SEPTEMBER 18, 2019

By Naresh Minocha, Consulting Editor

"IF I were to say that on the strength of these conversations, many and long, I pretend to know all about India, I should be foolish. I do not dogmatise. The man who dogmatises at all is not, I suspect, the wisest of men. But the man who dogmatises about India - and I throw this out for this afternoon's discussion-is a pure simpleton", stated Lord John Morley.

Lord Morley said this as Secretary of State for India while presenting Indian Budget for 1906 in the House of Commons. His speech is relevant to existing Indian economic slowdown. This is because Modi Government's dogmatic reiteration of 'Strong Fundamentals' as its defence against any economic criticism has contributed to the situation.

Reiteration of this mantra became more emphatic since 2017 when many stakeholders talked of adverse impact created by demonetisation. And 'Strong Fundamentals' were invoked by Minister for Information & Broadcasting Prakash Javadekar last week while releasing report card on 100 days of Modi Government's 2nd tenure.

Lord Morley's wisdom require more recall as he presented a surplus budget. In that he proposed further cut in salt tax to enhance purchasing power of citizens. He admitted cost of governance was high when he talked about "fiscal reforms". Yes, he used the term 'fiscal reforms' for colonized India way back in 1906!

The key to resolving present economic crisis thus lies in first defining it comprehensively by invoking Lord Morley's speech. He said: "I have heard a thousand times that India is an insoluble problem. Well, the man who runs away from problems called 'insoluble' is not fit for politics. I have generally found that what is called an insoluble problem is after all a problem wrongly stated".

The first step in grappling with economic slowdown and resulting jobs losses is to admit that a grave problem exists. It is certainly not a temporary one as claimed by Prime Minister Narendra Modi. Unemployment & layoffs won't disappear with Labour Minister Santosh Gangwar's claim that there is no jobs crisis.

The Government should show political will to admit that crisis is a multi-dimensional - structural, systemic and cyclic. Diverse problems exist at macro and micro levels. The slowdown is both sector and projects specific. Above all, it reeks of fear of uncertainty in mind of entrepreneurs.

Uncertainty is caused by complex play of factors such as 1) lack of stability in certain policies and regulations notably ones relating to taxation 2) multiple data gaps 3) policy paralysis in several domains 4) environmental activism by both judiciary and executive that derail businesses 5) Haphazard sequencing of reforms and lack of synergy between reforms.

Recent monetary and fiscal initiatives to arrest slowdown are welcome. They, however, can't remove uncertainty & revive animal spirits. Uncertainty can only be removed by Prime Minister Narendra Modi.

Mr. Modi should give categorical assurances of stability and protection of investments to revive private investments. And he should ensure that his words are honoured both at the Centre and the States. The Centre should, therefore, strongly disapprove the practice of States cancelling projects or commercial agreements with private companies with the change of political regimes.

A glaring case in point is Andhra Pradesh which saw change of political regime towards May-end 2019. Mere suspicion of wrong-doing in a deal can't be ground for cancellations.

If there is a case of proven corruption, then State should promptly book both the giver and taker of bribes. If a contract is crafted to benefit a private player, then the new regime must make full disclosures to build a case for cancellation.

PM should also put an end to the practice of Government pocketing public sector reserves under the garb of disinvestments. This is done by asking a cash-rich enterprise to buy government's stake in another one.

Let public sector have freedom to utilize their cash surplus for growth and jobs creation. The Government should enact a law to insulate both domestic and foreign investments from arbitrary executive interventions and judicial activism. If the judiciary cancels any project approved by the Government, then the Government must compensate the investors for loss of investment.

A case in point is arbitration cases and litigation over cancellation of 2G cellular licences, coal and non-coal mining licences. The delays in settlement of cases has created uncertainty in the mind of investors especially foreign ones.

Above all, the Government, especially ministers, should avoid giving controversial statements that add to uncertainty.

Plastics is a glaring example to show how Government works at cross-purposes, thereby dampening investments, triggering closure of units & causing job losses.

The Government, on the one hand, is promoting setting up of Petroleum, Chemicals & Petrochemical Investment Regions (PCPIRs) and plastic parks. On the other hand, it is going overboard to run down plastics - which are core of petrochemicals.

According to Department of Chemicals and Petrochemicals (DCP), four PCPIR, when fully established, are expected to attract investment of around Rs. 7.63 lakh crore. Investments worth Rs. 1.90 lakh crore have either been made or committed so far. The four PCPIRs are expected to generate employment for around 33.83 lakh persons. About 3.30 lakh persons have been employed in direct and indirect activities related to PCPIRs.

PCPIRs and existing petrochemical complexes would supply polymers to nine plastic parks coming up in different states. Each park houses several plastic processing units. Apart from this, the Government is training thousands of students in plastics processing through its network of skill centres operated under the aegis of Central Institute of Plastics Engineering & Technology (CIPET).

Last year, DCP organized three contests on mygov portal to remove misgivings about plastics. One contest was slogan writing on 'Bring out the positive role of plastics and removing the negativity around use of plastics'.

These initiatives have been eclipsed by Mr. Modi, certain ministers and millions of their fans on the social media. Mr Modi hardly ever forgets to target single-use plastic (SUP) in his speeches. He doubles his campaign through social media. A case in point is his lavish praise for a tweet by Bollywood Actor Varun Dhawan. The other day Mr. Dhawan tweeted: "Being a plastic-free nation is the need of the hour and great initiative taken by our prime minister and we can all do this by making small changes. The set of #CoolieNo1 will now use steel bottles".

In his retweet, Mr. Modi wrote: "Superb gesture by the team of #CoolieNo1! Happy to see the film world contributing towards freeing India from single use plastic".

Should PM not educate masses about environmental impact of plastics and its substitutes on basis of their lifecycle? Does manufacture of steel not require mining of iron, coal and other minerals? Does steel manufacturing not guzzle power and water? Does it not cause both air and water pollution?

Similar questions can be applied to other substitutes such as aluminium, paper, glass and ceramics. Political campaign against single-use plastics should thus be preceded by a well-defined policy and regulations.

The Government has neither legally defined SUP nor notified SUP products in spite of repeated plea by the industry. Should plastic units & pragmatic environmentalists not be heard? In many families, popularly identified SUP bags and bottles are reused many times. This is more so in poor families.

It is here pertinent to cite United Nations Environment Programme's (UNEP's) Report on 'Single Use Plastics - A roadmap for Sustainability' published last year. In the Foreword to Report, Erik Solheim, Head of UN Environment, concludes: "Plastic isn't the problem. It's what we do with it. And that means the onus is on us to be far smarter in how we use this miracle material".

As put by Mr. Solheim, "Plastic is a miracle material. Thanks to plastics, countless lives have been saved in the health sector, the growth of clean energy from wind turbines and solar panels has been greatly facilitated, and safe food storage has been revolutionized".

Listen now to All India Plastic Manufacturers Association (AIPMA). In its recent presentation on SUP, AIPMA invokes Lord Morley's logic defining insoluble problem. AIPMA asks: "Is plastic the problem or Is it plastic pollution". It answers: "Plastic Serves. Littering Pollutes. Segregate the waste. Bless Plastics. Ban Littering". It has proposed timelines to attain 100% collection and recycling by 2026.

The other day NCBCTV18 reported: "Single-use plastic ban to impact 10,000 manufacturing units, leave 4 lakh workers jobless".

Such sector-specific woes ultimately transform into non-performing assets (NPAs) for banks. Business failures, in turn, dampen tax collections, which impact Government expenditure and fiscal deficit. Rise in NPAs & decline in government revenue thus constrain growth of gross domestic product (GDP).

Like plastic units, many other industries face rapid changes in environmental regulations. Automobile industry is a notable case in point. Judiciary-ordered speedy changeover in emission norms has forced refineries and automobile companies to invest several thousand crores of rupees on capital investments.

This, coupled with strong Governmental push for battery-operated vehicles, has made the market fluid. It has, therefore, put everyone including buyers on the guard. The buyers are also upset at increase in cost of vehicles and fuel due to Government interventions. Hence the slowdown.

The key message from the slowdown is simple: The Government should manage the change process in way that the reforms do not prove counter-productive. As put by an IMF official the other day at a Press Briefing, "the recent economic growth in India is much weaker than expected, mainly due to corporate and environmental regulatory uncertainty and lingering weakness in some non-Bank financial companies and risks to the outlook are tilted to the downside, as we like to say".

It is Government's inability to manage the Change well that has spawned litigation with the implementation of each reforms. Two cases deserve mention - the Insolvency and Bankruptcy Code, 2016 and Goods and Services tax (GST). Implementation of these enactments is undergoing tortuous jurisprudence process. This has no doubt created uncertainty across all entities, including the Government.

Take the case of GST, which has emerged as a tax undergoing perpetual change in either rates, rules or interpretation of rules. Many entities are still learning the basics of GST and how to comply with the regulations. Several of them might have to close business if they had not hired consultants to guide them through GST maze.

It is common for companies to hire services of Chartered accountants to manage business uncertainty resulting from GST regime. Tourism Corporation of Gujarat Limited, for instance, last months, invited tenders for selecting CA firms for GST consultancy, software design and hand holding, training its staff.

The Railways deserves special mention here. It is awash with internal clarifications, memorandum and circulars on how to comply with GST regulations all round the year. A Railway Board circular dated 9th September 2019, for instance, shed light on GST accounting adjustment between in-house production units and the 'principal railways' (zonal railway). The clarification addressed an issue raised by a production unit and the principal railway concerned about account of input tax credit on raw materials purchased for manufacture of wagons, etc.

Another notable instance in point is Oil and Natural Gas Corporation Limited (ONGC). It is battling the Government in two high courts over levy of service tax and GST (after ST subsuming in GST) on royalty paid to the Government for grant of right to explore oil and gas. It has estimated the contested service tax liability (inclusive of penalty and interest) at Rs 3877 crore and GST liability at Rs 4438 crore. Like ONGC, other companies engaged in exploration and production of hydrocarbons and minerals would be locked in disputes with authorities at various levels. Why the Government always fails to enact clear-cut taxation laws and rules? Why it loves to raise tax demands through interpretation of rules?

The Government should thus undertake radical reforms to usher in stability in business eco-system if it wants GDP to rise to double digits on sustained basis to remove poverty by 2032.

This brings us to the need for massive data gaps listed by Ministry of Statistics and Programme Implementation in its baseline report on National Indicator Framework (NIF) for UN-mandated sustainable development goals (SDGs) for all countries. Released in March 2019, the Report shows that 37 national indicators for sub-goals under SGDs have not yet been formulated.

In June 2019, Comptroller and Auditor General (CAG) noted that out of the 306 indicators listed in NIF, data for 137 is not available. Leave aside, data deficit even for macro-planning is alarming - an issue that has been raised time and again by different stakeholders including official committees.

The other day RBI Governor Shaktikanta Das admitted to a big error in its GDP forecast for first quarter of 2019-20. In an interview with a TV channel, he quipped: "We knew that the growth will be very slow but I must say 5% came as a surprise". RBI had projected 5.8% for Q1 and all others had projected around 5.5%.

It is here apt to disclose that the Government started preliminary discussions with the World Bank (WB) for a proposed project named 'National Programme for Improving the Quality of Statistics in India'. The Concept Note for the Project has mentioned about credibility of data in a few cases and long periodicity for collection of data.

As put by the Note, "Statistical methods and processes must adapt to a fast-changing socioeconomic landscape. It is becoming increasingly difficult to incorporate the complexities of a globalized and digitized economy in headline economic indicators".

It is high time the Government realizes that it should exercise caution while parroting its claim that fundamentals are strong. Mind you, the foundation for fundamentals is data. The quantity and quality of data impacts Government's capability to sense the magnitude of economic problems and make timely policy interventions.

Dogmas have no place in optimizing economic growth. The Government of the day should not get offended by criticism over its complex problems that shape the economic slowdown. The Government ought to listen to all to improve the speed and quality of growth.