modi government took another step forward by signing the Multilateral Competent Authority Agreement on Automatic Exchange of Information, under which 54 countries including India will start automatically sharing financial data from September 2017.

In summary, there has been a robust G20-supported process underway for several years to bring transparency to international financial information, which Modi certainly didn’t start, and had little choice but to go along with.

The bottomline: Modi’s demonetisation drive marks an ambitious break from past practice. But his claim that previous BJP policies have brought in an unprecedented amount of money is just a jumla.

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Rank exaggeration

A look at India’s rapid rise in the World Economic Forum’s Global Competitiveness Index, first published as an oped in the Hindustan Times:

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It’s clear that the Modi government can’t get enough of comparative rankings and indicators. And this is understandable: despite a solid reform push and favourable (if controversial) official statistics, many feel that the economy is performing well short of its potential. The latest piece of bad news was that unemployment – the Modi government’s most pressing challenge – is at a five-year high.

It makes sense, then, that the government tom-tommed India’s climb from 55th to 39th place in the World Economic Forum’s Global Competitiveness Index 2016-17, after a comparable jump the previous year from 71st. So is this finally evidence that the government’s reforms are paying off?

Not quite. There’s an important qualification that much of the news reporting missed: 81 of the 112 variables that determine a country’s competitiveness score arise from a survey of corporate executives that asks respondents to rank items on a scale of 1 to 7. In other words, each country’s score is predominantly the aggregation of subjective corporate judgments. The correct interpretation of India’s ranking progression is that India’s competitiveness has greatly improved in the past two years in the opinion of many corporate executives. Corporate opinion is undoubtedly important, but it’s not the same as objective reality.

The increase in India’ ranking is also an artefact of how different countries stack up. India’s raw score went from 4.2 in 2014-15 to 4.5 in 2016-17, causing its ranking to jump from 71st to 39th place. This was in part because there were 36 middle-income countries clustered above it, converting a 0.3-point increase into a big rise up the ladder. With the same increase in absolute points, Israel went only from 27th to 24th and Iceland from 30th to 27th. That said, 0.3 points is nothing to sneeze at, only Albania, Iceland and Israel had an equivalent increase in their scores.

So what drove India’s rise, other than the artefacts analysed above? The categories that contributed the most were “institutions”, “innovation” and “infrastructure”. The institutions score includes perceptions of corruption and due process, and the BJP government – at least at the Centre – has been free of scandals. But recall that even the UPA was substantially free of such controversies in its initial years, and the big scams came home to roost in the second term.

The innovation score includes private sector R&D, research institutions and so on, and is likely driven by the explosion of startups in the technology and services arena. The infrastructure score is presumably being driven by activity in roads, rail and power, sectors in which corporate executives hold the ministers in high regard. Critics, including myself at the blog Chunauti.org, have pointed out that many of their claims are exaggerated, but the corporate consensus here appears positive.

There is no doubt that the government is trying to kickstart the Indian economy, be it with attempts to ease the business environment, speeding up the building of infrastructure or by loosening labour laws. But with results hard to come by in a difficult global environment, the government’s PR machinery is in overdrive, seeking signs of progress wherever they might be found, or even constructed. And it’s the media’s job to separate the wheat from the spin.

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The Lion’s Meow: a closer look at Make in India

The logic behind the government’s Make in India initiative is clear. As Prime Minister Narendra Modi stated in his speech at the launch of “Make in India Week” in Mumbai on 13 Feb 2016:

We launched the Make in India campaign to create employment and self-employment opportunities for our youth. We are working aggressively towards making India a Global Manufacturing Hub. We want the share of manufacturing in our GDP to go up to 25 per cent in the near future.

The specific goal is to increase the share of manufacturing in India’s Gross Domestic Product to 25% by 2022, which is expected to generate approximately 100 million jobs for Indian workers (see Ab ki baar, cut-and-paste sarkar for Make in India’s similarities with the UPA’s 2011 National Manufacturing Policy).

So how are we doing so far? If you believe the headlines, pretty well. Responding to the lifting of foreign direct investment (FDI) caps in several sectors, efforts to improve the Ease of Doing Business and of course Prime Minister Modi’s frenetic wooing of investment in foreign travels, gross FDI flows to India jumped 27% to $45 billion in 2015-16, an all-time high. Even the Finance Ministry’s usually measured 2015-16 Economic Survey touted the FDI increase as a success for Make in India.  With our social media feeds full of stories about this or that investment, clearly the #MakeInIndia lion is roaring.

But the closer you get to the lion, the more the roar sounds like a meow.

Consider the most recent FDI data from the Reserve Bank of India (RBI), broken up by sector, since Make in India specifically concerns manufacturing. After an encouraging jump to a record $9.6 billion in 2014-15, FDI in manufacturing actually fell to $8.4 billion in 2015-16 (below the $9.3 billion it had reached in 2011-12).

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Note that these numbers cover inflows approved by the RBI and other agencies, and exclude share purchases, reinvested earnings and so on. This pattern is consistent with data from the Department of Industrial Policy and Promotion, analysed here.

Furthermore, the percentage of FDI flowing to manufacturing, which has been in the range of 35-40% for the past four years, dropped to 23% in 2015-16. Rather than manufacturing, services — think e-commerce providers like Amazon, Snapdeal and Flipkart, ride-sharing services like Uber and Ola — seem to be drawing a greater share of investment.

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What about the broader economy? After all, Make in India’s main objective is to raise the share of manufacturing in the economy as a means of generating jobs.

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Sadly, no meaningful change yet: the share of manufacturing has been flat for the past decade, with a slight downward trend (data here and here).

Here’s the rub: there is no doubt that building infrastructure, liberalising land and labour laws and improving the ease of doing business is difficult and time-consuming, and will take time to play out. But the Modi government needs to convince voters that change is happening, and fast.

Which is the genius of the Make in India campaign: it is essentially a branding exercise under which the government claims credit for pretty much everything and yet nothing. Every factory inaugurated, every defence deal signed, every shovel stuck into the ground will now be accompanied by the hashtag #MakeInIndia, even if the percentage of GDP arising from manufacturing stays exactly where it’s been for the past decade.

Consider this recent tweet from the official Make in India handle:

The Tejas is an Indian fighter plane that has been in development for more than two decades and first flew in 2001, but let’s label it #MakeInIndia. The BrahMos is a modified Russian cruise missile with Indian software that entered service with the Indian Navy in 2005, but, hey, why not #MakeInIndia.

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How various regions fare in Modi’s Cabinet

There has been much talk of the politics behind Prime Minister Narendra Modi ‘s 5 Jul Cabinet reshuffle. It hasn’t escaped anyone’s attention that several new appointees came from Uttar Pradesh and Gujarat, both states in which the BJP has big stakes and that have elections due in 2017.

But how important is regional representation in the appointment of ministers? One way is to look at how under- or over-represented various regions are. This map (from the business news daily Mint) shows that Hindi heartland and western Indian states have the strongest representation:

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A good first cut, but this only gives us absolute numbers. And it shouldn’t surprise that the more populous states get the most ministerial positions. One way to check under- or over-representation is to compare a state’s presence in the Council of Ministers with a baseline expectation of how much it should have. One way to do this is to look at the ratio of a state’s share of ministries with the proportion of Lok Sabha seats that it has (a number that is also roughly aligned with its population share).

And here is what we find:

Best represented states in the Council of Ministers (ministry share/LS seat share)

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Surprise! Goa and Arunachal Pradesh are at the top of the list, since the appointments of Defence Minister Manohar Parrikar and Minister of State for Home Affairs Kiren Rijiju give each 3.5 times (or 350% of) their parliamentary presence (proportionate representation is equivalent to 1, or 100%). However small states skew these results because the appointment of only one or two ministers can give them huge over-representation.

Sticking to the larger states, Uttar Pradesh and Bihar now stand demoted. The best represented are Haryana (2.1), Madhya Pradesh (1.9),  Rajasthan (1.7), Gujarat (1.6), Jharkhand (1.5), Bihar (1.4), Uttar Pradesh (1.3) and Karnataka (1.2). The poorest represented are Tamil Nadu (0.2), West Bengal (0.3), Odisha (0.3), Telangana (0.4), Assam (0.5), Chhattisgarh (0.6), Andhra Pradesh (0.8) and Maharashtra (0.9).

The states with the highest representation include those with well-established state BJP units that comprise the party core (with Haryana a notable outlier). Conversely, the states with the lowest representation are mostly those where the BJP is weak (with the interesting exceptions of Assam and Chhattisgarh where the BJP is the ruling party).

Regional representation isn’t the only factor in allocation ministerial positions, administrative ability and identity group balancing being other plausible drivers that could explain some of the deviations from 1 (or 100%). But the broad pattern seems consistent with a patronage model of politics in which political parties need to keep their base happy, motivated and delivering benefits to supporters.

Update

Another way to predict how much representation a state “deserves” would be to look at its contribution of parliamentary seats to the ruling coalition, in this case the 331-member National Democratic Alliance (NDA). The pattern now appears somewhat different:

Best represented states in the Council of Ministers (ministry share/NDA seat share)

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This time the small states are joined at the top of the list by large states in which the NDA has a limited presence. West Bengal and Tamil Nadu score high because they account for two and one ministers respectively, the same as the number of MPs they sent to the Lok Sabha. Among the larger states, the best represented are West Bengal (4.2), Tamil Nadu (4.2), Odisha (2.1), Haryana (1.8), Madhya Pradesh (1.4), Punjab (1.4) and Karnataka (1.3). 

Other than Madhya Pradesh, which remains in the overrepresented column, the Hindi heartland and western states now seem more fairly represented, staying close to their weightage in the NDA: Bihar (1.1), Jharkhand (1.1), Rajasthan (1.0), Gujarat (1.0), Uttar Pradesh (0.9). Under-represented NDA states include Chhattisgarh (0.4), Maharashtra (0.6) and Assam (0.7).

From the NDA’s point of view, Modi’s Council of Ministers provides a good balance. No major state other than Kerala gets short shrift (though some in BJP-ruled Chhattisgarh, Maharashtra and Assam might grumble).

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Fact checking Modi’s WSJ interview

Prime Minister Narendra Modi gave a wide-ranging interview to the Wall Street Journal to mark the second anniversary of his government. Modi argued that he had restored confidence to India and put an end to the “sense of policy paralysis, bad economic conditions and corruption” of 2012 and 2013.

As usual, there was a grain of truth, and also the exaggeration and sleight-of-hand that we have come to expect from him (look here for a check of other claims by Modi).

Consider Modi’s highlighting of the Pradhan Mantri Jan Dhan Yojana (PMJDY) as an instance of how his leadership had ended “a sense of negativity and a sense of deep inertia in the government machinery”:

If you see my Jan Dhan Yojana, you’ll find that I mobilized the whole government machinery so that in a definite period of time, the country’s poorest could be linked to the mainstream of the economy, its banking system.

Certainly, the PMJDY has accelerated the spread of basic savings bank deposit accounts (BSBDA), and increased their usefulness by adding overdraft facilities and life and accident insurance. But the truth is that the entire architecture of financial inclusion (BSBDAs, Aadhaar, electronic payments, RuPay cards) was created and implemented long before Modi took office. Modi often talks as if he singlehandedly brought the poor into the financial system, but the facts show that India’s financial inclusion programme was already established and growing rapidly.

In the two years before Modi, the UPA opened 44 and 61 million BSBDAs respectively, which under Modi jumped to 147 million in 2014-15 and 67 million in 2015-16 (see table below). If we conservatively assume that another government would have opened 61 million BSBDAs per year (as the UPA did in 2013-14), then the Modi effect looks something like this:

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Modi’s mobilisation of government machinery did have a positive effect: we can quantify it at around 92 million accounts, or 20% of the 457 million accounts opened (as on 30 March 2016). Impressive, yes, but the “policy paralysed” UPA also brought millions of poor households into the financial system. Indeed, there was a downside to Modi’s big 2014-15 push: the number of accounts with zero balance was 45% one year after PMJDY began, although it had declined to 26% by 26 May 2016. The growth in account openings consequently slowed in 2015-16.

If Modi did end “negativity” and “inertia” in the government, the PMJDY is definitely the wrong story to pick.

Modi went on to say:

My country had lost a lot of face on account of corruption relating to the coal scam, the scam involving auctions of the 2G network. But within a short and fixed time period, we have ensured transparency. Auctions are now actually held openly and online in front of media.

There is little doubt that the coal and 2G controversies damaged the UPA and helped Modi’s election victory. Indeed, the Modi government has overseen a spate of auctions to allocate natural resources since he took office. But this is not new: the UPA auctioned 3G and 4G spectrum in 2010, and 2G spectrum in 2012 after the Supreme Court cancelled the flawed January 2008 allocations in February 2012.

Likewise, the Modi government had to auction coal blocks after the Supreme Court (in September 2014) cancelled the allotment of 214 coal blocks made between 1993 and 2011. The Modi government could be commended for its speed, but it didn’t have any choice in the matter either.

What Modi deserves credit for is the passage of the 2015 Mines and Minerals (Development and Regulation) Amendment Bill that requires mining rights to bauxite, iron ore and other minerals to be auctioned. The UPA sat on a similar bill for six years before the Modi government succeeded in passing it.

In defence of his economic policymaking record, Modi also stated the following:

In India, reform in the insurance sector, reform in the defense sector, reform in the Bankruptcy Code had been pending for years…  In defense, in my country, there was no private investment. Today I have allowed it to 100%. In insurance, private investment was not allowed.  I have allowed it… I have allowed 100% foreign direct investment in the railways.

Now it’s entirely true that the Modi government succeeded in doing what the UPA had failed do for many years: to raise the FDI cap in insurance from 26% to 49%. It also passed a comprehensive Insolvency and Bankruptcy Code this year that should help clean up Indian banks’  balance sheets. And FDI is now permitted in railway infrastructure (though not in rail operations) whereas previously it was allowed only in metro rail.

But the claim regarding defence FDI is simply wrong. Consider the UPA’s July 2013 policy on FDI in defence:

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Here’s the Modi government’s current policy:

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The new policy is certainly more liberal than the older one, but it is misleading for Modi to say “today I have allowed it to 100%”. Just as it does today, the government had the power in July 2013 to approve defence investments with 100% FDI if it had wanted.

And the reality? No 100% FDI proposals have so far been approved. Here’s what Defence Minister Manohar Parrikar told parliament in April 2016: “From August 2014 to February 2016, a total amount of Rs.112.35 lakh (Rs 1.12 crore) has come into the country as FDI in the defence sector”. Damp squib.

Finally, Modi stated that:

If you look at the entire post-independence phase of the country, you will find that in terms of money volumes the maximum disinvestment has taken place in the last two years.

An odd formulation, considering that disinvestment began in 1991-92, but Modi is, at first cut, correct. The Rs 48,234 crore raised through disinvestment in 2014-16 is somewhat higher than the Rs 45,697 raised by the UPA in 2009-11.

But that’s too simple: if you’re comparing long periods like “the entire post-independence phase of the country”, you need to account for inflation: the value of a rupee raised in 2004-05 is not the same as in 2014-15. A proper comparison requires us to deflate the value raised from disinvestment with an appropriate, consistent index, in this case the Wholesale Price Index (base 2004-05).

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We find that the volume of disinvestment by the Modi government (in constant 2004-05 rupees) at Rs 26,671 crore is dwarfed by the Rs 33,464 crore the UPA2 raised in its first two years. Even in 2012-13, under the “policy-paralysed” UPA, the value of equity divested was greater than in either of the Modi government’s two years in office.

But the cold reality is that disinvestment has been an embarrassment under both the Singh and Modi governments, and basically reduced to a fiscal deficit padding sham in which a third to a half of funds have come from the state-owned Life Insurance Corporation. The following chart (sources here, here and here) says it all:

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It could be that the NITI Aayog or the Bank Board Bureau proposes a genuine transformation of the public sector in the coming months. But until that happens, Modi would be well advised to avoid flaunting what is a policy embarrassment from every perspective.

 

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