Terrific Reforms PM Modi, But Beware The BABU-JAAL

For over five years, I’ve criticised the ‘state creep’ on Prime Minister Narendra Modi’s watch. This tendency hit a crescendo on July 5, 2019, when the second Modi regime’s first budget was read out in parliament. While that document was riddled with state over-reach, I will remind you only of the most egregious measure: a voluntary contribution under corporate social responsibility was converted into a criminal liability! Mercifully, it was quickly aborted, but not before it had betrayed the underlying instinct.

Inevitably, the sentiment, markets and financial indicators tanked after the July 5 Budget. A concerned Modi tried to ‘talk up’ the economy by feting “wealth creators” in his Independence Day speech, but it fell on deaf ears. The markets continued to plummet.

Sensing an apocalypse, the government fired a brahmastra (ultimate weapon). It slashed corporate tax rates by 10 percentage points for all existing entities, and an even more aggressive 20 percentage points for greenfield manufacturing companies. It was a desperate, but in my world view, a hugely-positive move, even though I felt the stimulus could have been a better-designed policy ploy to stem the panic. It half-worked. The markets abruptly reversed course, but the sentiment stayed subdued. The regime followed through with several half-measures, many of which I have applauded by clapping with one hand.

Finally, after what has seemed like an eternal wait of five years and six months, Modi-nomics seems to be trusting private enterprise and competitive markets. Yay again; clap again; ending with the ‘thumbs up’ emoji!

Oh Wait; What’s This BABU-JAAL?

But now I feel compelled to sober down. And warn the Modi regime about the dangers of an omnipresent, ever-lurking BABU-JAAL or bureaucratic cobwebs, a perfidious acronym constructed as follows:

• The first B stands for BPCL; the second B means BSNL,
• JA stands for Jet Airways,
• L stands for a common letter in IL&FS and DHFL.

BPCL Could be Forced To Go the HPCL Or GSPC Way

The BPCL privatisation is perhaps the most audacious market-friendly initiative by Prime Minister Modi. In one shot, he could get $10 billion into the coffers and eclipse more than half his $15 billion disinvestment target for the current budget. Of course, much beyond fiscal efficiency, this sale will signal India’s intent to the world: we are ready to bite the bullet and propel our economy to an entirely new trajectory. But unfortunately, as always, the establishment has inserted a few blind spots which could swallow the whole effort:

• The Numaligarh refinery will have to be ‘de-merged’ out of BPCL and sold to another public sector company, perhaps Oil India or Indian Oil. I have no quarrel with the strategic intent behind this action, i.e. to secure fuel supplies for India’s armed forces on the eastern border with China. But inevitably, this exercise will take time, since it shall involve a third-party valuation followed by the corporate process of ‘extracting’ Numaligarh from BPCL’s balance sheet. I doubt if this process could get completed before March 31, 2020. So why is that a blind spot? Read on.
• If BPCL is not sold in this financial year, the government could miss its disinvestment target of Rs 1.05 lakh crore or $15 billion by a mile, causing an embarrassing fiscal slippage. So now you get how the BABU-JAAL will be spread? The establishment will say “we can’t afford to slip on the fiscal target; and since it’s impossible to complete the sale process of BPCL by March 31, let’s do the tried and trusted trick. Let’s do what we did with HPCL and GSPC, which were forced down ONGC’s throat. Let’s shove BPCL down IOC’s gullet this time! We will account for $10 billion in our “disinvestment” proceeds, the fiscal target will be met, and BPCL will effectively stay in public hands”.

There you go again: a terrific idea, caught and choked in the BABU-JAAL.

Recall IL&FS And Jet Airways As You Take On DHFL

I was also thrilled when RBI pro-actively superseded DHFL’s board, appointing a seasoned professional to take charge. I thought the regulator had resolved to save the asset and inflict the pain on truant owners and managers. Unfortunately, I am sensing a BABU-JAAL here too. The fear is that the Insolvency and Bankruptcy Code will be invoked, forcing lenders to take a write-down and gum up the credit markets yet again. Worse, DHFL could close shop, in a bizarre action-replay of IL&FS and Jet Airways.

Finally, we turn to the cash flow relief to Vodafone and Airtel via the two-year moratorium on spectrum charges. It’s a tiny, but welcome, concession. Although the BABU-JAAL is starkly visible here too. There is no attempt to correct the definition of Adjusted Gross Revenue which, in my humble opinion (and with immense deference to the Hon’ble Supreme Court), is utterly flawed. Imagine paying spectrum charges on foreign exchange gains and losses! As the dollar moves up and down against the rupee, the spectrum liability yo-yos with it. Can it get more specious/suspicious/surreal?

So, in the end, I can only repeat what I said at the very beginning: these policy reforms are sensible but protect them against the bureaucratic cobwebs... BABU-JAAL.

Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of three books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, ‘Super Economies: America, India, China & The Future Of The World’, and ‘Super Century: What India Must Do to Rise by 2050’.