Budget 2022 - A Defining Moment

 

This piece is NOT about debating the Budget of 2022 but to decode the economy and the man who’s stamp is evident from the budget. When commenting on issues, its often tempting to use the wisdom of hindsight and show off. I prefer to share some comments I have made on Twitter in the past and they add to what I share here.  

Modi the reformer:

However much the popular notion about Modi as a reformer, anybody who has analysed his stint as CM of Gujarat, he was never in the mould of a PVNR/ MMS of 1991. He has never been the person who gets whistles and dancing on the streets or what I often call as an item number in matters economic. His attitude, as an analogy, has always been to build highways, rest rooms, fuel stations and then leave it to the industry to build automobiles and make people travel. Whether industry will build automobiles and people will travel is up to them, Modi will not give out free tickets, fuel or even entertainment to motivate.

In short, he has always been the supply side economist and expects the market to create and manage the demand side. One can agree/ disagree but this has been his economic approach by and large.

Private versus Public sector:

At every stage in his long stint as CM of Gujarat he supported the public sector to become one of the engines of the economy and if the private sector was motivated to build faster engines and race ahead, he would never prevent that and instead cheer it actively. He is what I term as a social reformer with a capitalist face. He uses social welfare as a catalyst for capitalism and then leverages capitalism to act as a force multiplier to add to the social welfare efforts and the public sector.

The key factor here is how many in the private sector globally understand this and plunges into the race with full gusto on their own or will wait for the Modi govt to give them sops and subsidies and carry the risk.

India is not Gujarat:

Let’s face the truth and only someone who lived and worked in Gujarat can understand this – however business savvy, the rest of India does not have the Gujarati mind. It would take a book to explain this, but two anecdotes explain the attitude.   

Way back in 1987 or so the Gujarat RTO started implementing some rule that stipulated the height of the letters for the registration numbers on vehicles. Within hours one saw even school children in uniform with a small tin of paint crudely painting vehicles a distance away from where traffic police were fining people. Even as an adult one would never be able to get this idea let alone implement it.

Around the same time the HBJ pipeline was being implemented and the Gujarat investment corporation invested in a 5 star hotel and then leased it to the ITC to run it and over the next few years had 100% occupancy and made huge money. In a meeting someone asked an IAS officer heading the organisation about how some 70% of the units in an area were running up losses and how Govt policies were bleeding the economy. He replied that these units constituted hardly 20% of the investments while the bulk of their investments were in the few units that were making huge profits.  

A Gujarati wants a stock exchange, not money to trade on the exchange. Consequently, the Modi economic strategy yielded quick results in Gujarat owing to the response of the local people but on a all India level it has been a different story and taking far more time. In my view Indian industry and investors by and large are yet to understand the Modi doctrine and still look for cues and sops to start running. 

Most don’t realise that they will get Gyms and running tracks but not running shoes and jogging dresses.  

Growth versus Jobs:

It is nobody’s argument that India has grown economically but in the recent past it’s been a largely jobless growth. Jobs are just not there like before. With the Infotech boom, a friend and industry stalwart told me long ago – if you are human, we will hire you. That has changed with maturing of the industry. The infotech industry needs qualified people, but the bulk of the Indian unemployment is in the unqualified, semi-skilled, unskilled segment. The only way they can be given meaningful jobs is by a vibrant manufacturing sector which so far has failed to deliver.

Here again government philosophy has been to focus on skilling, upskilling and while there can be many debates on this, fact again is the Modi doctrine in economics. Teach fishing and not give fish.

With schemes like the profit linked incentives, the common thread of strategy is seen where investment, marketing and sales are not “subsidised” “derisked” by the government, but results will be rewarded. Whether it is the NCLT, ease of doing business, stable tax regime, repeal of retro tax laws, delicensing of the LNG industry, licenses for the  natural gas industry based on end results and not financial terms, impetus to clean energy with global commitments with a end date, etc  the intent has been to create a freeway and then expect the investor to capitalise on it.

Free Trade Agreements:

Currently India has a number of FTA’s in place and here are some indicative figures in Billion Dollars

A very interesting fact emerges when you do a global study, that except for USA, India has a negative balance of trade with every other country in the world. India in short imports from every country globally MORE than it exports to them.

• India is a leading source of import for the following countries - Bhutan, Kenya, Nepal, Mauritius, Somalia, Sri Lanka, Tanzania and Uganda.
• China is the leading source of imports for 46 countries globally including the European Union, USA, Thailand, South Korea, Vietnam, South America, India and even Bangladesh.

Leaving aside statistics, there is a story here somewhere that needs to be understood.

While it is not my case that just because India has a negative trade balance it is not good economically, the data gives answers to several foreign policy and economic decisions of the Modi government. They also indicate that while strategic reasons would have played a major reason, the economic arguments have driven even foreign policy.

Without intending to sound demeaning, when Somalia, Uganda are the countries that have India as the leading import partner, and you have a deficit with 99.95 % of the world, Indian economic policy needs a serious relook. The one country with who India has a positive trade balance is USA which is mainly driven by Infotech labour arbitrage. Now we begin to understand why the SAARC was ignored as a platform and is as good as dead. For another the Atmanirbhar programme now starts making a lot more sense in its focus. One can fault the communication but from an economic imperative this policy was desperately needed.

That India is relooking at FTA’s and is vary of new FTA’s is fully understandable because not one FTA even with a Vietnam has helped India. Everybody has grown fat and big on India and most of these FTA’s are with countries where manufactured goods have a large share. India can claim to have benefitted but then that’s like using statistics to say that we have a fig leaf and so not standing naked when others are suited booted so to speak.

Free Trade Agreements Being Reviewed

Indian Manufacturing/ Private sector has failed:

Let’s face it. For all the chest thumping that Indian industry does, and no credit taken away from their contributions, the Indian private sector business strategy has been predominantly trade/ commodity/ service related than hard core engineering, technology, and manufacturing. These have been more by default and force of circumstances rather than hardnosed strategy and ambition. It is surely not due to lack of talent since Indian talent is feted globally.  

The ridiculousness of the situation can be seen by the fact that India IMPORTS 80% of its agarbathi or incense sticks which is up from 2% in 2009. In 12 years this industry has simply died causing huge loss of semi skilled/ unskilled jobs - the key. If duties on these imports are being increased, it makes ample sense.

Import or Agarbathis or Incense Sticks

As the Finance Minister rightfully asked sometime back, the country IMPORTS clay, ceramic idols of Indian gods like Ganesha, Laxmi when these can be so easily made locally. Hell, we import MUD literally. India is the 2nd largest ceramic tiles producer in the world but has only 7% market share, was 5.5 Billion Dollar in size 5 years back, and more than 60% was reported to be in the unorganised sector. These numbers tell a rather grim story and only reinforce the failure of private manufacturing sector. The Indian manufacturing sector has been lazy in general and never demonstrated the ambition to leverage size, talent, opportunity to grow. Manufacturing activity requires hard work, blood, sweat and tears unlike trading where one gets to travel all over the world and strut around like a peacock talking of how great India is. No wonder that India has a trade deficit with 199 out of 200 countries globally.

This budget once again emphasises that however far removed we claim to be from Nehruvian economic philosophy, we are in reality far closer to it than understood. Except that it is being given a new direction and focus under Modi in that the sops and subsidies coupled with patronage are being done away with. Sops and subsidies given are more to catalyse investment decisions and not to act as a third leg/ crutch. This is the underlying message in the Budget of 2022 with the following key aspects to be noticed.

• A 35% increase in capital expenditure to reach 7.5 Lakh crore or 100 Billion dollars. The total investment proposals from the private sector are much less than this and today more than 60% of the Indian investments are by Govt. if you focus only on manufacturing the private sector investment as per reports is not more than 10 Billion with the rest being taken up by financial, services segments.
• Fiscal deficit of 6.9% against the target of 3% in the fiscal responsibility and budget management target.
• Design linked manufacturing in 5G technology which in my view is a dry run indicator of future policy direction in other sectors – again whether the private sector gets its act together or waits is the moot question.

The key in the final analysis is whether the Indian private sector in manufacturing will now stand up to be counted since the Govt is betting on a contrarian global view that Govt investments crowd OUT private investment by expecting that Indian private sector will crowd IN their investments. Reading op-eds and comments by almost every captain of Indian industry what stands out is how little they have to say about themselves, their contribution, their commitments but instead wax eloquent about Govt investments, projects, efforts, success. 

Therein lies a message that does not look optimistic.