How to read the central government’s stake in Vodafone and Tata Teleservices this month by the Bharatiya Janata Party (BJP)? Similarly, I would say read the various Production Linked Incentive (PLI) programs introduced over the past couple of years.
The government started to show a strong capacity to engage with the private sector from the start. It is a remarkable turnaround from one of the biggest accusations that any ruling party or coalition in India has faced in successive decades.
How to engage with the private sector?
Even Prime Minister Narendra Modi had to take a step back in 2015 when faced with the colorful epithet of “suit-boot ki sarkar”. It was essentially the same class of fear that has hampered an array of economic policies for years, from divestment to public-private partnerships. All parties in power were afraid of being accused of crony capitalism.
As a result, every ruling party in the States or Center has been wary of simple commitments over the decades. In his first Independence Day speech, PV Narasimha Rao had to sell his first set of reforms as bringing back the true socialist state. But he was not the only one to adopt this subterfuge. There would be a promising start in each phase of the policy where the private sector was to be involved, but soon the wheels of engagement would stop.
The stop-and-go process gave enough space for politicians to practice a snap version of the reforms. The reason any vigilance or audit report would get instant news with the public was this environment. Ministries and departments were the most reluctant to make contract details public when dealing with the private sector. In the climate of fear, contacts often inserted one after another punitive clauses that caused investors to back down. For example, look at the contracts the railways have offered to private parties to manage station development for years. There is no possibility of termination of contracts that have gone wrong by contractors. Only now are these being erased.
Since all contact with the private sector was the proverbial kiss of death for a political career, a timid minister would choose to overlook the salient details written by his officers, while those seeking personal advantage decided to withhold information. vital with them.
The unease had spread downwards. If there are media and several control bodies at the Center to bring these problems to light, although with delay, the States have drafted contracts where no serious investor would take the plunge.
In Andhra Pradesh, Chief Minister YS Jagan Mohan Reddy terminated PPA (power purchase agreement) contracts with renewable energy developers, convinced that the public would be delighted if he could wave the flag of the crony capitalism against the contracts signed by the previous state government.
Going back further, India missed out on deploying SEZs (Special Economic Zones), a fantastic manufacturing opportunity, again fearing that epithet. Delhi’s former chief minister, Sheila Dikshit, has paid a heavy political price for being seemingly comfortable with private sector companies. It has been stalled, along with other progressive politicians, because the ruling parties have not announced ab initio the extent of the financial commitment the state will have to make in the agreements. They spat out the data under public pressure, and it was too late.
This is why the current set of policies is remarkable. LIPs certainly have problems. Whenever the state plays a game of selecting among investors to subsidize, there will be an element of subjectivity. There is also the risk that companies weaned from the PLI subsidy regime will refuse to improve their competitiveness to meet challenges abroad. Yet it is also true that no significant economic power in Asia has advanced its manufacturing sector with a simple free trade environment. Whether it was the textile companies of Bangladesh, the automotive auxiliary sector in Malaysia, or the South Korean chaebols, initial state support was essential.
The advantage of PLI schemes is that they clarify the government’s financial commitment to each company in the 13 sectors covered. Therefore, it is a much better political policy than the tax exemptions granted to various sectors, which were available for decades but which never specified who were the beneficiaries and the extent of the levy on the Treasury public. In PLI, the government commits in advance on the amount of two trillion rupees that will be offered to each company. It has never been so black and white before.
The same goes for the stake that the Center acquired in VodafoneIdea and Tata Teleservices. Both companies have decided to convert their interest liability payable to the government into equity. In turn, the government can sell these shares at the appropriate time and receive the amounts due. As these are publicly traded companies, the public can at any time assess the loss or profit the government is making on its holdings.
This is a much better solution than to find that throughout the 1980s, successive budgets softened the textile sector by changing the tax treatment of raw materials and finished products. The favorite company was known to everyone and was known to no one. In comparison, the new practice of publicizing the benefits of the tax pool allows for informed public debate.
(Subhomoy Bhattacharjee is a journalist and writes on economic issues)
Disclaimer: The opinions expressed above are those of the author. They do not necessarily reflect the views of DH.