Uncurl the body

THE SCREAMS BEGIN most mornings at 9am. Elderly men and women in a Delhi park hold their arms in the air and shriek, then laugh. After years of observing the pensioners from his office window, your correspondent one day joins them. “Open your lungs,” the team leader instructs. “Laughter is good exercise for the internal organs, the lungs, the heart.” A woman as old as independent India (it turns 68 in August) explains: “We are not young in age, so we get stiff and need to uncurl the body.”

India needs to clear its own internal blockages. In the language of laughter, it has tended to respond with discreet giggles: a series of incremental changes. Its economy did enjoy a boom in the early years of this century, with high investment and rapid growth, in spite of decades of over-regulation, state domination of many sectors, including banks, and a lingering scepticism about markets. But now it needs to uncurl the economic body properly with much bolder reforms. Many had hoped Mr Modi would set these in motion, but so far he has done little, even though his whopping mandate would allow him to push through any measure he wants.

He has paid too little attention to the economy. The two budgets he has overseen so far have lacked an unambiguous thrust for growth, despite some welcome initiatives. Nor did he appoint a strong figure with reformist credentials as finance minister. He might have chosen Arun Shourie, a former privatisation minister who sold many state-run firms, but instead he picked a deferential loyalist lawyer, Arun Jaitley.

Mr Modi is not at heart a liberaliser. In Gujarat he proved himself as a rigorous manager who excelled at implementing projects to boost investment. He got public-sector firms to run better. He is pro-business, but not necessarily in favour of more market. He is attracted to East Asia’s development model, with a powerful role for the state. Gurcharan Das, an astute and supportive observer and author of a book on reforming India’s economy, calls him a moderniser more than a reformer. Another man, who worked closely with him in Gujarat, notes that “he galvanises government machinery, he doesn’t reform it.”

When Mr Modi was voted in, he lifted confidence merely by ejecting the previous government, which had been mired in corruption and famous for indecision. Macroeconomic conditions also started to improve around the same time, notably with a sharp fall in inflation. Austerity policies introduced under the previous government were kept going, which helped reduce the big fiscal deficit. Since 2013 monetary policy has been run by a respected central-bank governor, Raghuram Rajan. As a big oil importer, India got lucky when crude prices slumped—a “$50 billion gift” to the economy, as Mr Rajan has said.

As a result, short-term prospects look promising, certainly brighter than in most emerging markets, or in India itself a couple of years ago. The central bank is trimming rates (though banks have been slow to pass on the cuts), and India is setting up its first inflation-targeting regime. Exports have done badly, but thanks to cheaper oil and lower import costs the current-account deficit is no longer scary. The rupee is stable. In January government statisticians released a new series of GDP figures which seemed to suggest that the economy has been growing by 7.5%, up from around 5-6% in recent years and faster than China’s.

Slow going

Yet other indicators do not support that rosy assessment. Industrial production is anaemic, credit and investment are barely growing, construction is slow, few jobs are being created and consumer demand is limp. On the ground, not much is moving. In April Ratan Tata, the former boss of Tata, India’s biggest conglomerate, had to chide the grumblers not to be “disillusioned so fast” with Mr Modi.

It would be easier to believe talk of rapid growth if there were a stronger story of reforms to tell. Defenders of the government say other things matter more: reducing the fiscal deficit, making government more efficient, improving the business climate. Jayant Sinha, the junior finance minister, admits that the economic mood is flat, but says that restoring “the balance of the macroeconomy [is] a major accomplishment.” The combined impact of many smallish steps, he predicts, will “really transform the economy”.

He denies that India is emulating East Asian-style state capitalism, pointing to efforts to give the market a bigger role. State-run defence firms are notoriously incompetent, so the private sector is being invited in. A cap on foreign investment in the sector has been lifted from 26% to 49% of any joint venture (though so far foreigners have made no new big investments). Similarly, in March parliament finally agreed to raise the cap on foreign investment in the insurance industry, also to 49%. In railways, private firms will be given a bigger role, and restrictions on foreign capital have mostly been lifted.

That just about sums up the economic story so far. The previous BJP-led government, from 1998 to 2004, was bolder, even though it had to keep coalition partners happy, and had a privatisation ministry headed by Mr Shourie (who is unlikely to be invited to join the government after saying of Mr Modi in December that “when all is said and done, more is said than done”). The present government has adopted Congress’s approach of divesting only slices of massive state companies, raising revenue but not changing their ownership or management.

Now and then Mr Modi suggests that the economy should involve “minimum government”, but does not spell out what he means. He could have announced plans for the outright sale of state-owned steel or oil firms or banks by now, but “basically he doesn’t want to sell,” says a businessman in Ahmedabad. Asked in a private conversation last year why he was not setting an example by selling Air India, the low-flying national carrier, Mr Modi said he had no wish to battle unions as he began ten years in office.

Mr Sinha argues that the state is in fact pulling back. The scrapping of subsidies on diesel, begun under the previous government, has been completed. The power ministry has auctioned off most coal-mining licences issued in the past two decades after the Supreme Court cancelled them because of corruption. That raised over two trillion rupees ($32 billion). The winning bidders, including private firms, can now dig more coal.

But note what has not happened. The government could have considered breaking up Coal India, a state firm that mines the lion’s share of the country’s coal. If you ask Piyush Goyal, the power minister, whether Coal India could go down that route, or even be privatised, he rolls his eyes and says there is no need to be ideological.

It is a similar tale for India’s troubled banks. Many are state-run and have endured decades of political meddling. Ideally some of them should be recapitalised and made independent, and the worst of them should be closed. They are lumbered with big old loans from previous splurges by infrastructure investors, many of them with political connections, on projects that are going nowhere. The government counts 1,400 stalled projects worth $80 billion. That helps explain why there is little new investment: credit growth has been slowing since November 2013.

Adding to the pressure, in a few years banks will have to comply with new global rules, Basel 3, to hold more capital. But instead of recapitalising them or getting them ready for private buyers, the government is determined to restart those stalled projects, which may prove slow going. It is also telling state banks to promote financial inclusion. Earlier this year it ordered 75m new bank accounts to be opened, enticing customers with free insurance and overdrafts. In fact state-run banks have set up double that figure, though many of them were for people who already had accounts and lots of the new ones are dormant.

Mr Modi’s government is missing a rare chance to launch some bold reforms, along with an opportunity to educate the public about why reforms are to be welcomed, not feared. Time is short because in another year or two minds will begin to turn to the 2019 election.

Just possibly, critics will be mollified if Mr Modi gets one big thing right. Everyone agrees that India needs a bigger manufacturing sector to create lots of new jobs. Currently manufacturing accounts for only 16% of the economy, much less than in other Asian countries. The government has set a target to lift the share to 25% by 2022, and launched a nifty website and an official slogan, “Make in India”. But for that target to be achieved, at least four big reforms are needed.

One is to ease strict labour laws. Even a government official calls India’s the worst in the world, both cumbersome and contradictory. “You can’t apply 100% of Indian labour laws without instantaneously violating 10% of them,” grumbles a businessman, noting that most new jobs in India are of the informal kind.

Mr Modi should have led from the front, explaining that overly strict regulations (for example, on firing workers) stand in the way of creating formal jobs. Instead he has subcontracted the task to willing state governments in Rajasthan, Tamil Nadu and Gujarat, which are among the main manufacturing states. But that is second-best to encouraging the whole country to reform faster.

A second area is tax reform, where progress has been mostly disappointing. Indian governments have long had a bad habit of levying taxes retrospectively, and the current one has failed to demonstrate that this has been abandoned, so planning investments remains difficult. Nor has the government simplified or cut corporate or income taxes. To its credit, it is pushing a goods and services tax to replace separate levies raised by the states with just one imposed centrally. It will not be perfect, but it will create a single market that should allow manufacturers to serve the whole country from one place. Mr Jaitley says this reform could add two percentage points to India’s growth.

Fixing the power supply is a third urgent need. Those coal auctions could help, though breaking Coal India’s dominance would have been better. Much will depend on getting the railways to deliver the coal to power plants (see article) and fulfilling a pledge greatly to expand solar, wind and hydropower generation, as well as cranking up nuclear power. But even if all that is done, there will still be distribution problems: many manufacturers continue to use generators because the grid is unreliable or absent. State-run distribution firms are often useless.

The fourth, contentious, area for reform is land. Some manufacturers fret about a lack of space for factories. Others worry that the government will not be able to get hold of land quickly enough to build lots of new roads, railways and other infrastructure. One painful legacy from the previous administration is the first new law on buying land since 1894. It enshrines a slow process and gives farmers strong rights to ward off compulsory purchases. In December Mr Modi’s government came up with an ordinance (a temporary law to be confirmed by parliament later) on land, but it was badly drafted and infuriated farmers, many of whom have been ripped off by developers conniving with officials and politicians. “He is pushing a land bill that is fatally flawed,” laments an expert. The government has made more changes, but for now the bill is stuck in parliament.

Climate change

Even if all these reforms succeed, there is no guarantee that faster growth and lots of jobs will follow, because India’s business climate is notoriously awful. But politicians can do a lot to change that. A senior bureaucrat in the commerce ministry, Amitabh Kant, has listed 98 tasks that state governments must complete by July to make the country a more appealing place in which to do business. The central government will then name the best- and worst-performing states to spur competition for investment.

Mr Kant tells some good stories. In a previous job he dreamt up “Incredible India”, a tourism campaign that won many plaudits (though India still lures only 7m foreign visitors a year). He is the driving force behind the “Make in India” campaign. Now he is busy trying to snip red tape for investors.

As a benchmark, the government is using the World Bank’s ease of doing business index, which ranks India a dire 142nd out of 189 countries, behind countries such as Yemen, Sierra Leone and Ethiopia (see chart). One of India’s worst problems is getting contracts enforced: it takes an average of 1,420 days to settle a court case. Other headaches include the lack of a proper bankruptcy law and archaic rules for setting up a business, getting permits and shipping goods across borders.

Mr Kant says things are getting better. A small indication was the scrapping in April of the last foolish restrictions that allowed only small businesses to produce items like wooden furniture, locks, candles, matches, bangles and pickles. Mr Modi said late last year that India will advance to the top 50 in the rankings within two years. Even if it doesn’t, at least it is now trying. In order to improve its image, it is all but gaming the World Bank system, putting intense efforts into reforms in Mumbai and Delhi, the only two Indian cities surveyed for the index.

The finance minister promises to introduce a bankruptcy law, and red tape is becoming less tangled, even if it is not disappearing altogether. Instead of 14 forms for a permit to move goods across borders, would-be exporters now have to fill in only three. In Maharashtra, the state that includes Mumbai, it used to take 67 days and seven administrative steps for a firm to get an electricity connection. This is supposed to have come down to three weeks and three steps, but much depends on implementation. The manager of a factory in Rajasthan complains that getting a good electrical connection has taken him two years when officially it should have happened in months.

Onno Ruhl, the World Bank’s representative in Delhi, thinks that aiming for the top 50 is “very ambitious, but not as crazy as it sounds”. Mr Modi has plans for introducing far more technology in government so that all form-filling, visa-issuing and other official interactions are carried out online (see article). Some authorities are already setting an example: a study of 17 Indian cities in 2009 suggested that if the whole country were to adopt the best practices seen in different states, the national ranking would leap by 50 places.

The World Bank’s index does not capture everything that bothers investors. Particular bugbears include a poor work culture (which shows up in things like absenteeism) and skills shortages. In Rajasthan, Kajaria, the country’s most successfultilemaker, complains that it took two years to get permission to put up a new $15m factory near Alwar because suitable land was so hard to find. In any case, a ranking may matter less than market conditions, consumer demand and growth prospects. Foreign direct investment at least is up: Mr Kant says that in the financial year just completed it is likely to run to $45 billion.

Yet a puzzle persists. If India had wanted to present itself as more business-friendly, it could have already notched up some easy gains by cutting corporation tax from 30% (higher than in most countries) and simplifying a tax code riddled with exemptions that allows authorities to gouge companies at will. Mr Jaitley, the finance minister, talks of both but has done neither. Mr Kant’s imperatives are welcome, but they can offer no categorical guarantee that investors will respond.