Tatsat Chronicle Magazine

Economic Spring On India’s Horizon

Post the second phase of the Covid-19 pandemic, India’s economy has witnessed an uptick. But while the worst may be over, full recovery is still some time away
January 20, 2022

In August 2021, Union Finance Minister Nirmala Sitharaman announced that the government would bring about an amendment in the appropriate law to negate the effect of the capital gains tax imposed by Pranab Mukherjee, finance minister in the UPA government, on several foreign companies through a law having retrospective effect.

This came after seven years of refusal by the Narendra Modi government to do the right thing. With remarkable lack of concern about domestic or international opinion, Sitharaman had stood her ground on a law which was poor from both moral and legal angles, legislated in 2012, allowing the government to tax capital gains from 1962. Only an unthinking leader would change – with retrospective effect – a law to gain money through such unsavoury means. Mukherjee, of course, did not live to see his blunder set aside reluctantly by a government which had come to power on the promise of good governance.

Sitharaman only accepted the inevitable when she, and her government, realised that the nation might have to face major embarrassment if any of the government’s assets were seized in a foreign country, including the aircraft of Air India or the ships of the Shipping Corporation of India, if they persisted in their wholly mistaken belief that the world would conform to their unreasonable norms. The possibility of such seizure was real, after Cairn Energy plc, a British petroleum major, moved court in France and the US (and several other countries) to enforce an award by the Permanent Court of Arbitration at The Hague, which held that the Indian government had been wrong in imposing a retrospective capital gains tax on the company, and directing that India pay around $1.2 billion (over `8,500 crore) in damages. Interest would push up the amount. A French court ordered a freeze on about 20 residential properties owned by the Indian government in Paris.

The arbitration court said that this related not merely to a tax dispute but was an investment matter under the bilateral treaty signed between governments. Similar was the case with Vodafone plc. Finance Minister Mukherjee had imposed capital gains tax with retrospective effect and the UK-based telecom operator too won the arbitration case. Instead of seeing the folly of the earlier decision, the Modi government persisted, hoping to accrue an unjustified windfall while throwing good governance norms to the wind. Officials said the government would file an appeal against the arbitration rulings and would uphold its sovereign right to tax, forgetting that bilateral investment treaties signed between governments often voluntarily curtailed such rights.

In August 2021, Finance Minister Nirmala Sitharaman introduced the Taxation Laws (Amendment) Bill, 2021 in the Lok Sabha

The arbitration court held that the action against Cairn was in breach of the guarantee of fair and equitable treatment, violating the India-UK bilateral treaty. The Indian government has moved in the opposite direction from signing bilaterals. It has done away with most of them, thus bringing foreign companies within the ambit of Indian courts where justice is often denied through inordinate delays. This may have a consequential effect on foreign investment.

If the government wants success in its effort to privatise, it has to offer value to its buyers and long-term benefits to its employees to raise $24 billion through the sale and, thus, keep the fiscal deficit from ballooning from 9.5 percent to 12 percent of the GDP.

Now, trying to hide an obvious red face, Sitharaman is asserting that the latest decision by the government to cancel the retrospective taxation was in keeping with the policy position taken by the Modi government.

No way to privatise
This attitude of the Modi regime is evident in many other areas, including its subversion of institutions (see boxes). Its co-option includes packing many of the institutions with like-minded people or those who have shown a pliant nature. It has also subverted the rule of law by aiming to attack the highest court – encumbered with a huge backlog of cases – and unleashing the state investigating agencies against opponents and instituting tax cases against those who speak up.

But, on the economy front, it has often moved in fits and starts. Take, for example, the privatisation of public sector units. A prime example is the effort by the Modi government to offload the government-run airline, hobbled by losses accumulated over the years. Air India exemplified why governments should not run businesses. Offered for sale in 2017, half-hearted efforts to get rid of the white elephant ended in attracting no takers by mid-2018, though over 150 parties had shown interest. The trouble was, the bureaucrats had not thought through the sale process, despite several examples of successful privatisation around the world, including British Airways in the UK. No thought was given to how the huge debt of the airline, running into some $5 billion (`33,500 crore then) would be handled nor the issue of the employees.

Bureaucrats were certain there would be many suitors. After all, Air India had modern aircraft and valuable flying rights in many foreign countries. Domestic aviation too was on the upswing. From a monopoly position in the early 1990s, the airline’s domestic share had been reduced to less than 15 percent by lower-cost private airlines offering far better service. Typical bureaucratic thinking ensured that the government would still hold almost one-fourth of the shareholding and might not allow attrition among employees. Added to it were the ongoing losses. No airline wanted to be handicapped by so many negative factors.

In a renewed effort, the government announced earlier this year privatisation of some 28 public sector units out of almost 350, including the flagship air carrier. The bureaucrats managed to put in some sops and make the deal more attractive for buyers. Eventually, Tata Sons won the bid in poetic justice for the group from which the government had pried away the airline started by J.R.D. Tata, nationalising it in 1953 along with eight other airlines. The spree of nationalisation since then ensured the so-called “commanding heights” of the economy, for which the public sector was formed, kept the nation poor for decades.

After Air India, Bharat Petroleum and Life Insurance Corporation of India are on offer. The born-again move to put Air India on the block is the first successful move by the government in this direction. But if the government wants to succeed in its effort to privatise a substantial number of the companies on its list, it has to offer value to buyers – not merely aim to squeeze out as much money as it can. Employees too should be able to see long-term benefit for themselves, if the aim by the government is to raise $24 billion (`175,000 crore) through the sale and thus keep the fiscal deficit (or its borrowings) from ballooning from 9.5 percent to 12 percent of the GDP, putting India’s rating at risk.


Undercutting autonomy

What’s done: The Modi government has never brooked independent thinking among the bureaucracy or pivotal institutions. Celebrated economist Raghuram Rajan had to leave the governor’s post when he opposed demonetisation before it was implemented in 2016. Urjit Patel’s opposition to giving money to the government to bridge its fiscal deficit was seen as an affront. He too had to leave. Recently, S. Gurumurthy, an RSS ideologue and head of the Swadesh Jagran Manch, has been inducted into the board. Shaktikanta Das, who vigorously supported demonetisation, was appointed governor in December 2018 and has done the bidding of the government.

What’s needed: The banking regulatory authority needs autonomy from the government to be able to function effectively in its role of controlling the banks and deciding the monetary policy. Just before Patel resigned, Deputy Governor Viral Acharya had publicly stated in 2018 that any government which does not respect the independence of the central bank would face the wrath of the financial markets. Finance Minister Arun Jaitley responded that the nation was larger than any institution in the country, actually implying that he meant the government. That was a clear signal that the RBI would have to follow the centre’s diktat. Acharya resigned in July 2019. Since then, the government has used the RBI as a milch cow to bridge its deficit gap. The statutory liquidity ratio has handicapped the bank into investing almost a third of its deposits in government-decided investments, generally with low yields. There is need to rethink this approach to allow banks more financial autonomy.

The spree of nationalisation ensured that the so-called ‘commanding heights’ of the economy, for which the public sector was formed, resulted in keeping the nation poor for decades.


Economy catches viral fever
How did we reach such a huge fiscal deficit, which would have been very alarming in normal times, to say the least? Covid-19’s impact on the Indian economy was huge, not least because of the fumbling, hesitant policies followed by the central government. India’s economy was showing a downtrend in many areas before the pandemic, with unemployment rising, investments falling and demand stagnating. Then the viral tsunami struck.

Source: Ministry of Statistics and Programme Implementation

India’s GDP went down by 7.3 percent by March-end 2021 before the second wave took its toll. But the impact of the first lockdown in 2020 (the GDP had fallen 24 percent in the second quarter compared to the earlier year) had a devastating impact all around. The government’s hands-off approach regarding lakhs of migrant workers who, jobless, took to the roads to walk hundreds of kilometres home, will remain an excruciating example of apathy. The premature claim that the government had effectively tackled Covid-19 successfully would thus remain hollow.

The second wave also had a major impact on the middle class, many members of which found their incomes declining sharply. Surveys found that almost half the employees in firms found their income down by 40 percent. People sold or mortgaged their assets to make do. Hundreds of thousands lost their jobs, dipping into their savings or borrowing to tide over the period. Product sales declined sharply. Sale of mobile phones, a good indicator of the buying power of most people, saw a fall. Two-wheeler and four-wheeler sales went on a slide. Eating out, travelling, hotel occupancy and airlines suffered a shock.

The searing images of people consigning the bodies of their loved ones to flames in parking lots and open fields, the hundreds of burials in very shallow sand graves and bodies floating down the Ganga will remain as the indelible legacy of a government unable to cope with the tragedy of an unbound virus. Added to those images were the ones which showed shortage of oxygen in hospitals, with relatives running with cylinders from one supplier to another. Hospital floor space was in short supply and admissions were refused. India’s official death toll due to the Covid pandemic has been estimated at 4.75 lakh by the second week of December 2021. Yet, that is surely an underestimate. Researchers at the Center for Global Development, a think tank in Washington, D.C., have put the number of deaths in India from Covid-19 at around 4.1 million. That is almost 10 times the official count. The Center used the method of ‘excess deaths’ that were based on reports from various organisations, looking at how many more died during the pandemic in India compared to an earlier normal year. The Economist too has come to a similar conclusion in its estimate. The government, of course, has denied all this. But it has not made any effort to find out the number of dead or set up any country-wide probe to look into it, as would be expected in a democracy.

Since the beginning of the pandemic, almost 1.75 crore new demat accounts were opened in India by individuals, taking the total to over 4 crore for Central Depository Services Limited alone. More demat accounts means many more investors in the stock markets.

During the 2020 lockdown, lakhs of migrant, jobless workers took to the roads to walk hundreds of kilometres home (Photo: PIXAHIVE)

The feared third wave may be avoided by India if the pace of vaccinations keeps picking up. Till December second week, 133.8 crore people had been vaccinated with at least one dose even as the number of those affected by the virus rose to 3.47 crore. The percentage of fully vaccinated persons – those with two doses – was 35.2. If the country is to reach its target of vaccinating all eligible adults soon, the pace will have to be substantially increased.

Markets board a bullet train
In a sea of gloom and doom, one area that has witnessed consistent growth lately is the stock market. Markets and the economy generally look at different areas. The economy is an image of the growth or otherwise in the recent past for which statistics have been captured. The markets view the future prospect in current terms. Several factors, pushed together by the pandemic, have resulted in a perfect storm in share prices.


Attacking a fiercely independent institution

What’s done: Having seen the impact that CAG reports had on various policies of the government and what Vinod Rai, as former CAG, had been able to bring out as implied corrupt practices and wasteful expenditure, the government had no intention of bringing an independent mind into this crucial position. In August 2020, it appointed G.C. Murmu, a Gujarat-cadre retired IAS officer, who had been principal secretary to Modi as chief minister, bypassing several secretaries. Earlier, the bureaucrat had been made the governor of Jammu & Kashmir.

What’s needed: The CAG, a constitutional authority, is empowered to audit receipts and expenditure of the central and state governments and is also the statutory auditor of public sector units. Its reports are placed in Parliament and often become major points of discussion. The founding fathers had made sure that the CAG could work independently. But the appointment of the CAG was left in government hands, thus leaving the institution open to being undermined by a leader bent on packing institutions with suppliant people. Parliamentarians have urged the government to go through the collegium route for appointment of the CAG, but to no avail. The Bharatiya Janata Party, when in the opposition, supported this idea, but in power the party is quiet on the issue.

Global liquidity has resulted in flow of funds into the stock markets from abroad. An estimated $16 trillion is locked up in negative-yielding debt funds worldwide, a part of which is likely to have moved to the equity markets. The US Fed has said that it is not going to change the low-interest rate regime in a hurry. Global equity market capitalisation – number of shares multiplied by the prices – has increased 75 percent to $119 trillion by September 2021 from March 2020, according to broker group Motilal Oswal.

In a sea of gloom and doom, one area that has seen consistent growth lately is the stock market.

Some portion of this liquidity has flowed into India, boosting stock prices. At the height of the second wave in April-May 2021, there was a net outflow of `9,650 crore and `2,950 crore, respectively. Yet, till September first week, the money coming in from foreign investment had touched `56,000 crore, according to the figures with the stock exchanges. In fact, in 2020-21, India was the largest recipient of foreign portfolio investment in the world. Further, the second wave did not have a substantial impact on the companies, although the toll on individuals was devastating. The top 100 companies in India saw a rise of 5 percentage points in their earnings before tax in 2020-21, according to brokerage houses which analyse the figures. Information technology companies which have an 18 percent weightage on the stock market did exceptionally well, though low weightage firms like hotels and airlines faced a hard time.

Additionally, because of the pandemic, other avenues of investment in India had shown a sharp decline, including property, triggering further interest in stocks. Since the beginning of the pandemic, almost 1.75 crore new demat accounts were opened in India by individuals, according to Central Depository Services Limited, taking the total to over 4 crore for CDSL alone. More demat accounts means many more investors in the stock markets.

The market capitalisation of all shares in India touched 111 percent of the gross domestic product, overshooting the earlier record set in 2007-08. Indian markets have outshone all the emerging markets, with metals and technology leading the pack. The sharp rise – the Nifty50 index rose 1,000 points from 16K to 17K in 19 trading days – is somewhat of a record. But it has also triggered fears among experts that the market may go in for a sharp correction. The price-to-earnings ratio on Nifty50 is already about 23 percent, indicating high levels and low chances of further rise. “Everything is fully priced,” says Sanjiv Bhasin, director at IIFL Securities. “I am a typical greed and fear person, and right now I am very fearful,” Bhasin recently told ETMarkets.com. The fear is that greed may still win for a while.

Whither growth or withering growth?
Though some experts have predicted a recovery later this year, Krishnamurthy Subramanian, the chief economic adviser to the Government of India, says that a V-shaped recovery is already visible and that a series of reforms by the centre would see a robust increase in growth soon. Subramanian is a government spokesman. Bureaucrats talk like politicians. The strong votaries of truth that one heard about a long time back are, well, things of the past. This trend has been in the making for several years, irrespective of the regime.


Losing independence in small doses

What’s done: Similar to the CAG, the Election Commission of India is a constitutional body which assumes significant powers during elections and the nation looks upon it to bring about fairness in the electoral process. Chief Election Commissioners like T.N. Seshan and J.M. Lyngdoh had strengthened the institution by keeping governments and politicians at bay. But now the functioning of the Election Commission has come under a cloud, following its failure to take any action against the prime minister for the “dog whistle” speeches during the West Bengal elections. Despite several complaints, the EC failed to take action, even when one of its three members – Ashok Lavasa – put in notes of dissent (largely ignored by the CEC) against lack of action against Modi and Amit Shah, the home minister. Lavasa later resigned.

What’s needed: The founding fathers had also left a lacuna in the appointment of the CECs and Election Commissioners by allowing the central government to appoint them. A far less important institution, relatively speaking, the Central Bureau of Investigation, has its chief appointed by a collegium of the PM, the Chief Justice of India and the Leader of the Opposition. Something similar is urgently needed in the case of the CEC, Election Commissioners and the CAG. The Supreme Court has a petition before it to that effect. But it is not known when it will be taken up.

Perhaps the height of such abject yesmanship was reached when, as economic affairs secretary, Shaktikanta Das proclaimed repeatedly in 2016-17 that there were enough new notes available while the government presses worked overtime and lakhs of people stood in queues all across the country to withdraw money after demonetisation. He was merely parroting what the politicians were saying. It came as no surprise that he was later appointed governor of the Reserve Bank of India, a position which had seen the premature exit of two highly-regarded economists – Raghuram Rajan and Urjit Patel – because of differences with the central government.

But more sober voices have seen the 20.1 percent rise in GDP in the first quarter of the year, compared to the 24.4 percent decline last year, and have cautioned against reading too much into numbers which come on a low base. After last year’s decline, a reset would require an increase of 32.3 percent. The group chief economic adviser of the State Bank of India, Soumya Kanti Ghosh, says that growth in the first quarter of 2021-22 declined substantially vis-à-vis the last quarter (January to March) of 2020-21. “This shows that measured sequentially, over two consecutive quarters, the Second Wave impact was quite high.”

He says further in his report that the GDP in real terms expanded by 20.1 percent in the first quarter of 2021-22 while nominal GDP (including inflation) expanded by 31.7 percent, “indicating substantial price rise and such entrenched inflationary pressures might be a drag on growth if domestic fuel and commodity prices, and hence logistic costs, don’t correct going forward.”


Closing a fresh-air window

What’s done: The Right to Information Act, 2005 was a major feather in the cap of government transparency and the office of the CIC was formed under it. But in practice it has not functioned very well. The appointment of the latest Chief Information Commissioner, Y.K. Sinha, an IFS officer, and other commissioners drew allegations from the Congress leader, Adhir Ranjan Chowdhury – who was part of the selection panel – that the Supreme Court-mandated rules on transparency were not followed. Chowdhury did not object to Sinha’s appointment, but to inclusion of Uday Mahurkar, a journalist and a Modi camp follower, as a commissioner. Mahurkar has written two highly laudatory books on Modi. Chowdhury said Mahurkar had not even applied for the post.

What’s needed: Even when a law provides for a semblance of fairness in appointments, the process can be subverted by a government bent on getting its way. The appointment of the CIC and other commissioners (10 in all) is to be done by a panel of the PM, one cabinet minister and the Leader of the Opposition, thus giving two votes to the regime in power. This should change in favour of the CBI formula. Also, a shortlist of names must be published. Mahurkar’s name was quietly added at the last moment. For institutions to flourish, constitutional protection needs to be given at every level.

Due to the pandemic, other avenues of investment in India had shown a sharp decline, including property, triggering further interest in stocks.

Some more sectors are likely to touch pre-Covid-19 levels by the end of the fourth quarter, say some other experts, though areas like trade, hotels, transport and communications are 30 percent below pre-Covid levels and may catch up only by the second or third quarter of 2022-23. Both consumption demand and investments are indicating a revival. Exports too have increased, though so have imports.

But India may not reach the overall pre-Covid growth rates soon and may never be able to make up the difference. “It is a bit too early to predict the nature of the recovery path, but definitely the recovery will be uneven across sectors and industries,” says Abhijit Mukhopadhyay, in an ORFonline article. Those expressing a sigh of relief by looking only at the markets may have to wait a bit. The worst may be over, but full recovery is still some time away.

Hardev Sanotra

Hardev Sanotra is a freelance journalist based in Delhi-NCR. He was the former Managing Editor of IANS. Besides, he has held senior editorial position is several of India’s leading business publications.