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22nd June 2014
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High expectations from the new Prime Minister’s governmentShiv Puri
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- I have had several interactions with senior people within the government over the last two months. The signs are very encouraging. There is a sea change within the Indian bureaucracy.
- Unlike any other previous government in history, the PM has set up direct lines of communication with the top bureaucrats across ministries. In his first meeting with 70 of the nations key bureaucrats on June 4th, he issued a clear directive that each of them had to: a) remove at least 10 or more outdated rules and any laws that the previous government put in place that slowed decision making, b) use technology ubiquitously for approvals, project awards, storage of information, etc. c) stick to a time bound approval process.
- A major area of focus for the PM Modi government is to kick start the infrastructure development cycle. To this end, the momentum is visible. For example, in the month of June, road projects worth over $6 billion have been approved. Another $10 billion worth of projects have been identified for clearance over the next three months.
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The outcome of the elections has been in line with our expectations. In the final tally, the BJP won an overwhelming majority, a feat no political party has achieved in 30 years. This victory significantly diminishes the risk of regional parties stalling decision making and reforms. It also means the country has a strong, decisive and pro-business Prime Minister who has a free hand to govern.
Modi won this election showcasing his economic track record over 15 years as Chief Minister of Gujarat. It is an admirable track record. Gujarat grew on average at 8.5% in real terms over the last decade, significantly higher than the rest of the country. He achieved this by doing a few key things. Firstly, he followed his guiding principle that “government has no business being in business”. Secondly, he created in Gujarat arguably the most efficient bureaucracy in the country. Thirdly, he quickly implemented reforms in infrastructure, manufacturing and agriculture. As a result, Gujarat is the only state in the country that has uninterrupted power. It is home to all of the country’s large scale ports, it has the highest output per capita in agriculture and the state where over 25% of India’s manufacturing resides despite having only 5% of the population. Mr. Modi’s blueprint is to replicate this on the national level. While it will not be an easy task given the complexities of running a big country like India, I am confident that he will be successful in doing so. At his juncture, India has the best possible CEO (PM Modi) and CFO (RBI governor Raghuram Rajan).
I have had several interactions with senior people within the government over the last two months. The signs are very encouraging. There is a sea change within the Indian bureaucracy. For example, the coal ministry, which experienced delays in granting approvals, has been given three months to put online, all current and prospective coal block bids and allocations. All allocation decisions henceforth are to be time bound and transparent. The environmental ministry, in charge of clearance of these coal projects (which was a key bottleneck in the past administration), received a circular dated June 15th that gives them two months to put online the status of all pending environmental approvals. A time bound clearance system for each project is being put in place wherein upon receipt of a request for environmental approval, the ministry has two weeks to respond, and upon receiving the information, it must make a decision within 60 days. Additionally, approvals will now require 4 signatures rather than the traditional 16 signatures!
Many infrastructure projects have been stuck for lack of approvals in the environment ministry for several years. This should now change quickly. Such examples are visible across ministries, be it in railways, roads, shipping/ports, power, healthcare, etc. Apart from shaking the existing bureaucratic sloth, PM Modi has abolished other legacies of the previous administration. For example, he dissolved the Empowered Group of Ministers (EGOM), axed the National Advisory Council and removed financial allocation powers of the Planning Commission. These were essentially “super” ministries or ministries on top of ministries that clogged decision making.
Unlike any other previous government in history, the PM has set up direct lines of communication with the top bureaucrats across ministries. In his first meeting with 70 of the nations key bureaucrats on June 4th, he issued a clear directive that each of them had to: a) remove at least 10 or more outdated rules and any laws that the previous government put in place that slowed decision making, b) use technology ubiquitously for approvals, project awards, storage of information, etc. c) stick to a time bound approval process. Any delay in missing deadlines for approvals will have to be explained in detail with copy sent to the Prime Minister’s Office. No bureaucrat wants to be in that position too often. They are well aware of Modi’s style of functioning in Gujarat where unnecessary delay by any bureaucrat meant getting shunted out. The attitude is slowly moving towards a realization that accountability will be very important.
The biggest impediment to growth in India was stalled decision making. The actions being implemented will help accelerate GDP growth over time. The change in India is largely happening behind the scenes and not being broadcasted in the media. That is Modi’s style of functioning. He will let results speak for themselves which will be a welcome break from the previous administration.
It is an unfortunate legacy of India’s “colonial heritage” that such an excessive focus is paid to the government’s annual budget. In most countries, it hardly gets any attention. The Modi government will not use the budget as the only platform for government action. By way of example, the day after the budget saw the Indian central bank announce an interesting relaxation of lending rules to infrastructure which will have the practical effect of making it easier for banks to lend to infrastructure and channel a portion of the $300 billion dollars of annual savings into infrastructure lending. This is a “big bang” step that found no mention in the budget.
A major area of focus for the Modi government is to kick start the infrastructure development cycle. To this end, the momentum is visible. For example, in the month of June, road projects worth over $6 billion have been approved. Another $10 billion worth of projects have been identified for clearance over the next three months. The government is determined to have 30 kilometers of roads being built each day by 2016 from less than 10 kilometers today.
The government has laid out a roadmap to spend $1 trillion in infrastructure over the next 5 years, including several large projects like the $90 billion Delhi-Mumbai freight corridor, the ultra-megawatt power plants, linking of India’s rivers (a $100 billion project that could increase agriculture output by over a third) and building 100 “smart” cities. As the investment cycle picks up, we estimate infrastructure spend to add 1% to GDP growth within 12 months and more thereafter.
The delays in decision making by the previous government resulted in stalled projects ballooning from 2% of nominal GDP in 2008 to around 8% currently. With the new government looking to streamline decision making, these projects will start gaining momentum. New project announcements as a % of nominal GDP also fell from over 40% in 2008 to under 5% last year. This is partly attributed to overleveraged infrastructure developers. But the deleveraging cycle among Indian corporates is now underway. In the last two months alone, $10 billion of assets have been sold by such developers. The buyers are global PE funds and global or local strategic buyers.
The government has opened up the previously closed defense sector to foreign investors, which we believe will be a big growth opportunity. In addition, in the insurance sector, the government has allowed foreign investors to own a 49% stake from 24% previously. As a result, one should expect billions of dollars to come into the insurance sector in the near term and into the defense sector over the medium term.
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