The Modi government is becoming more mature in its economic and financial reasoning, in keeping with its venerable nine years in office. Yet, it is exhibiting a Dr Jekyll-Mr Hyde split personality in many cases, which is undermining any confidence people have in this emerging maturity.
On the one hand, the government’s policies on disinvestment, crypto assets, compromise settlements, transparency in budget numbers, and even the way it has handled the withdrawal of the Rs 2,000 currency note show that it is thinking things through before acting. On the other hand, Mr Hyde still rears his head in the way foreign currency transactions are now taxed, the way critical data is being withheld, and the way the government publicly ignores the Indian economy’s dependence on China but then quietly enables this same dependence.
The mature Modi govt…
To be fair, there are a number of signs of the government’s growing maturity, especially in its economic and financial policies. Let’s start with disinvestment. In 2020, the government announced its Public Sector Enterprises policy under which it said it would maintain a minimum presence in some strategic sectors and would exit from all others.
This seemed like a drastic announcement, but the government has actually taken quite a calibrated approach to it, as explained by the Department of Investment and Public Asset Management (DIPAM) secretary. In previous years, especially in the 2017-20 period, the government set humongous disinvestment targets and single-mindedly tried to achieve them, to the detriment of the stock prices of government companies.
What this huge push for disinvestment did was to depress the stock prices of listed PSUs even though the overall Sensex was rising during that period. Over the last few years, however, the government has pulled back on its disinvestments, communicated this to the markets, and has instead taken a balanced approach to how it earns money from the companies it owns.
That is, it has realised that dividends from these companies are as, if not more, valuable as what can be earned from selling them. This is a remarkably mature policy change for a government known for a single-minded approach towards achieving numerical targets.
Even the Reserve Bank of India’s policy on compromise settlements–no doubt discussed in detail with the Ministry of Finance–exhibits this growing maturity. Basically, the RBI allowed banks to enter into settlements with loan defaulters so that they can recover as much as possible, even if that involves taking a haircut.
Given that this does not preclude the penal action taken against such defaulters, such a step will help the banks recover what they can of their dues and move on with further lending. Separating the financial and criminal aspects of loan defaults shows the regulator and the government have thought deeply about the issue. Now, if they can prevent banks from dropping the criminal cases once they recover their dues, that would be the icing on the cake.
The overall maturity in thinking is showing itself in the way the government is handling crypto assets as well. Earlier, the government was sure it wanted to ban them, a hallmark of its attitude towards most things it does not understand. This has since evolved. Now, the government taxes profits on crypto transactions while users are on their own if they lose money or are victims of fraud.
The government and RBI have both been repeatedly warning users that such frauds and losses are a distinct possibility. At the same time, the government has also made it clear that it will legislate on cryptos only when there is international consensus on the matter. This combination of warnings and taxes is a more considered and considerate way to handle cryptos than outright bans.
Over the years, the central government has also been increasingly transparent about its budgeting by bringing several big-ticket off-budget items onto the official budget. Things like dues to the Food Corporation of India, and borrowings from the National Small Savings Fund, earlier kept off the budget to make the deficit numbers look better, have now been included. Acceptance of the negative impact this transparency has on the fiscal deficit is a sure sign of the growing maturity in the government’s financial planning.
In fact, even the way the withdrawal of the Rs 2,000 note has been handled, in contrast to the hasty and seemingly-unplanned demonetisation, shows the government can, at times, learn from its mistakes.
All of this makes it seem like the government has turned into a sagely organisation, above the realm of small-mindedness. Unfortunately, this isn’t quite the case. Maturity in the way it has handled some issues doesn’t hide the government’s denial of reality in others.
Also read: The pains and gains of Modi’s reforms are deferred—GST, banks to demonetisation
…and its immature steps
Let’s take statistics. The way the government scrapped the latest version of the Consumer Expenditure Survey–one of the most helpful ways to determine poverty levels–and hasn’t moved with the required speed to release a new one shows it doesn’t want to face the prospect that real incomes have fallen for almost everybody. Its lethargy in conducting and releasing the national census also exhibits an immature attitude towards statistics.
Denying the numbers only denies reality, but doesn’t make it any less true.
It would also be mature of the government to accept the Indian economy’s dependence on China as something that exists and that cannot be undone in the near future, despite all the schemes and tariffs the government can bring to bear.
Last month, the procurement division of the department of expenditure issued a quiet office memorandum allowing public sector companies to import solar components from China, something banned for all Indian private companies. There was no announcement, no press release, and no justification.
All this shows is that the government realises the domestic industry cannot compete with Chinese imports. It just doesn’t want to accept it publicly.
The government’s justification of the Tax Collected at Source (TCS) it will soon levy on international transactions above Rs 7 lakh is another example of how they have done first and thought later. There’s already a limit on the amount of cash a person can take out of the country. As for digital transactions, they can be tracked without the TCS, the key reason why the government brought it in.
What the government also didn’t think through was how banks can tell if a customer has exceeded the Rs 7 lakh limit. The short answer is they cannot. So, all international transactions are seeing a 20 per cent TCS being levied because the banks would rather erroneously conform than somehow fail to conform.
In all this, we all pay 20 per cent more when we’re abroad. It’s no real consolation that we are supposed to get this 20 per cent back at the end of the year. People will believe it when they see it happening painlessly.
This split-personality of simultaneous thoughtfulness and immaturity would end most relationships. In one with the government, where there’s no escape, it’s just frustrating.
Views are personal.
(Edited by Anurag Chaubey)