Modi can be the statesman India needs
Privatisation beckons as government tries to plug budgetary gaps
by Meghnad Desai
Mon 19 May 2014
Narendra Modi, India's prime minister-elect after the country's most decisive election result in three decades, faces a string of challenges. The foremost is pressure on budgetary resources that may give significant impetus to ground-breaking privatisation.
Indian equities have soared on expectations of an economic revival. I support Modi's economic policies and objectives. I am basically bullish about the outcome, which can reinforce India's position as one of the world's leading emerging powers. Modi faces the task of leaving behind his hard climb to the top and all the bitter memories. He can be the statesman India needs and expects.
Modi's BJP has won 282 seats – more than the 272 majority – so he can rule without coalition partners. The landslide win, and the crushing of the Congress party, add up to a profound transition. The BJP is undergoing generation change as well as ideological transformation.
Modi has the capacity to change Indian politics, for better and not for worse, as many liberals fear. He remains marked by the sectarian riots of 2002 which happened within months of his becoming Gujarat chief minister. He has tried to shed this image and work on governance. Along the way, he has refashioned the BJP's vote-winning formula away from heavy reliance on upper-caste Hindus. Muslims are yet uncertain whether India will be led by the Modi of 2002, as Congress insists – or the Modi of inclusive governance and One India which I (and many like me) would like to see.
One thing is clear. Modi stands in a complete contrast to Rahul Gandhi, the Congress No. 2 who has accepted responsibility for its worst-ever performance. Modi had to do all the hard work himself. He used to be the young man everyone patronised and took for granted, quietly standing in a corner while the bigwigs met. He kept his own counsel, making his own list of friends and detractors. Now he has to assemble a government that can rule for the whole country. He must handle real power. He will have to bring into government potential rivals to show he is secure in success, similar to India's first Cabinet after 1947 independence.
The going will not be easy. Manmohan Singh's outgoing administration leaves behind a financial scorched earth. Estimates for the budget deficit for the previous and current fiscal years are grossly understated. There has been a lot of window-dressing, postponing of payments and spending under-provisioning. The new finance minister will face a serious problem paying outstanding bills and providing for non-planned spending this year.
The best way for Modi to tackle the budget and current account deficits and the debt burden is to embark on massive privatisation from the outset. This would help lower the huge burden of government debt interest payments, the largest item in the budget, taking up around a third of total tax revenue. Money must be released for health, education and defence. Reducing debt would allow a private corporate debt market to develop. Long-term borrowing costs would fall if the rating improved as markets saw fiscal discipline.
This year's report on banking governance established by the Reserve Bank of India and led by former Axis Bank chairman P. J. Nayak has suggested the government reduces its stakes in the 'public sector undertaking' (PSU) banks to well below 51%. Propelled by the buoyant stock market, a future Modi government can do this for all PSU banks except perhaps the State Bank of India.
India can learn from the UK's 1980s experience. There was no problem in privatising free-standing corporations in steel, telecommunications and airlines. This proved popular and enhanced efficiency. The British government underpriced initial offerings, which were sold at a profit once trading opened. This allowed many ordinary households which would not otherwise have bought shares to realise an early profit if they wished.
More difficult was privatising the water, gas and electricity utilities and the railways. Regulatory institutions were needed to protect public interest and enforce competition. Ensuring tough regulation has been difficult. Public dissatisfaction is widespread. However, if there was willingness to extend privatisation to the Indian railways, freight could be hived off. Railway stations could be sold on a leasehold basis, aiding renovation and modernisation. Individual regional lines could be privatised on 10 year franchises to allow competition.
Air India is another candidate for privatisation, if not to raise resources at least to plug a big black hole, down which much money disappears. There are many other PSUs that are not 'commanding heights' companies but were added ad hoc during the 1970s and 1980s. These could be hived off at a profit, signalling a radical shift in economic approach.
Congress, meanwhile, will be respectful in words but ruthless in its approach to its failed leaders. The party went through a similar watershed in 1969 when Indira Gandhi split the party to throw out the older leaders who thought they could rule from behind the throne. That gruesome episode changed Congress into a personal and then, in 1984, a dynastic party. Congress is now paying the price as it finds itself saddled with a clueless heir-apparent. We will see whether Gandhi has the stamina to lead his party for five wilderness years.
Congress neither can get rid of the Gandhi dynasty nor can it dare to suggest that he should take a course in public speaking or work harder. The party faces opposition with a leader who doesn't like attending or speaking in parliament. Up to now, Gandhi has been able to come and go as he pleased. He no longer has that luxury. With only 44 MPs as seems likely, learning discipline will be hard.
Lord (Meghnad) Desai, Emeritus Professor of Economics at the London School of Economics and Political Science, is chairman of the OMFIF advisory board.
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