Narendra Modi of 2015 is very different from Narendra Modi of 2021, if one looks at his approach to political economy reforms.
The reasons and motivations for these two contrasting approaches are a study in themselves.
Consider then finance minister Arun Jaitley’s 2015 draft budget proposals. The centrepiece of reform back then – and not many are aware of this – was a complete overhaul of the Bank Nationalisation Act in order to facilitate the privatisation of most public sector banks (PSBs), barring five or six large ones which would remain government-controlled. This proposal was brought before Modi by Jaitley and his team of senior officials. In fact, one of the officers, since retired, even preserved the slide titled, “Should Bank Nationalisation Act remain a Holy Cow?”
Prime Minister Modi rejected the idea, which made the former finance minister and his team quite unhappy as they thought this would be their biggest reform item. Jaitley probably wanted this to be his lasting legacy, according to an official who worked with him.
Fast forward six years. Exactly the same proposal, that of bank privatisation, has been embraced by the PM. What explains this big change of heart?
Modi’s logic in rejecting bank privatisation then probably was that the government needed control over banks to reach out to the larger masses to secure last-mile connectivity to deliver welfare. Also, he must have calculated that the currency demonetisation exercise would not have been easy in the midst of a massive bank privatisation exercise with lakhs of bank employees protesting, as they are now.
So, Modi was happy pretending to embrace a very statist, Indira Gandhi-type approach in economic management during his first tenure. This disappointed many of his classic Thatcherite admirers, who thought he would usher in a new era of total state withdrawal from economic activity.
The same people are today ecstatic that the prime minister is on a campaign to sell government assets – blue chip PSUs, banks and other infrastructure like gas pipelines, power grids etc – to raise money to run the government, even as economic growth and thus government revenue have collapsed over the past three years. Now, there is clear desperation to sell government assets and raise money and the entire exercise is ironically couched in terms of atmanirbharta (self-reliance)!
Raising resources is important, but…
Of course, an important reason for the sale of assets is to raise necessary resources. Even the private sector has been selling its assets to raise resources.
Today, foreign private equity majors like Blackstone are among the biggest land bank owners as they have bought real estate assets at distressed prices across the country. Domestic capitalists are over-leveraged and are selling equity in their prime assets to global MNCs. Adani has sold equity in his lucrative gas distribution project to oil major Total of France. Bharti Airtel, India’s leading telecom company, has been gradually letting its foreign partners gain a dominant share in equity.
Even a traditionally cash-rich group like Mukesh Ambani’s Reliance Industries Limited (RIL) has been so debt-laden that it had to sell its equity to a clutch of global companies like Facebook, Google to deleverage its balance sheet by over Rs 2 lakh crore.
It is not just the government which is selling its assets on a large scale to recover cash but even the private sector is doing the same. But the private sector is getting much better prices for their assets. The cash crises pervade the economy. In a sense, both the government and private sector are facing an unprecedented cash problem in a consistently declining economy these past five years. Of course, the small and informal sector has been blown off the charts completely, especially after the COVID-19 lockdown.
In 2015, Narendra Modi was clearly more confident and self-assured and therefore he decided not to resort to wholesale privatisation of PSU assets and banks. Today, he has his back against the wall, with the economy in massive decline, gaping holes in government revenues, multi-decade high unemployment and a resource crisis worsened further by the pandemic.
In conclusion, Modi’s change of policies and basic approach to the political economy appear largely opportunistic and not necessarily informed by any deeper convictions.
As the economy is in the dumps with no fresh private investments forthcoming, he has come to depend a lot more on large corporates to step up activity via cheap credit and tax benefits. There is talk of creating a dozen big corporate champions across sectors. However, all this cannot happen in a vacuum. The absence of growth in aggregate demand in the economy is still worrying, to say the least.
The prime minister is very skilled at brand messaging and he couches the wholesale privatisation and asset monetisation effort as part of the second generation structural reforms which previous governments could not do. He even described the controversial farm laws as such. But note that he is facing massive resistance against these so-called structural reforms – whether farm laws or bank/insurance privatisation – and the next few months will test his political capacity to deal with how people perceive such reforms.
The most tricky question plaguing the government on privatisation is at what price should the assets be sold. Even highly profitable PSU assets with vast resources have seen over 40% decline in stock prices since 2014, even as their private sector peers are valued much higher.
For instance, about a dozen highly profitable listed PSUs in the energy, coal, minerals and infrastructure space have a stock market value which is well below the RIL’s market capitalisation. Similarly, in the banking space, HDFC Bank has twice the market value of all listed government banks put together. It would be absurd to sell PSU assets at existing market prices.
This question remains unresolved even within the government and can become a political hot potato, with the Congress warning that profitable assets built over decades with taxpayers money may get sold for a song. Modi also perceives the risk of getting hurt by this political narrative.
As a political party, the BJP finds it much easier to politically mobilise on socially divisive issues but its mettle is now being tested on matters of livelihood – manifested in the farm protests or the strike by bank employees against privatisation, which cut across caste and religion. This will be an interesting space to watch.