When Harry met Modi

In a Forbes magazine article that caused a happy stir in right-wing social media, Harry G. Broadman argued that Prime Minister Narendra Modi’s “governing prowess” had “boosted India’s GDP growth” and “produced sizeable increases of inflows of foreign direct investment (FDI)”. He stated that the reforms implemented by Modi in his first three years were “sizeable, though not huge”, but still impressive in the context of a “messy” system of democracy, and “against the backdrop of decades of reform inertia and inaction by successive governments in Delhi”. Furthermore, Modi’s reforms “are destined to make lasting, rather than transitory, changes in the structure of the Indian economy”.

It sounded a lot like the claims that pro-Modi commentators used to make until demonetisation and farm loan waivers broke their spirit. Take a dash of genuine policy accomplishments, toss in some tweaked (or, worse, simply renamed) pre-Modi initiatives that have carried on, add some hyperbole, underplay the blunders and voila! you have a Strong Reformist Government.

But don’t take my word for it, let’s evaluate the list of claims presented to prove that a “cunning and effective” Modi is transforming India in an unprecedented way.

Broadman starts with FDI, arguing that Modi has contributed not only to a big jump in FDI flows to India (which is plausible) but that India under Modi has equalled China, the great economic story of our time. That’s because India’s FDI in 2015 (as a share of GDP) rose to 2.1%, approaching China’s 2.3%. Furthermore, “between 2005 and 2015 (obviously a period that in part predates Modi)”, he writes, India’s FDI (as a share of GDP) doubled, while China’s halved.

It’s unclear why India deserves the credit for a slowing of FDI flows to China, and the World Bank chart (below) is self-explanatory. FDI to India has picked up, but is still in line with the historical trend. But don’t let that stop anyone overselling this accomplishment.

Screen Shot 2017-07-03 at 11.29.59 PM.png

Broadman then goes on to list eight “notable” reforms, which we analyse below, starting with those that are, in fact, correct:

A revised law on bankruptcy, which will generate freer flows of capital and the flexibility for them to be invested in their highest value in use, thus promoting a more robust, competitive Indian market both for new business start-ups as well as for forcing stale companies who cannot make ‘a go of it’ to close shop and sell their assets.

Few people realise that India’s investment rate is currently at a 14-year low, and a major reason is the inability of some of India’s biggest companies to pay off their debts, which has hurt banks’ ability to lend. The 2016 Insolvency and Bankruptcy Code is aimed at reversing this by speeding up the resolution of bad loans. This will be a complex and drawn-out process, but putting this law in place was necessary, and counts as a win for the Modi government.

The introduction of a nationwide sales tax, which will integrate an otherwise excessively complicated disparate system of different state and federal taxes, a reform that will not only increase tax collections but also help reduce interstate barriers to trade and distortions arising from gaming where within the country purchases should be consummated.

There’s a heated debate underway over how much India’s complex Goods and Services Tax (GST) will benefit the economy, and many will recall that Prime Minister Modi was instrumental in blocking the United Progressive Alliance (UPA)’s original GST proposal as Gujarat chief minister. But hypocrisy aside, the Modi government has shepherded the GST into existence, helping transform India into something close to a single market, and gets the credit for this major tax reform.

Elimination of subsidies for diesel fuel, which will help plug a fiscal hole in government revenues, and even more important create disincentives for using an energy source that adds to, rather than diminishes, pollution and greenhouse gases.

It is true that the Modi government formally decontrolled diesel prices on 18 Oct 2014. But all the heavy lifting had been done by the UPA, which on 17 Jan 2013 permitted retailers to increase the price of diesel by 50 paise/month.  As a result, the gap between the actual cost of supplying diesel and its subsidised retail price dropped from ₹9.21/litre to ₹2.80/litre between Jan 2013 and May 2014 (according to Ministry of Petroleum data). It continued under the Modi government until a collapse in global oil prices starting Aug 2014 eliminated the price gap entirely. By the time the Modi government decontrolled diesel prices, oil prices had crashed to the point that decontrol produced a diesel price cut (rather than a hike) of ₹3.37/litre, a freebie no politician could refuse.

If anyone deserves credit here, it is Manmohan Singh.

Removing regulations that forced companies to repetitively renew their business licenses at an artificially high frequency simply to generate revenues to be collected by local bureaucrats.

This one is mystifying. India abolished licensing for most industries on 26 Jul 1991, and the list of industries that require a licence has declined to four: aerospace & defence, industrial explosives, hazardous chemicals and tobacco products. The process of renewing licenses for this handful of industries has indeed been simplified — most notably in defence, where the duration of a licence has extended from three to 15 years, but this hardly qualifies as major reform.

Relaxing rules that reserved specific sectors to be the province of only small and medium sized enterprises even if large firms could produce the goods or deliver the services at lower cost and create economies of scale.

This one is just wrong. The number of items reserved for small-scale enterprises fell from 836 in 1995 to 20 in 2015 under successive governments, and the Modi government’s sole contribution here was to de-reserve the last 20 items. The perils of Googling your way to economic analysis?

Using transparent and competitive auctions for allocating access to the telecom spectrum.

There’s no doubt that the Modi government held telecom spectrum auctions in Mar 2015 and Oct 2016, and is planning one more in 2017. But there’s nothing new here. Even the UPA conducted a “transparent and competitive” auction of 3G and 4G spectrum in May-Jun 2010, before its reputation had been tarnished by what the Supreme Court termed an “arbitrary” and “capricious” 2G spectrum allocation in 2008. Following the Supreme Court’s cancellation of that allocation, the UPA held 2G auctions in Nov 2012, Mar 2013 and Feb 2014. Essentially, the Supreme Court has ensured that no government can allocate resources without holding an auction, and Modi’s being PM is frankly incidental here.

Opening investment in the railway network to majority foreign ownership, thus allowing India to tap into new sources of capital to build out its infrastructure and help the country integrate into a unified economic space to create economies of scale in both manufacturing and agriculture and thus enhance its international competitiveness.

Sounds promising, one problem: foreign investors are still substantially barred from “investment in the railway network”, which remains the preserve of Indian Railways. Where they are permitted is in railway infrastructure, specifically suburban corridors under public-private partnership (PPP), high speed rail, freight corridors, railway electrification, signalling, freight and passenger terminals, rail projects in industrial parks and mass rapid transport systems. This is a solid set of investment avenues, although there was already foreign participation in mass rapid transport and freight corridors before Modi took office. More importantly, any investment in railways depends crucially on the decisions made by a cautious railways bureaucracy. Raising FDI limits may be helpful, but they were never the main barrier to private participation in India’s rail story.

This could count some day as a win for the Modi government, but it’s still very much a work-in-progress.

Permitting foreign investors to participate in construction projects that otherwise were reserved for only domestic service providers, thus generating opportunities for joint ventures and other businesses to incorporate world-class construction techniques and materials.

Another misfire, it would seem. FDI has been freely allowed in construction for more than a decade, and accounted for 7% of total FDI flows between Apr 2000 and Mar 2017. However, stagnation in the sector has slowed FDI flows in recent years, and the Modi government has eased minimum area restrictions, investment lock-in periods and the like (here and here), winning approval from the real estate industry. But the reforms haven’t yet worked: FDI flows to the sector in the last two years were US$218 million, one-twelfth (I kid you not) of the US$2.6 billion that came in during the UPA’s final two years. These reforms may be desirable, but they are far from transformational.

It turns out that only two of the eight reforms proposed as evidence of Modi’s reformist chops add up; five are simply wrong, and one seems too minor to count. To top it all, Broadman concludes with a familiar defence of demonetisation, repeating the widely-known benefits of going cashless without any real examination of the heavy costs of demonetisation, something even Modi supporters now acknowledge (here and, ahem, here).

To sum up, I’ll have what he’s having. 

Spinning an electricity turnaround in Uttar Pradesh

An Economic Times (ET) report on 26 Apr credited the newly elected Bharatiya Janata Party government in Uttar Pradesh (UP) for a dramatic turnaround in the state’s electricity situation. The news report claimed that UP had “shed blackouts within a month of the BJP taking over the reins, moving from perennially running short of electricity to ‘zero-shortage’ in April”.

Soon enough, Power Minister Piyush Goyal shared the article with an approving tweet:

https://twitter.com/PiyushGoyal/status/858150103776931840

That’s a whopper.

It is certainly true that UP’s energy deficit (measured in million units) hit a record low in Mar 2017 of 0.2%, compared to a much bigger gap of 10.5% a year ago in Mar 2016. However, it would be ridiculous to give the new government credit for this improvement: the UP election results were declared on 11 Mar, and a new government sworn in on 19 Mar.

The ET article cited unpublished data from the National Load Despatch Centre, which oversees the national electricity grid, to show that this improvement continued into April, but we’ll have to wait for numbers from the Central Electricity Authority to get a clearer idea.

But regardless of how April turns out, the ET claim completely elides the fact that power shortages in UP, and indeed all over India, have strongly diminished over the past year, as this chart vividly shows:

Screen Shot 2017-04-29 at 12.53.50 PM

India’s energy deficit fell sharply in the first half of 2016, and particularly so in UP. UP’s deficit (shown here as a 3-month moving average) converged with north India’s around Sep 2016, and by Dec 2016 had fallen below that level. This was unanticipated: the Central Electricity Authority’s 2016-17 Load Generation Balance Report had anticipated that UP would have an energy deficit of 6.5%, but it turned out to be only 1.7%. Since the BJP ran the state only 13 of those 365 days, the decline in UP’s power shortage had little to do with it, Goyal’s celebration notwithstanding.

Even so, fewer blackouts and less load shedding can only be good news, right?

Yes and no. As much as India’s power capacity has risen in recent years, it is more weak growth in demand that accounts for the disappearance of India’s once-chronic electricity shortages (see chart below):

Screen Shot 2017-04-29 at 4.10.34 PM.png

The chart above shows a steady decline in the growth of energy demand since 2014-15, both in UP and in India. This doesn’t have to be a bad thing; many economies display lower energy intensity as they grow, and technological advances could also play a role. Consider the UJALA scheme to promote energy-efficient LED bulbs: government claims likely overstate the energy savings by a factor of two (see Why you shouldn’t be bedazzled by Modi’s LED claims), but their adoption probably shaved a percentage point off 2016-17 energy demand. However, if the decline in demand reflects industrial weakness, and the lingering effects of demonetization, that would be an unhealthy sign. And the rapid decline in the growth rate of energy demand in the past two years is worrying.

Either way, one thing is clear: the ending of UP’s power shortage is part of a broader structural story that has little to do with the new UP state government. And no amount of PR claims dressed up as news reports can change this reality.

(This article was originally published in The Quint.)

 

 

Why you shouldn’t be bedazzled by Modi’s LED claims

Prime Minister Narendra Modi is proud of the government’s scheme to distribute millions of low-cost, energy efficient LED bulbs. And why not: Modi told the Lok Sabha on 7 Feb that the distribution of 21 crore LED bulbs had helped households save ₹11,000 crore in electricity bills. Even the name bears his unmistakable imprint: “Unnat Jeevan by Affordable LED for All”, whose acronym is UJALA, Hindi for illumination.

Unfortunately, these numbers are mostly fiction.

First, a brief history.  As with many other schemes that Modi has hogged the credit for, UJALA was designed and piloted by the UPA under the much less catchy name DELP (standing for — I kid you not — “Demand Side Management-based Efficient Lighting Programme”). DELP followed in the footsteps of the semi-successful Bachat Lamp Yojana that had resulted in the sale of 2.9 crore CFL bulbs at a price of ₹15 each and, the government contends, boosted demand nationwide by driving market prices down. In 2013, the UPA decided to apply this strategy to pricier but even more energy-efficient LED bulbs; while the first scheme was subsidised by carbon credits, DELP would be paid for by power distribution utilities out of the savings generated by shifting from incandescent to LED bulbs.

A Nov 2013 pilot project in Puducherry led to the distribution of 6.5 lakh LED bulbs to 2.5 lakh households at a subsidised price of ₹10 each. The government’s bulk order of 6 lakh LED bulbs caused the price to fall from ₹800 per bulb in 2012 ₹Rs 310, proof that the concept worked. As the chart below shows, successive orders caused bigger and bigger price drops, falling most recently (and controversially) to ₹38.

Screen Shot 2017-04-20 at 3.36.54 PM

There’s no question that the Modi government has taken UJALA forward, scaling it up with sales of 23 crore LED bulbs (as on 21 Apr). But if you think this was in any way a brainchild of Modi’s, or that Power Minister Piyush Goyal did much more than implement a roadmap already laid out for him, think again.

Still, how does it matter who came up with the idea, as long as it benefits the nation, right? The problem is that the claim of financial and energy savings is based on dodgy maths.

The government’s claims are based on a Sep 2015 PricewaterhouseCoopers (PwC) study that it sponsored, that looked at LED usage during pilot projects in Puducherry and in four Andhra Pradesh districts. The report stated that, once you factor in defective and unused bulbs, each LED bulb would produce an average saving of 134 kilowatt hours a year. Which translates into the savings Modi claimed in the Lok Sabha.

Multiply this by 77 crore LED bulbs, the planned total under UJALA, and you have a saving of 20,100 megawatts of peak load demand, equivalent to five ultra-mega power projects costing US$15-20 billion (₹97,000-1,29,000 crore), for only ₹3-4,000 crore. What’s not to like?

The issue is, the PwC study made overly strong assumptions to attain these savings. It assumed that all 77 crore 7-watt LED bulbs would replace 60-watt incandescent bulbs (which is fine) and, more problematically, that each would be used for an average of 8 hours/day, 320 days in a year, equal to 2,560 hours/year. Now this is perfectly reasonable if you live in Leh, India’s northernmost district, and every day is the winter solstice when you get 10 hours of proper daylight, and everyone sleeps only six hours; then you might conceivably leave all your LED lights on for 8 hours. But, seriously?

Indeed, a 2008 World Bank study calculated that a light bulb will be used 913 hours/year. Even the state-owned Energy Efficiency Services Ltd (EESL) that actually runs UJALA assumes that a light bulb is used for 3.5 hours/day, 300 days/year, for a total of 1,050 hours. These more conservative figures translate into savings that are only 36-41% of what Modi claimed in the Lok Sabha.

More reason to take a dim view of the Modi government’s claims.

Update 25 Apr

The state-owned EESL, which oversees LED bulb distribution, took issue with this analysis in a lengthy rebuttal carried on BloombergQuint on 23 Apr. EESL disagreed that LED bulb usage should be taken as 3.5 hours/day rather than 8 hours/day, pointing out that the former figure was recommended by the United Nations Framework Convention on Climate Change for carbon credits when actual usage data are unavailable.

EESL stated that a nationwide survey of 35 DISCOMs, and a study by PwC in Andhra Pradesh, showed that LED bulbs are used for 5-6 hours/day, and that “a conservative estimate of 5 hours has been taken for calculation”. Furthermore, it said that an Andhra Pradesh government monitoring survey carried out by “two leading educational institutions” found that actual usage was even higher at 8 hours/day.

Since EESL has not provided copies of these reports, it is difficult to independently verify these claims. For one, it is erroneous for EESL to state that “5 hours has been taken for calculation” when the original PwC report cited, and available on the government’s UJALA website, clearly states on Table 24 that bulbs are assumed to be operating 8 hours/day, 320 days/year.

It was also widely reported on 21 Feb 2016 that the Andhra Pradesh government-sponsored study of the districts of Guntur, Anantapur, Srikakulam and West Godavari (the same ones covered by PwC), by Andhra University in Vishakhapatnam and the Hyderabad-based Engineering Staff College of India, found that the actual average energy saving per LED bulb was 73.7 kilowatt hours (kWh), considerably lower than the 133.6 kWh that PwC projected. Assuming that both reports used the same methodology, this suggests that the actual LED bulb savings are 55 percent of what the government claims.

After the original analysis was published, Twitter user Somnath Mukherjee pointed out that the PwC study assumed an electricity price of ₹3.50/kWh, which may have further inflated the projected financial savings from LED adoption.

Consider the electricity tariffs offered by the Uttar Gujarat Vij Company Ltd in northern Gujarat. Depending on whether you are a rural, urban or “below poverty line” user, your first slab of 50 kWh/month of electricity costs somewhere between ₹1.50 and ₹3.50 per kWh; with nighttime usage between 10 pm and 6 am attracting a charge of ₹2.60/kWh. The true cost of the electricity used by LED bulbs, in northern Gujarat at least, is likely less than ₹3/kWh for the first slab in which the bulk of households will fall, rather than the assumed ₹3.50/kWh. This suggests that savings may in fact be inflated at two compounding levels: (1) the calculation of average use of a bulb and (2) the rupee savings per hour of usage.

To sum up, these inconsistencies need to be clarified, and I look forward to EESL releasing the methodology and findings of the various studies mentioned above. Until then, there is still reason to believe that the government’s projection of savings from LED bulb adoption is based on dodgy maths.

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.

Screen Shot 2016-11-12 at 5.41.56 PM.png

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.

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.

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:

Screen Shot 2016-05-29 at 10.11.52 PM

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.

 

Arvind Panagariya spins an infrastructure tale

There’s something about serving in the Modi government that converts seemingly sensible people into inept spinmeisters. Consider the respected Columbia University economist and NITI Aayog Vice Chairman Arvind Panagariya. In an 8 May 2016 Business Standard op-ed titled The turnaround in infrastructure, he reeled off the Modi government’s many accomplishments in this arena. Following which he warned critics to “ponder the fate of infrastructure in the country had the previous administration continued.”

Except, if anybody bothers to look closer, Panagariya’s claims turn out to be irrelevant, misleading or simply false. In fact the “previous administration” equalled or exceeded many of the Modi government’s infrastructure achievements.

Consider highway construction. Panagariya points out that the government has unblocked Rs 3.5 lakh crore out of Rs 3.8 lakh crore worth of stuck road projects, and that “the construction (sic) of national highway projects awarded has risen from 3,500 kilometres in 2013-14 to 8,000 kilometres in 2014-15 and 10,000 kilometres in 2015-16.” So far so good.

But then he proudly adds:

“Road construction has risen from 8.5 kilometres a day during the last two years of the previous government to 11.9 kilometres in 2014-15 and 16.5 kilometres in 2015-16.”

A near doubling of the highway construction rate, pretty impressive right?

Not even close. Real data show that, in its last two years, the United Progressive Alliance (UPA) built 13.7 km/day of highways, compared with 14.3 km/day built in the first two years of the Modi government. That’s pretty much the same pace. In Panagariya’s defence, his fibs aren’t as blatant as Roads Minister Nitin Gadkari’s ravings (see Nitin Gadkari’s highway jumla), but they’re still way off.

As the chart below shows, there is no need to lie. The UPA did well, and in 2015-16 the Modi government did a bit better.

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Let’s look at railways next. Panagariya claims that:

In railways, the average rate of expansion of tracks has risen to 7 kilometres per day during 2015-16 from 4.3 kilometres per day during the previous six years. Investment in railways during 2015-16 has been double the average during the preceding five years.

An impressive increase, at least at first glance. But hold on. Panagariya is conflating track expansion with track commissioning. This detail is taken from Rail Minister Suresh Prabhu’s 25 Feb 2016 budget speech, in which Prabhu changed the measure of rail expansion from “completion” to “commissioning” because “nothing has started functioning until it has been commissioned”.

Fair enough. But, just out of curiosity, what does the old “track completion” metric, used for so many years, show?

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Say it ain’t so! What the Modi government claims to be a six-year track expansion high under this convenient new metric turns out to be a six-year low according to the now-discarded metric. Could the policy paralysed, rudderless UPA really have built tracks faster than the 56-inch Modi Sarkar? We’re still waiting to hear whether the government has hit its more ambitious 2,500 km target for 2015-16 (according to the old measure), but keep in mind that even this just about tops the UPA’s 2,300 km plus record in 2010-11 and 2011-12.

What about the claim that the Railways’ investment in 2015-16 was “double the average during the preceding five years”? A former Railways official points out in a 10 May 2016 Indian Express article that the Rs 94,000 crore railway investment figure for 2015-16 includes Rs 15,081 crore in funding for joint venture partners, a category not previously included. A like for like comparison shows the Railways’ investment to amount to Rs 70,000 crore in 2015-16, a record number but nowhere close to double the previous five-year average of Rs 48,000 crore. Busted.

(This propensity to spin isn’t new, as Manoj K noticed in Railway Ministry: 8 Achievements That Really Aren’t in July 2015.)

There are other claims in Panagariya’s op-ed, including some that may be true. Consider:

In domestic civil aviation, the total number of passengers carried has jumped from 66.4 million in 2014 to 80.8 million in 2015.

Great, but this had almost nothing to do with government policy.

In power, the government has already electrified 6,816 villages in the last two years compared with 5,189 villages in the three years before that. The prime minister has now announced his intention to bring electricity to the 12,000 villages or so that are yet to be electrified, by May 1, 2018.

A good effort, no doubt, but still modest once we look at a longer period. Turns out that rural electrification under the UPA in 2006-07, for instance, proceeded at four times the NDA’s rate. Cherrypick much?

Furthermore an investigation by The Hindu‘s Samarth Bansal shows even this 7,000 number to be exaggerated, and “that unelectrified villages have been counted as electrified”. To be fair the UPA’s numbers could be considered similarly suspect, but the fact is that the UPA vastly outperformed the Modi government in this arena.

One could go on, but it seems clear that Panagariya, like so many others in the Modi government, is guilty of cherry-picking or distorting data to make the government’s case. Not only is this futile, it obscures and even undermines the government’s genuine achievements. But in the interpretive dance that is the Modi Sarkar, facts don’t seem to count for much.

Nitin Gadkari’s highway jumla

Roads and Shipping Minister Nitin Gadkari likes to present himself as the singlehanded builder of Indian highways. He has repeatedly claimed — most recently at the 2016 India Today Conclave — that the pace of highway construction has increased by close to ten times under his watch:

This would be brag-worthy if it were true, but it isn’t. Check the table below:

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There has been an increase of 30% in the pace of highway construction between 2014-15 and 2015-16, from about 12 to just under 16 km/day. While that’s commendable, it is the same pace of highway building that the policy-paralysed United Progressive Alliance (UPA) achieved in 2012-13.

Mr Gadkari has a penchant — like others in his government — for exaggeration. Perhaps he should hold the boasts for when the pace of highway construction actually exceeds the (did I mention demotivated and paralysed?) UPA’s.