Modi government gave the Economy just what the doctor ordered: Tough structural reforms

By the end of UPA government’s tenure in 2014, gross fiscal mismanagement and “policy paralysis” had left Indian economy in the doldrums. Reckless bank lending had created a mountain of bad loans, GDP growth had fallen below 5%, inflation had crossed 6%, current account deficit had crossed 5% of GDP and food inflation had crossed 10%.

In 2012, S&P lowered India’s credit rating to negative. In 2013, they warned about another possible downgrade to “junk” status and Morgan Stanley included India in the Fragile 5 economies.

Source: The Hindu and livemint

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Since coming to power in 2014, Modi government has introduced a series of structural reforms that have helped to curb government expenditure, increase revenue and brought down fiscal deficit year after year.

Deregulating diesel prices

  • As of 2013, Indian Government was subsidizing oil companies to the tune of INR 92,000 crore (INR 920 billion) every year for diesel alone and the amount was expected to cross INR 1,50,000 crores (INR 1.5 trillion) and beyond in coming years
  • Since the roll-out of Diesel prices deregulation by the NDA government in 2014, diesel consumers are required to pay the market price to oil companies. This freed up the funds that government was shelling out in subsidies.

Data Source: Business-Standard

  • Bringing down such government subsidies played a key role in controlling the expenditure and reducing the fiscal deficit

Aadhaar linking and Direct Benefits Transfer to bank accounts

  • It was common for a big part of government benefits and subsidies to be gobbled up by middlemen instead of reaching the actual beneficiaries of such schemes
  • Aadhaar linking and Direct Benefits Transfer to bank accounts has helped arrest the revenue leakage to ghost accounts. 130,000 fake teachers (drawing government salaries), 3.5 crore LPG connections (using government subsidy) and 1.6 crore fake ration cards were discovered
  • Resultant savings amount to Rs. 65,000 crores (INR 650 billion) every year
  • According to a World Bank report of 2016, Aadhaar linkage could potentially help save $11 billion annually for the Indian government by reducing corruption and plugging leakages

Insolvency and Bankruptcy Code (IBC)

  • For long, Industrialists could borrow as much as they wanted from banks and default without any impact. By 2014, UPA government had left Banks crippled with bad loans worth INR 10 lakh crores ($150 billion). Lack of capital had choked India’s credit and industrial growth
  • As explained in this article in detail, Insolvency and Bankruptcy Code (IBC) was passed in May 2016, which created a one-stop solution for resolving the insolvencies and bringing the capital back into the system
  • Since then, IBC has been cracking on all major NPAs. Resolution of Bhushan Steel case brought INR 35000 crore back into the system and Electrosteel brought another INR 5000 crore. Recently, in yet another success Jyoti Structures was ordered liquidation which will bring back more capital for the lender.
  • Due to the fear of IBC, thousands of smaller accounts have cleared their dues which has resulted in another INR 83,000 crore coming back into the banks
  • With many more large accounts set to be addressed in 2018 and 2019, a significant part of the capital lost in the form of bad loans are successfully returning to the banks and making funds available to spur the credit growth

Goods and Services Tax (GST):

  • Extolled as India’s largest tax reform since independence, Congress had struggled for more than 10 years to roll out GST. The reform was stuck due to revenue concerns raised by many states including Maharashtra (Congress ruled), Tamilnadu (non-BJP), Odisha (non-BJP), Kerala (non-BJP) and few other states
  • GST bill proposed by Modi government effectively ensured that no states would lose revenue under the new tax regime, which cleared the way for roll-out by July 2017
  • GST with a tagline of “one nation, one tax” has transformed India into a single market and drastically improved the speed of goods transportation across different states
  • It has also increased the formalization of the economy and brought more businesses under the tax net. Since the launch of GST, the number of indirect taxpayers increased by 50%, direct tax collections surged drastically to an all-time high and India’s tax to GDP ratio has improved
  • Financial Times has listed India’s GST rollout as a lesson for India’s neighbours and other developing countries for arresting tax evasion

Ujwal Discom Assurance Yojna (UDAY):

  • For many decades, due to political reasons, State Power Distribution Companies (DISCOMS) had been supplying electricity at low tariffs that are even below the cost. To make the matters worse, unusually high inefficiencies in power distribution had further strained their finances. Consequently, loss-making discoms had piled up a massive load of debt totalling to INR 4.8 trillion (by September 2015)
  • In 2015, NDA government launched UDAY to rescue the country’s ailing discoms with an objective of freeing them from their massive losses and making them operationally viable
  • Under the scheme, states took over (75% of) the debt of their respective discoms which brought down the cost of debt
  • More importantly, and in return for this bailout, the discoms were given target dates (up to 2019) to adopt technology for increasing their efficiency parameters such as reduction in power transmission losses, preventing power theft and faulty metering, installing smart meters and implementing GIS (geographic information system) mapping of loss-making areas. States were also required to ensure that power tariffs were revised regularly
  • Increased efficiency, reduced interest costs and higher revenues have started showing results. Since the launch of UDAY, discoms in Rajasthan, Haryana, Chhattisgarh and Punjab have reported a huge reduction in their interest costs
  • Rajasthan’s interest cost in 2016-17 dropped by half. Chhattisgarh’s projected interest cost in 2016-17 fell to just 19% of previous year. Haryana managed a turnaround and even reported a profit. Discoms reported a cumulative savings of more than INR 14,000 crore (INR 140 billion) by December 2016
  • PwC India has projected that as the demand picks up further (with increasing GDP, increased manufacturing under Make in India, higher electrification coverage and focus on 24×7 power) and the gap between the cost to revenue is bridged, many more discoms will become profitable in the next two to three years
  • Real time progress of this project with each discom level data can be tracked on UDAY Dashboard

Source: livemint& Bloomberg

Impact and Results:

Four years into its tenure, the structural economic reforms implemented by Modi government have systematically helped in controlling government expenditure, arrested revenue leakages in corruption/tax evasion and increased government’s revenue through increased tax base. This has helped reduce fiscal deficit year after year.

  • A recent Forbes report published in May 2018 titled “India’s Disappearing Deficit” mentions –

The Indian government is close to balancing its books for the first time since the Global Financial Crisis of 2007-2009

India’s primary fiscal deficit, which excludes interest payments on the national debt, has fallen from 1.1% of GDP to virtually nothing since Modi and Jaitley took office in May, 2014.

The gross fiscal deficit, which includes interest payments, is down from 4.5% to 3.2%

It would be the fourth consecutive year with a deficit less than 1% of GDP

  • Lower Fiscal deficit translates to increased debt repayment ability which reduces India’s cost of external debt. Consequently, in 2017, Moody’s upgraded India’s credit rating. The last upgrade had happened in 2003 during the previous BJP government led by Vajpayee

Source: Bloomberg

  • In January 2018, considering the successful outcomes through IBC and introduction of Bank Recapitalization, CRISIL Ratings agency upgraded India’s Public Sector Banks outlook from “Negative” to “Stable”
  • From $280 billion in 2014, India’s Foreign Exchange Reserves have consistently increased to reach a comfortable all-time high of $400 billion in 2018
  • In 2017, India’s ranking in World Bank’s Ease of Doing Business improved by 42 places to reach 100. This is the highest improvement in rankings by any country ever and helped India break into Top 100

Source: TradingEconomics and Business Today

  • It must be noted that these rankings are based on data up to May 2017 and hence do not consider the benefits of uniform taxation brought in by GST (rolled out in July 2017). The next release of rankings (expected in Oct 2018) is likely to consider a stabilized GST and many successful insolvency outcomes from IBC. Both these factors are expected to help India improve its ranking even further. Per Finance Minister Mr Arun Jaitley, many more reforms are lined up based on which India could target Top 50 in World Bank’s EoDB ranking. Such improvement in ranking is expected to attract more businesses, bring in more investment, create more jobs and increased prosperity.

From S&P downgrade and Fragile Five in 2013, India’s economy has managed a phenomenal turn-around within 4 years. The above listed structural reforms by the Modi government have addressed many of the systemic issues holding back the economy and unleashed it onto the path of unprecedented growth in future years.


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