Episode 4 of economic package: The good, the bad and the ugly

Day four of the ongoing Rs 20-lakh crore announcements focused on medium to long term policy action in eight sectors. These sectors are not necessarily the worst affected ones by COVID-19. Some though not all the measures could be termed structural reforms. The common thread running through all these announcements is government ceding more space to the private sector in areas dominated by the State. It harks back to Prime Minister Narendra Modi’s promise of minimum government, maximum governance when he first came to New Delhi in 2014.

Since the government juggles with multiple demands for investment, if the private sector shoulders a part of this responsibility, it will free up capital the government can employ elsewhere. As an aside, higher domestic content will also reduce the country’s import bill. And, if all this investment creates more jobs then that’s another problem solved.

While all of this seems neat and well thought out it does not do anything for the current crisis facing Indian industry. Also, private sector investments have been slowing down even before COVID-19 due to a weak economy and under-utilisation of existing capacity. That’s a hindrance for the success of this plan. In sectors such as defence where the government is the main buyer, a committed buying programme will be a prerequisite for making investments. Moreover, not all of them are new and have been stuck in limbo for some time.

Perhaps, the best announcement today is raising the foreign direct investment (FDI) limit in the defence manufacturing under automatic route from 49 percent to 74 percent. We clearly need to make more defence goods in India. According to the Stockholm International Peace Research Institute, India was the second largest arms importer in the world between 2015 and 2019. Raising the FDI limit to give clear ownership could see big multinational defence goods companies set up shop in India. This does qualify as a structural reform. But as with most of the announcements in this package, we need to see the fine print.

Converting Ordnance Factory Boards into corporate entities is welcome but also an existing proposal. The idea of making them into companies and listing them is to push them to pay more attention to the financial viability of their operations. But getting employees on board for such measures has not proved easy in the past and that’s a key aspect to the proposal succeeding.

Freeing up the coal and minerals sector is also a welcome measure. These sectors have been a focus area for the government, as they tick several boxes of utilisation of India’s natural resources, creating employment and providing the basic fuel and raw material inputs for many industries. However, a lot of these measures are just a reiteration of those made earlier. Even amendments to law have been carried out as recently as January. The focus of industry will now turn to implementation.

While reforms in this industry have been an ongoing process, there are a few problems. Demand appears to be one main issue. For instance, demand for thermal coal depends on thermal power generation, which is not in the pink of health. Similarly, demand for minerals also depends on investments being made in downstream sectors such as aluminium or zinc or steel. In a post-COVID world, companies have been talking about cutting back on capex. As with the rest of the package announced so far, measures to boost demand are missing.

The risk is that companies bid for and secure mining contracts but don’t do much work on the actual mining after that. Then, state governments need to be on board for taking forward these reforms. What could help is if the government boosts investment in downstream projects, or supports the downstream sectors in some form. Also, the investments in mining-related infrastructure of Rs 50000 crore is a good measure but only if the execution is swift. Finally, exports of these minerals are a controversial subject as the preference is for value addition within the country. However, if there isn’t enough absorptive capacity for these minerals, then a more liberalised export policy too may be needed.

The government also just seems to be winging it as far as the aviation sector is concerned. This sector has been one of the most vociferous in demanding cash support to pay salaries, tax waivers and cheaper credit lines. What is has got instead, at least for now, is a set of long term measures. Sure, opening up the airspace is good in principle (the details are lacking). There is no clarity also because last year the Airport Authority of India signed a pact with Boeing for developing an air traffic management roadmap which will improve airspace utilisation. Similarly, airport auctions have been ongoing for quite some time. The dream of making India a hub for maintenance, repair and overhaul (MRO) of aircraft was presented in the Union Budget as well.

Similarly, a tariff policy for the power sector has been in the works for some time, so too is the privatisation of discoms. There are private discoms in some states already. The key thing here is that the Centre can push through such privatisation only in Union Territories (which is all that it has done).

The government has been advocating setting up of or upgradation of healthcare facilities in districts through the PPP mode. On this front, it plans to increase its viability gap funding from 20 percent to 30 percent. COVID-19 has exposed the inadequacy of investments in public health. While this measure may go a small way in improving it, what’s needed is a concerted investment in healthcare infrastructure by the states and Centre, a role that the private sector is ill-equipped to perform.

Date: May 19