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. 

Advertisements

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.

Screen Shot 2016-05-10 at 1.47.49 PM.png

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?

Screen Shot 2016-05-10 at 2.51.18 PM.png

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.