Why, you ask?
To understand this conundrum, let’s dial back a few months, to May 2019. Everybody thought that a struggling economy would dent Prime Minister Modi’s 2014 mandate. But he shocked the whole world by improving upon his tally, crossing a breath-taking 300 seats in Lok Sabha. The markets broke into a euphoric dance of crazy expectations. Surely, he would use his vastly enhanced political capital to finally essay deep, difficult reforms to unshackle the economy, once and for all, right?
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[00:00:00] You're listening to The Quint's podcast. Rise Above the Din Unbox the News with me, Raghav Behal. Coal output crashes by over 20%. And overall, 8 core sectors lose a stunning 5.2% year on year over September 2018 and they have contracted to an 8-year low. GDP has hit a 6-year low.
[00:00:29] And yet, India's stock markets hit an all-time high. Why? Of course, why? You would ask. Now to understand this conundrum, let's dial back a few months to May 2019. Everybody thought that a struggling economy would dent Prime Minister Modi's 2014 mandate.
[00:00:53] But he shocked the whole world by improving upon his tally. Of course, he crossed a breathtaking 300 seats in Lok Sabha. The markets broke into a euphoric dance. They had crazy expectations. Surely, the markets thought he would use his vastly enhanced political capital to finally
[00:01:15] assay deep, difficult structural reforms to unshackle the economy once and for all. That was an expectation? No. Wrong. Prime Minister Modi's first budget was a very unusual tax and spend kind of document. Among several excesses, it unwittingly brought foreign investors under a super-rich tax of nearly 43%.
[00:01:40] The fear of flight of FBI from India is not well-founded at all. The increased effective tax rate will affect only high-income individuals and it is this government's policy that these individuals should contribute more towards nation-building.
[00:02:00] Now when the Finance Minister said this, foreign investors sort of felt spurned and they sort of panicked and therefore they voted with their feet. The markets then tumbled nearly 10% and they were threatening to test much lower bottoms. That's when the government learned a fatal lesson.
[00:02:19] The Modi magic can bewitch an electorate. It can wow foreign leaders but it simply cannot force all the markets fury. So even an indomitable Prime Minister had to roll back. He cut India's corporate tax rate by an unbelievable eye-rubbing 10% in one swish
[00:02:42] of the axe and for new manufacturing companies, listen to this, it was slashed to around 17%. Now that's perhaps the lowest and most competitive rate on earth, the whole globe for an economy of comparable opportunities. The government usually doesn't do it but the government then also admitted its mistake
[00:03:04] in leving the super tax on foreign investors. Now when all of this good news came altogether, the markets abruptly changed course and they climbed to record highs within weeks of acknowledging this sort of turbocharged action by the Modi government.
[00:03:19] Now ever since that U-turn, the government has actually been accelerating in that reverse direction of more and more reform. It is actually talking about hitherto unthinkable actions. I'll give you a few instances. This decision to sell, this is a purported decision, an expected decision to sell
[00:03:39] BPCL to a private acquirer, private acquirer, private acquirer for close to 10 billion dollars. Now it's also thought that the government could be rolling back the egregious taxation of equity capital by killing dividend distribution tax and long-term capital gains taxes that's being fought about.
[00:03:58] And of course the government has also made Air India far more sellable by now permitting a 100% equity sale by transferring the debilitating debt burden out of the carrier's balance sheet. It's also now allowing the new buyer to lay off people, to change the brand and to merge
[00:04:21] the airline with the acquirer. These concessions were once thought to be impossible. So in this turbocharged sort of action environment, has the government given up its, what I would call, what I would and have been calling, obscurantist policies for good?
[00:04:41] Has it fully and completely endorsed a competitive and market friendly policy architecture? Unfortunately, unfortunately the answer is no. Now just look at the merger of BSNL and MTNL. MTNL is really merging two dying companies, just merging two dying public sector companies.
[00:05:02] You're giving them, I don't know why but you're giving them an anesthetic infusion of 70,000 crores, 70,000 crores and what will that achieve? It will eventually just create a giant corpse. Now see how the government is also blindly refusing to understand that by allowing systemically important finance companies to fail.
[00:05:25] Systemically important finance companies like ILFS last year and perhaps DHFL this year. Now if you do that, that really creates a very disorderly trauma not for the companies but for ordinary citizens. But of course if these very assets are saved and I've been saying this over and over
[00:05:46] again the assets if they are saved while only errant owners and managers are punished, public welfare is actually enhanced. It's not diminished it's enhanced. It's been now proven in development economic theory and macroeconomic theory that that happens.
[00:06:03] But of course instead of also fixing the deep-rooted malaise of public sector banks the government is sort of creating the illusion. It's the illusion of reform by changing, chopping, merging bad balance sheets. But that's only getting this public sector bank patient.
[00:06:23] Yes it's going off the ventilator but then from the ventilator it's going into the intensive care unit. It's not really solving the problem. You know it's this what I call this lingering. It's not a sharp dissonance. It's a lingering dissonance, a lingering confusion in the government's policies
[00:06:43] and that is exemplified so graphically by what I just told you the government's very different stance on BPCL versus what it's doing with BSNL, MTNL. This sort of lingering dissonance is now radiating through the economy
[00:07:00] and that is the confusion that's now creating the situation where markets are at a record high while key sectors are still reeling in pessimism. Therefore what the government now needs to do is to kill the dissonance and therefore move only one way on this highway to bold reform.
[00:07:40] This is the end of this episode of Raghav's Tech.