The Indian Goldilocks Situation: The tightrope walk between too little and too much governance

There have been many economic and political achievements made by India in recent years.  The rate of GDP growth has consistently reached above the 7% mark, India has taken great strides of eco-political significance in the global community: for instance, through the establishment of the Asian Development Bank, and several social initiatives have taken seed in the nation such as the Beti Bachao, Beti Padhao Yojana. Nonetheless, the government has still failed to achieve an equilibrium between strict enforcement of the law and free market liberties in several situations.

Too much: There are times when the government over-reaches

One of the first examples of too much control is the Air India sale. A Public Sector Undertaking that has become a quintessence for inefficient public sector organizations and generally poor business, we see Air India having bled more than Rs. 30,000 crores in the last nine years. Rs. 30,000 crores of taxpayer’s money being put on the line for corporate experimentation. Yet, after nine entire years of such colossal failure, the government finally stepped up and decided to privatize the mess that Air India has become.

However, the government refused to put the entire pie up for bids, as only 76% of the firm was for sale. This has been attributed as a large push factor for corporates in making the investment, as 24% of the firm would still be the government’s, thereby bringing the same factors of inefficiency, corruption and slow bureaucracy that intoxicates Air India today. As the administration has admitted that such sales could be beneficial in countering the massive fiscal deficit of 3.3% in the GDP, it seems like nothing less than pretentious strictness is stopping the government from seeking mutual benefits, of liberating Air India from their public hand, countering their own fiscal deficits and allowing the private sector to make something out of nothing.

Another very similar example is the Telcom Spectrum bids that were being held cyclically. Out of Rs.5.63 trillion worth of spectrum put on sale, only Rs. 65,789 crores and 41% of all the spectrums sold. This was attributed to very high prices for the spectrums by the government – another example of attempting to be stricter and more stern – instead, of helping the immensely competitive telecom market in the midst of Reliance Jio’s relentless run. The inability of smaller firms to capitalize from such government-organized auctions to increase corporate capacities has been proven by the increasingly oligopoly-like nature of India’s telecom today with the top three telecoms today having more than 70% market share, as the market continues to get more and more concentrated among a smaller number of firms.

Thus, on one side, while Air India’s failure proves how being too strict has led to the downfall of what was one of the nation’s highlights in aviation advancements, on the other the telecom industry suffers from the increasingly concentrated nature of a handful of large competitors, that is detrimental to both government and nation.

Too Little: Other times when the government just vexes and wrings its hands

On the other side of the spectrum, lies the type of government intervention that completely fails to be stern enough to failing and faltering markets and firms.

The current situation in terms of toxic debt in Public Sector Banks is a great reflection of the aforementioned, where NPAs rose fourfold between 2010 and 2014, and another fivefold between 2014 and 2018. The sheer lack of action as NPAs rose 20 times in just eight years to more than Rs. 10 lakh crores today, is astounding and proves the lack of mettle when it comes to the nation’s will to stop such crises. Despite this augmentation of the crisis, firms’ exposure to debt in toxic industries continues to increase today.

Instead of clamping down and liquidating the poorly performing PSUs through Asset Reconstruction Companies, the government spends time artificially propping them up through cash injections and artificial mergers – where IDBI Bank’s failure has been treated by selling a small stake off to ICICI Bank, instead of understanding the critical flaws, generating policy centered around the same and implementing it. The lack of proper disincentives to malpractice and poor business has proven its costs through this crisis that continues to act as a pain in the side for the nation.

Similarly, if we witness the current anchoring of the rupee, the prioritization of economic growth over currency stability has been evident with the immensely delayed policy response to the same. In Modi’s entire administration, this is only the first time we’ve seen a rate hiked deployed, with an aggressively expansionary monetary policy, moving from an interest rate of 8% in 2014 down to 6% by 2017. This is despite the variety of international events that pose threats to currency stability and potential triggers to global capital flight to developed economies’ currencies such as the North Korea-USA meet, Trump’s election, Brexit transition talks etc. The aggressive expansion, lack of premeditation and lack of a ‘B-Plan’ has led to the currency dipping sharply down to almost Rs.70 to a US Dollar.

The volatility in currency and the accumulation of toxic debt is the other side to this story of too little, too late that has almost become a bipolar, yet evident motif in Indian government intervention.

In Conclusion, here’s what we’d prefer

This is not to critique all of the administration’s actions, where the Demonetization and GST proved to be gutsy, necessary evils that the government had successfully undertaken, absorbing the short-term losses of the same to only bolster the nation’s long term stability and growth. The efficiency in the implementation of the world’s largest biometric database – Aadhar – is yet another example of pure efficiency and success in policy conceptualization and implementation. However, in many other ambits of their intervention, there is a dire need to reassess the government’s stance to prevent avoidable drawbacks and ensure long-term sustainability of the nation’s growth and development.

Rishit Jain is a writing analyst at Qrius 

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