India’s Mr Clean-Up

If someone were to ask Narendra Modi, at the end of his second term as Prime Minister in 2024, what is your lasting achievement, there could be many answers. It could be about poverty reduction, cutting down corruption and black money, taking the Indian economy to the $5 trillion level, improving ease of doing business rankings, or many such things.

If however, one were to ask the same question at the end of first term and at the start of his second, one can reasonably assert this: no one has done more to clean up the system than Modi in India’s post-Independence history. The one running theme in almost all of Modi’s major actions and schemes is cleaning up.

Some of his schemes may have flopped or misfired (demonetisation, for example), others may have met with resounding success (shifting government subsidy payments to direct cash transfers), and yet others may be a work-in-progress in the second half of 2019, but there is little doubt that the trajectory is set.

Narendra Modi can genuinely lay claim to the title of Mr Clean-Up.

Cleaning up is costing him political capital – and the economy some amount of growth. Growth is down and in trouble because cronyism will no longer help rescue firms in loan default to recover quickly; there is no great advantage in remaining small or in the unorganised sector after the advent of the goods and services tax (GST) and incentivisation for formalisation of employment; the scope for speed money in transactions with government is rapidly reducing; the digital push is forcing more and more small businesses, even vegetable sellers and kirana merchants, to accept non-cash payments or risk losing business; the real estate sector, once the Gangotri of corruption and black money, is learning to clean up its books, especially after the legislation of the Real Estate Regulation Act (RERA); and corrupt businessmen, who once demanded the right to hire and fire labour, are now finding that they themselves are being fired by being pushed to the insolvency court, the National Company Law Tribunal.

At the ground level, a simple ruse like neem-coating of urea has reduced the diversion of this highly-subsidised nitrogenous fertiliser to negligible amounts, and farmers no longer find it a problem procuring the amounts they genuinely need. One study showed that even in a year of record food production (2016-17), fertiliser offtake actually went down.

Cleaning up adds costs to doing business in the short run, especially for those who were surviving by feeding off the udders of a corrupt state. Now that those udders are drying up, individuals and businesses have to adjust to the new realities. Growth will revive once the mindset change occurs, and people see transparency and honesty as better ways to do business.

The Prime Minister’s clean-up strategy can be broken up into three broad categories: physical clean-up of our natural surroundings, financial clean-up of the banking and related corporate crony systems, and transparent policies that prevent the build-up of more opportunities for corruption and illegal wealth generation in future.

But it is worth talking about two half-failures first.

Exhibit One is demonetisation. There is little doubt that the shock delivered by Modi on 8 November 2016, when he invalidated over Rs 17 lakh crore worth of Rs 500 and Rs 1,000 notes, brought home the message that illegal cash holdings are no longer okay. But the economy paid a high cost for this gambit. With over 99 per cent of the outstanding notes coming back to banks, India’s crooks showed that the system was still far too compromised to allow for such an easy isolation of black money from white. The resultant slowdown in the economy and loss of consumer and business confidence suggests that demonetisation delivered more costs than benefits.

But it did send the right message, and set the stage for more formalisation that was to follow, with the introduction of the goods and services tax from July 2017.

The second partial failure is electoral funding, again another fountainhead of corruption and black money. In its first term, the National Democratic Alliance (NDA) government announced that political parties can be funded with electoral bonds. Under the scheme, donors, including corporations, can buy bonds and anonymously gift them to political parties of their choice. The good part of the deal is that political funding is now substantially coming from white money, but there is a lack of transparency on which businessman is funding which party. A State Bank of India reply to an RTI query indicated that the bank had sold Rs 1,057 crore worth of electoral bonds in 2018, and Rs 1,716 crore worth in January and March 2019, obviously in the run-up to the general elections of April-May 2019.

This is too much anonymous money to too few. We must rate the electoral bond system as a partial failure for two reasons: one, while it gives parties sources of clean funding, the tilt to the ruling party is worrisome, and leads to suspicion about why companies are so gung-ho about only one political party. Two, the actual black money used in elections may not have fallen at all, as funding to individual candidates may still be based on illegal cash hoards. The massive cash hauls reported from Vellore Lok Sabha constituency in April forced the Election Commission to cancel the polling and shift it to August, and Vellore was only the tip of the iceberg.

But nothing can take away from the fact that almost no prime minister before Modi even attempted so many clean-ups so consistently. It is thus worth dilating on the three kinds of clean-up mentioned above, so that we do both — acknowledge the attempts made, and the challenges ahead.

Physical Clean-Ups

The most obvious and costliest attempt at clean-up of the physical environment relates to the Swachh Bharat campaign. It started out as a general clean-up exercise involving all public places, with political leaders showing up on TV channels with brooms in hand, but the scheme’s parameters were quickly focused on building toilets and making India open defecation-free (ODF). According to the Swachh Bharat Mission portal, by the third week of July 2019, some 624 districts (out of 725) and 5.73 lakh villages had declared themselves open defecation-free, thanks to the building of 9.83 crore household toilets, not to speak of public conveniences.

It is possible that some of these claims may be overblown, but there is no doubting the scale of the achievement in five years. The World Health Organization (WHO), in a statement issued last year, complimented “India’s commitment to accelerated coverage of safe sanitation services which, assuming 100 percent coverage is achieved by October 2019, could avert up to 300,000 deaths due to diarrhoeal disease and protein-energy malnutrition (PEM) since the country launched the Swachh Bharat Mission in 2014.”

The next big deal in terms of cleaning up the physical environment relates not to an actual clean-up, but a policy decision to incentivise cleaner cooking fuels. Under the Ujjwala scheme, over 7.5 crore poor households have been given gas connections (they still have to pay for subsidised refills), and this has enabled an extension in cooking gas connections from 55 per cent of households in 2014 to over 90 per cent as in mid-2019. While it cannot be anyone’s claim that all connections are used fully, or that those given gas connections have totally stopped using kerosene stoves or wood or coal-fired ovens, there is little doubt that the extension of gas to 90 per cent of households is a huge step forward in reducing the use of polluting cooking fuels.

The third physical change is in the Ganga, the holiest and yet one of the dirtiest rivers in India. While plans to clean up India’s most sacred river have been afoot since 1985, and the United Progressive Alliance (UPA) government in 2011 launched the National Mission for Clean Ganga, the river just got worse and worse. Till 2014, barely Rs 4,000 crore had been spent, and even later, after Modi renamed the project Namami Gange, the spends had only been around Rs 5,000 crore in the first four years of Modi 1.0. The Rs 20,000 crore budget for cleaning up the river is far from being fully spent.

But the focus on stopping effluent inflows into the river, supplemented by riverfront development and surface cleaning of the Ganga, is beginning to bear some visible results. The ghats are being spruced up, and even though the river is not yet fit for bathing, the 254 projects worth Rs 24,000 crore sanctioned for cleaning it up will start to bear results a couple of years down the line. The impact has been less than expected so far because river flows are also reducing, which means even a reduced amount of polluted flows into the river may be showing up as the same old level of pollution. The solution clearly is to both augment flows and reduce inflows of effluents into the river.

The clear gain is the political commitment to clean up the river, and the build-up of public awareness on the issue.

The focus on a clean-up of the physical environment includes two other elements, one being the increasing emphasis on solar power, and the other being the proposed move to gradually eliminate internal combustion-driven automobiles, which use petrol and diesel, and replace them with electric vehicles (EVs) by 2030. In the initial phase, three-wheelers are to become fully electric by 2023, and two-wheelers below 150 cc are to go fully electric by 2025. The automobile industry is kicking up a hell of a fuss over these stiff deadlines, but the direction is clearly right. India’s urban air, now one of the biggest causes of concern, will start getting cleaner after 2025.

In solar, for the first time ever, capacity additions outpaced other forms of power-generation in 2017. The cumulative solar power capacity reached 20 GW that year, but policy waywardness and import duty increases to promote the domestic manufacture of solar panels may prevent the country from touching the stretch target of 100 GW by 2022. But this hiccup will, hopefully, be temporary. India’s energy sources will get cleaner in the years ahead, but whether this will make our air substantially cleaner or merely prevent it from getting worse depends on how well the policy framework needed for cleaning up India’s air and water works is backed by adequate funding.

Financial Clean-Ups

The Modi government’s financial clean-up act involves a handful of approaches. One is to focus inwards, at government subsidy payouts to citizens to prevent leakages. The second is to bring more and more people and businesses into the tax net by extending the goods and services tax (GST). Third, the attempt is to put fly-by-night shell companies to pasture. Fourth, the government is cleaning up bank balance-sheets by both recapitalising them and by pushing defaulter companies towards the bankruptcy courts, thus enabling recovery of some of the money lent, faster. Fifth, it is going after economic fugitives who flee the country after failing to pay up banks. And sixth, it has closed some of the tax loopholes that allowed round-tripping of funds and gave unintended tax breaks to investors bringing in money from abroad. Double-taxation agreements with Mauritius, Cyprus and Singapore have already been reworked to enable this.

Clearly, the most successful clean-up has been the extension of the direct benefits transfer (DBT) scheme to more and more subsidies. At last count, the government was running nearly 439 subsidy schemes, and direct payments to beneficiary bank accounts are believed to have saved a cumulative Rs 1.41 lakh crore since 2013. The government says that in 2018-19 alone Rs 51,664 crore was saved by transferring government payments directly into Aadhaar-authenticated bank accounts.

We can take the saving numbers with a pinch of salt, for the figure can look bigger if subsidy amounts grow larger over time (as they did when gas subsidy bills and MNGREGA payments went up), but the denial of payments to fake or dubious beneficiaries is clearly a win for Modi’s Operation Clean-up.

The launch of GST in July 2017 may not have been the smoothest of affairs, nor is the current tax structure optimal, with multiple tax rates and exemptions that effectively allow some categories of taxpayers to escape the net. But with over one crore registrations, and tax collections now crossing Rs 1 lakh crore a month with some consistency, improved monitoring of compliance will make it tougher to evade the tax net. As big GST payers get input tax credits only if their suppliers are also GST payers, over time the pressure to comply will become self-fulfilling.

A related move involves eliminating shell companies that are often used to evade tax. They are being systematically weeded out. Last year, some 2.25 lakh shell companies which had not filed tax returns for two years running were put under the scanner, preparatory to deregistration and exit.

Some of the costs incurred in cleaning up have been huge. Over the last two years, the Modi government has pumped in massive amounts of capital into public sector banks. As at the end of March 2019, the government had recapitalised them to the tune of nearly Rs 1.95-2 lakh crore, and this year’s budget offers another dollop of Rs 70,000 crore – making it nearly 2.65-2.7 lakh crore of public money given to clean up the bad debt pileup and resume lending. This is the biggest balance-sheet clean-up drive in India’s 50-year-old public sector banking history.

The write-off of bad loans does not, however, mean relief for borrowers, who are being taken to the cleaners by banks and other lenders. The Insolvency and Bankruptcy Code (IBC) has been used like a blunt instrument to force corporate defaulters to either pay up or lose their companies to new owners.

Ever since the IBC came into force in end-2016, some 1,858 cases of loan default were admitted for resolution by March 2019. Of these, some 378 companies were being liquidated, 94 had been sold to new owners, 152 were under appeal or settled, and 91 cases were withdrawn due to settlement outside the IBC process. This still leaves a hefty 1,143 cases pending before the National Company Law Tribunal (NCLT), but the delays were primarily due to court challenges and the refusal by some company managements to help the resolution professionals, which the government is planning to address through some key changes to the IBC law.

The most important gain is time for recovery. Before the IBC came into being, the average time taken to resolve bankruptcy cases was six years; after IBC this came down to 317 days. Before the IBC came into being, the Insolvency and Bankruptcy Board of India (IBBI), the body tasked with nurturing the new bankruptcy ecosystem, reckoned that banks and lenders recovered roughly 22 per cent of their dues; after IBC this recovery has gone up to 43 per cent. In 2018-19, banks recovered nearly Rs 70,000 crore from defaulting companies that ended up at the NCLT. This year, if the Essar Steel, Bhushan Power and some more resolutions find fruition, similar amounts could easily be recovered.

This must rank as one of the biggest clean-up successes of Narendra Modi, for lenders can exert pressure on borrowers only if politicians do not pressure them to help out crony businessmen.

Modi told Swarajya in an interview last year, “We had identified the problem with banks in 2014 itself. A retreat of bankers was held in Pune where topmost officials attended. I told them to go about their work with utmost professionalism and clean the sector. I assured them that the long-standing culture of phone calls from Delhi influencing their working is not the way our government works… Earlier, if someone owed Rs 500 crore and when it was time to repay that loan, a phone call from Delhi would ensure another loan of Rs 500 crore is given so that the previous loan was repaid. This cycle persisted. We stopped this. This is why the old loans had to be shown as NPAs. Now (with the Insolvency and Bankruptcy Code), many businessmen have had to lose their companies for failing to pay bank dues.”

While it is impossible to verify claims that political influence does not work with banks anymore, the numbers of businessmen who lost their companies reads like a who’s who of India Inc. The reason is that lenders now can call the shots, IBC or no IBC. Here is a partial laundry list of businessmen who have either been forced to sell their best businesses before lenders applied pressure, or when they were taken to the IBC. The Ruias have lost two of their biggest companies (Essar Oil and Essar Steel), the Ambanis one (Reliance Communications), and the Tatas one (Tata Teleservices to Airtel, as the group chose to cut its losses in telecom outside the IBC process). Other groups, from Jaypee to GMR to GVK to Lanco and Bhushan, have also been forced to sell their stakes, thanks to the lenders’ ability to operate without undue political interference.

At the more visible level, the Modi government has adopted a policy of hot pursuit not only against terrorists across the border, but businessmen fleeing the country after defaulting on loans or defrauding banks. Vijay Mallya, who owes the banks more than Rs 9,000 crore due to the failure of Kingfisher Airlines, is close to being extradited from Britain. Efforts are also on to extradite diamantaires Mehul Choksi and Nirav Modi for defrauding Punjab National Bank to the tune of over Rs 13,000 crore.

The Fugitive Economic Offenders Bill, passed in 2018, allows the government to take over the properties of absconders in India. Under this law, Vijay Mallya has already been declared an economic fugitive, and Nirav Modi and Mehul Choksi are fighting hard in Indian courts through their lawyers to avoid having their assets taken over in India.

Internal Clean-Ups

The third prong of the Modi strategy – to gradually eliminate opportunities for corruption by increasing transparency in government procurements and allotment of scarce natural resources through auctions – is now slowly becoming the norm. Coal mines and spectrum have been auctioned in recent years only through an auction process, and increasingly government purchases are being made online through a cashless, paperless and contact-less process. The last is most important, for corruption happens only when sellers have to contact the government department for payments on supplies made.

According to an Economic Times report on GeM (the Government e-Marketplace), the government’s e-procurement platform now has 2.5 lakh vendors and 37,000 buyers (ie, government departments and public sector undertakings), offering over 10 lakh products and 12,798 services. Over the last three years since 2016, transactions worth Rs 32,000 crore went through GeM, and the target for 2019-20 is Rs 1 lakh crore.

We are talking of an Amazon or Flipkart being built quietly, and no one has even noticed its potential to revolutionise e-procurement and reduce corruption and speed money payments to buyers.

Between auctions to sell scarce national resources like spectrum and coal mines, and GeM, we are talking about a complete clean-up of the essential process of government interactions with sellers.

But what does one do with the vice-like grip of the bureaucracy, which is often a key source of corruption and non-transparent functioning? Given Modi’s dependence on the bureaucracy to deliver on his social and economic goals, how can any clean-up work if the people managing the show have questionable antecedents or poor efficiency levels?

Well, here too, Modi has been moving steadily. In the last five years, the government has quietly eased out more than 300 bureaucrats – an annual rate of over 60 – using his power to prematurely retire them. After scanning the service records of more than 36,000 Group A and 82,000 Group B officers, 312 of them were retired prematurely.

Under the provisions of FR 56(j (i), Rule 48 of the Central Civil Services Pension Rules, 1972, and Rule 16(3) (Amended) of the All India Services (Death-cum-Retirement Benefits) Rules, 1958, government has the absolute right to prematurely retire those it believes are either incompetent or lack integrity.

Simultaneously, in the last financial year, the government began lateral inductions to the bureaucracy, with nine experts being given five-year contracts at the level of joint secretary. This year, some 40 more could be inducted at levels of joint secretary and below.

Modi is clearly moving slowly but surely to clean his own house even as he focuses on cleaning up the rest of the country.

It does not matter if all the claims of improvement do not fully materialise, or actual achievements turn out to be less than stated. What matters is the direction of change, not its speed.

Modi has earned the right to be called India’s real Mr Clean-Up.