Recently, I met with a number of policymakers, senior bureaucrats and journalists in Delhi to assess whether the criticism levelled at Prime Minister Narendra Modi for doing too little only 100 days into his term is actually fair.
In this analysis I evaluate the progress being made on some projects that are vital to putting India back on the path to growth.
To really change India Modi will need at least two terms as prime minister, if not three (he himself has mentioned 15 years on a number of occasions).
The reforms that India urgently needs will take many years to formulate, implement and roll out.
(Actually many of the reform ideas have been bouncing around various Indian ministries and committees for a number of years, but they have lacked the political will to carry them further.)
While people applaud Modi on his clarity and decisiveness, one of his most striking attributes is his pragmatism.
Even though he was given a quite extraordinary mandate from the electorate, he has been constrained in his actions by two key state elections in mid-October that are important for sentiment and the balance between the states and the centre (Delhi).
Therefore, the prime minister has embarked on a series of “undercover reforms” that are essential before a more aggressive stance can be taken after the elections.
The areas Modi has addressed so far mainly focus on enablement and implementation.
Implementation has historically been India’s Achilles heel.
Therefore, Modi has concentrated on reforming the make-up of the ministries and how they operate, and on wholesale changes to the working culture of the bureaucracy.
One of the positive changes most commented upon was the vast improvement in inter-ministerial co-operation.
Certainly from the several meetings I had with bureaucrats at various levels, there was a palpable sense of energy and urgency.
The centre and the states
With implementation issues being addressed, the focus then turns to what changes are needed to put India back on to the growth path.
Here I think there is some misunderstanding of the facts.
Since independence in 1947 India has operated a federal structure, today consisting of 29 states and seven union territories.
There is a clear delineation of responsibilities between the centre and the states (Fig 1).
The relationship between both has often been fraught, and since the 1990s there has been a steady shift of power from the centre to the states due to weak, unstable governments in Delhi.
This means that for Modi to achieve anything he needs state backing, especially as the low-hanging reforms that the centre needed to do have been done a long time ago, for example reduction in tariffs, reduction in corporate taxation, privatisation, currency policy.
Looking at Fig 1 it is clear that the areas needing urgent change are areas where state involvement is either absolute or shared with the centre.
The critical areas are infrastructure (concurrent), electricity (concurrent), labour reform (concurrent), land reform (state), industrial/resources policy (concurrent) etc.
The states are massively important in driving India’s next wave of growth, and a new relationship or grand bargain is required to achieve this.
An early example of the goodwill that Modi is trying to gain was his scrapping of India’s Planning Commission.
This commission was established by India’s first prime minister, Jawaharlal Nehru, to introduce central planning Soviet-style into India in the 1950s.
Latterly, it has been seen as a blunt tool to impose the centre’s policy on the states, and was much loathed for that reason.
By closing down this powerful body, the prime minister has sent a message to the states that the federal government wants to empower state governments to take more responsibility in key areas.
Interestingly, Modi is India’s first prime minister not to come from the Delhi establishment.
He has experienced life on the other side of the coin, being the chief minister of the state of Gujarat for almost 13 years before becoming prime minister this year.
This is a critical advantage, as he fully understands what is required to get the relationship between the centre and states working well.
Resetting this relationship is where Modi can achieve greatness.
Projects in progress
I also visited a number of vital projects that were instigated by the much discredited Congress administration of the last government.
Pragmatist that he is, the Modi was dismissive of a number of these initiatives when he was a chief minister, but now he is a prime minister he is a wholehearted supporter of anything that creates efficiencies and transparency.
The stand-out meetings were with the Unique Identification Authority of India who are rolling out the Unique Identification (UID) scheme and the department responsible for the dedicated rail freight corridor.
Project visit 1: Unique Identification Authority of India1
Perhaps the biggest initiative, UID was launched in 2009.
It is an ID scheme using biometrics (ten fingers, two irises) in order to provide a unique twelve digit random number to every resident in India over five years old.
All that is recorded are the name, address, gender and date of birth of the person, while a photo is optional.
Once the biometric data is recorded, the UID number is issued in letter form (not a card, as that would be too costly to replace).
The target is to enrol 1 billion people by the end of next year, and to date they have issued 700 million numbers (they target issuing close to 1 million numbers a day)!
Why is this so important?
In a country as large and varied as India there are many millions of people with no formal source of identification, particularly in remote rural areas.
These people have no access to the formal economy.
In addition, the scope for corruption is vast in these circumstances, particularly when it comes to welfare provision.
Therefore, by finally ensuring every person has a UID number you can radically alter welfare service delivery to the person involved.
The projected total scheme cost is $2 billion (R22bn), with it being estimated that by linking the UID number to welfare service delivery will save the government of India at least $60bn by cutting out wastage due to “ghost” claimants.
That could save the country about 1 percent of gross domestic product (GDP) annually if fully implemented.
That is probably the best $2bn India will ever spend.
This scheme has a host of other potential benefits that the current administration is pursuing.
One of the goals of the prime minister is to ensure that all Indians have equal access to a bank account.
This has been problematic for many as a lack of ID has meant banks are unable to fulfil Know your customer (KYC) on large sections of the population.
This will now change as a confirmed UID number and ID is acceptable to banks for KYC purposes, therefore, introducing vast numbers of people to the formal financial system.
The positive impact from UID will only show at a macro-level from 2016 at the earliest, but it is good to learn the project is on track and actively supported by Modi.
Project visit 2: Dedicated Rail Freight Corridor2
This is a $16bn 3 340km-long project that was founded in 2006. It is a dedicated double-track freight corridor running east to west in two separate but connected sections.
(The west leg is from Mumbai to Delhi, the east from Delhi to Kolkata).
Funding is being provided from the Japanese, the World Bank and various other governmental organisations.
The project is largely on track, having had issues with land acquisition, and both sections should be completed 2018/19.
This is another transformative project that will deliver massive productivity gains for the Indian economy.
Currently both passenger and freight trains share the same rail network in India, with passenger trains taking precedence.
As the population and economy have grown, the rail network has not, resulting in massive congestion with the average speed of freight trains falling to levels not seen since the 1940s.
This has pushed a huge amount of freight on to the already overcrowded road networks.
In 1950 the railways carried 90 percent of freight, but today their share has fallen to 33 percent of a much larger pie.
It is estimated that the new high speed dedicated freight lines will bring the following improvements:
- Freight capacity will be boosted by over 40 percent and productivity circa eight times better.
- Average speeds will be tripled.
- Introduction of a timetable.
- Average costs will be 30 percent to 40 percent lower.
I also met with NTPC (state-owned electricity generator), IDFC (Infrastructure Development Finance Company), the Delhi-Mumbai Industrial Corridor Corporation and the National Highways Authority among others, which revealed the following:
- Power – Limited new capital expenditure, but recent moves signal consolidation.
State electricity boards are mostly bankrupt and need long-term financial restructuring and new pricing structures.
This will be reliant on state support to ensure implementation.
- Roads – Smaller players are under extreme stress, but there is little consolidation as yet.
The whole policy framework is being looked at as the previous framework is no longer working and lenders are reluctant to commit new capital. Of projects, 4 400km have been terminated as a result.
- Other infrastructure – Bank lending to infrastructure space is still under considerable stress.
It is likely to be another year or so before the non-performing assets issue in the power sector bottoms.
This needs consolidating before new projects begin
.
Of airports, 250 to be operational by 2030, with aviation infrastructure spending forecast to be $12bn, with 75 percent being raised privately.
Summary conclusions
It’s all about the states.
To my mind, Modi’s critical mission and aims are misunderstood.
He wants to make federal India work.
In fact, he can only achieve success if his empowerment of federal India succeeds.
The new administration has actually done plenty, but mostly “undercover reforms”, implementation and empowerment, as well as re-energising the bureaucracy.
There is so much more to be done.
Critical infrastructure sectors remain a mess from the previous administration.
There is stress on banks to remain elevated for a few more quarters.
Overall, regardless of reforms, the cycle was turning as Modi arrived and falling commodity prices are manna from heaven.
Behind the scenes India’s UID programme could be equally transformative as the goods and services tax and completion of the Dedicated Freight Corridor Project.
We remain bullish on Indian asset markets.
Jonathan Schiessl is the head of global equities at Ashburton Investments