EVERY government could be said to go through three phases. The first is the ‘reset’ phase, when people get a chance to assess what realistically to expect from the government they have elected, and thereby reset their sights. The second is what might be called a ‘cruise control’ phase of everyday politics, followed by the third phase when the government’s focus switches to the business of trying to win re-election.

From this perspective, the Modi government is at the end of its ‘reset’ phase – those who had great hopes of it and those who had great fears about it have both had a chance to adjust to the reality of what the government has shown itself to be, and what to expect from it in the next phase. You don’t have to be partisan to note that there is disappointment on the economic front, even as those who expected the worst will have noted, with some relief, the pullback from the disturbing agenda that seemed to have been set by Hindutva-wadis a few short months ago.

On the economic front it is now clear that the postulated growth rate for 2015-16, of 8.1-8.5 per cent, is not going to materialize. Instead, what seems to be on the cards is a repeat of the 7.3 per cent achieved a year earlier. That would be nothing much to write home about, since the growth rate two years ago, under the outgoing ‘paralyzed’ government, was 6.9 per cent. Given that the recovery is slower than what many people had come to expect, one can discount for the foreseeable future any prospect of scaling up to 10 per cent, the magic of double-digit growth that has been held out by the finance minister and others at various times during the year gone by.

Even such GDP growth numbers as have been reported remain a mystery, since the supporting numbers don’t reflect the 7.4 per cent growth ascribed to the July-September quarter. Both exports and imports have shrunk, bank credit growth is still a single-digit figure, year-to-date industrial production is up only marginally, agricultural growth has been affected by a second successive below-par monsoon, the business outlook is barely positive (if you go by a widely used survey index), the real estate market is moribund, and growth in electricity consumption as also freight movement is nothing to write home about.

A possible explanation for the mismatch between GDP and other numbers is that wholesale price deflation, in oil and other commodities, has made nominal GDP growth (barely six per cent) slower than real growth. This is virtually unprecedented, and creates a perception issue as well as a management challenge. Nominal interest rates are now higher than nominal growth, creating the conditions for what could become a debt trap – especially for all the companies and groups laden with debt. Groups that seek to reduce the size of their debt mountain by selling good assets might be left with underperforming companies, even as the buyers of assets are almost always foreign investors. As banks start taking control of those companies that can’t repay their loans, the chickens are coming home to roost. The full impact of the borrowing binge of the past is still to be felt. What is more, there is little that the government can do.

The resulting lack of optimism is palpable on the stock market, with the Sensex ruling lower in December than it did a year earlier, and only about four per cent higher than when Narendra Modi led his party to victory in 2014. The market reflects corporate reality: in the July-September quarter, the results of nearly 4,000 companies showed combined growth in sales of a poor 3.16 per cent, compared to a year earlier, while profits actually fell by 2.10 per cent.

 

The realization has slowly dawned that the serious problems which the government inherited – banks laden with bad debt, the leading business houses similarly loaded with debt that they find hard to digest or eject, a Pandora’s box of projects that cannot progress because of problematic contracts, or be scrapped because of the money already invested, or hamstrung by a lack of raw materials – are hard to deal with, and impossible to resolve in a short period of time. There was initially a lot of brave talk of quickly sorting out the problems, but that was inexperience showing, combined with the inevitable hubris of ministers entering office for the first time and believing in their own sales talk of a new day having dawned. The positive side to the story is that the uptick will eventually come; indeed, it may come just in time for the 2019 election, creating a convenient synchronization of the political and economic cycles.

 

Where the government has scored is on the economic stability front. Inflation is within the band preferred by the Reserve Bank, and fiscal correction seems to be on track despite the burden of implementing the Pay Commission’s recommendations. The external account causes no worry because the current account deficit is relatively small and the capital account shows more than compensating inflows. The rupee has fallen five per cent against the dollar, but the dollar has been gaining on virtually all currencies.

Much of the stability that is on display has been helped by the sharp drop in oil prices, which has helped cut the government subsidy bill, reduced the import bill, and brought down energy costs and prices. While this is a gift from oil producers, what goes to the government’s credit is that it has used the opportunity to deregulate diesel prices and also mop up some money in the form of additional taxes on energy; this has been an important contributor to the improved fiscal situation. When countries around the world (especially commodity exporters) are challenged by macro-economic instability, or by the prospect of it because of impending monetary changes in the US, India certainly looks stable.

 

Having delivered stability but fallen short on growth, has the government removed the infrastructural obstacles in the way of future growth? There has been plenty of action in addressing the issues faced by industries as varied as mining, telecom, roads, banking and electricity. The problem is that the government seems to prefer an ad hoc and even project-wise approach, not always rooted in broad policy or principle. To simply say that government owned banks will not lend to power distribution agencies to cover their losses because that is the government’s wish is to ignore more systemic approaches that would guarantee the required action.

As for potentially transformative projects, the story is again of qualified success, whether it is cleaning the Ganga or the country, activating the 190 million Jan Dhan accounts or achieving the first year’s targets for the clean energy programme. The key mega-projects – the two freight corridors and the Delhi-Mumbai industrial corridor – will not be done in the life of this government, which therefore puts some question marks on the targets for the Make in India programme – which is unfortunately saddled with thoroughly unrealistic goals like making manufacturing climb from 17 per cent of GDP to 25 per cent by 2022. So while the government has rolled out its signature programmes, the slip between promise and delivery continues to show in various ways.

Meanwhile, the party and the prime minister have responded to growing criticism about overt and indeed offensive majoritarianism by adopting a less aggressive and more accommodating posture, first in speeches abroad and finally at home in the parliamentary debates that kicked off the winter session. Our globe-trotting prime minister would have very quickly realized that being silent in the face of divisive rhetoric at home would only undermine his position in the most important councils abroad, attract unwanted personal criticism (remember President Obama’s parting speech at a ‘town hall’ meeting in Delhi), and deflect from his main mission as the leader of a country that seeks a larger global role. Once statements on inclusivism and diversity had been made abroad repeatedly, domestic statements had to follow that reflected, belatedly, the electoral promise of sabka saath, sabka vikas. Whether reflecting true conviction or not, the stated position is now the constitutionally correct one, and the only politically sustainable one as well.

 

Two points follow from this. First, even as Modi’s personal popularity and credibility remain very high among an overwhelming majority, a measure of realism has replaced the exaggerated hopes of radical change that were placed on him and his government. The demand for abolishing Article 370 of the Constitution has yielded precedence to forming a coalition government in Jammu & Kashmir, and the Ram mandir is not something that the BJP wants to mess with just now. Nor is anything being said about the Common Civil Code, however desirable it may be. For the army of faithful Hindutva-wadis who may have thought that this was their moment, it has turned out to be not the case; their antics and loose talk (often revealing carefully masked positions) have only embarrassed the government and provided fodder for a somewhat rejuvenated opposition. That Modi did not speak out strongly, clearly and quickly enough, as behoved a prime minister, is of course true – and might reflect the limitations of his political position. Equally though, the government has clearly (if belatedly) distanced itself from those who are called fringe elements, even if some of them happen to occupy ministerial berths.

 

On the economic front, those who thought that the advent of the Modi government would bring about a quick and dramatic change from the inactivity and scams of the Manmohan Singh government have had their hopes only partially realized. There have been no scams – or, at least, none have been unearthed. And there has been a lot of activity, and many pronouncements – from the prime minister, of course, but also from some of his eager-beaver ministers, men like Piyush Goel and Nitin Gadkari who are prone to making exaggerated claims about their actions. For those hoping for miracles, or something equivalent, the realization has dawned that one man cannot change everything, indeed that he is not looking to make structural changes, even as his team remains somewhat underpowered. The government is also seen to have made both substantive and tactical mistakes in its first 18 months.

The second point is that Narendra Modi and the BJP have evidently decided that the initial posture of in-your-face triumphalism has to be given up, along with the revisionist posture that 60 years of misrule and non-development would now change – as though a new set of leaders does not stand on the shoulders of those who were there earlier. Instead, the new rulers seem to have decided that they would have to stoop in order to conquer. Crucially, the Bihar assembly election results have brought a measure of realism to calculations about the shifting party-wise numbers in the Rajya Sabha. It is now plausible that the ruling alliance will not get a majority in the upper house during the current term of the Lok Sabha – and certainly not the two-thirds majority required for constitutional amendments to be pushed through. The assertive talk of convening joint sessions of Parliament and the undemocratic step of repeatedly issuing ordinances to amend the land acquisition law (thereby bypassing Parliament) have given way, consequently, to the slow and unwilling realization that the government has to win the opposition’s cooperation.

 

A year ago Manmohan Singh had advised Narendra Modi that the goods and services tax (GST) was in the national interest; it therefore had his personal support, and that the government was likely to get Congress cooperation if he reached out to Sonia Gandhi. Modi chose to spurn such advice, till now – when he has finally done what he could have done much earlier. It is unfortunate, even tragic, that the possibility of a breakthrough on vital legislation has been scuppered by extraneous issues on which the opposition has got together. The result is that, after a brief period of hope, there is no prospect now (though not yet any certainty) of Parliament passing the constitutional amendment required for the introduction of the GST.

In other words, while the government has got rid of its initial hubris, it continues to find it difficult to get Parliament tofunction. The hold-outs led by Rahul Gandhi seek to extract more blood before declaring a truce, so the government cannot hope for success on its legislative agenda. This is most unfortunate – the business for which a government was elected has to go on.The BJP is learning some basics of how to behave like a party of government; equally, the Congress has to reconcile to the role of ‘His Majesty’s loyal opposition’.

Meanwhile, like other ideology based and/or cadre based parties, the BJP places less importance on building and sustaining institutions than on providing jobs for the party faithful, to the extent of appointing poorly qualified and even unqualified people to key positions. The quality of appointments that have been made to a number of educational, academic, artistic and other bodies speaks poorly of a ruling party that has criticized previous governments for similar action. Many posts were or are still vacant for long stretches (including, for some time, that of the Chief Information Commissioner), and at least one management institute has all its board positions vacant. It does not help that some of the government’s appointees have gone on to promote obscurantism by confusing science with mythology. On a parallel track, there is a clear attempt to squeeze the funding of civil society organizations which are an independent and often critical voice in the system. It is also an open secret that critical media organizations and individual journalists/commentators are leaned on, with pressure often coming from the very top. Whatever the motivations or compulsions, no government does credit to itself with such actions.

 

An interesting question that has not received sufficient, if any, attention is whether the age of big crony capitalism is fading. This might seem a naïve and perhaps even a stupid question to ask when nothing has been done to clean up political funding, which after all is the source of the corrupting business-politics nexus. Elections are expensive, and parties need money. They have few legitimate sources for raising the funds that they spend; the dark matter that brings about balance in this universe is corporate funding. Logically, cronyism should continue to flourish.

The problem with this line of argument is that it is a simplistic view of the problem. Cronyism of the kind that is said to have flourished in the years before Narendra Modi’s advent is usually seen as having involved large deals with, or favours for, big business. To an important degree, that flowed from the fact of a politically weak prime minister leading a coalition; he had little control over his errant cabinet colleagues, some of whom chose to do exactly as they wished. Today’s situation is entirely different: one party has a Lok Sabha majority, and it is led by a strong prime minister of whom his ministerial colleagues are wary if not scared. Cronyism of the old kind cannot run rampant, even if some deals do get struck.

 

But the truth is that the biggest source of political funding is probably government contracts involving individually modest sums, and middle-level businessmen whose names would not ring a bell. Such mezzanine financing (to borrow and adapt a term from the financial world) has the advantage in the political world of being below the radar screen of the metropolitan media, unless someone specifically rakes up an issue – like the massive irrigation scam in Maharashtra, or the nexus between urban builders and local politicians.

Thus the Shiv Sena, it could be argued, depends for its funds more on the contracts given out by the Mumbai municipal authorities (the budget is more than Rs 30,000 crore annually) or on the local monopolies that flourish, such as in the sand business, than on funding by large corporate houses. In Madhya Pradesh, the political establishment seems to have been feeding principally off the corrupting of an exam system. In West Bengal, the source of much political funding in recent years seems to have been yet another of the financial Ponzi schemes that seem to find hospitable terrain in that state. The lucrative mining scams in Karnataka would have gone unnoticed if the scamsters had not sought to also wield direct political power. In doing so, they created political antibodies. The point is that while the large business houses may be called upon to contribute at election time, it is by no means clear that they are the principal wellspring for parties’ and candidates’ undeclared funds.

It is worth noting that India’s richest politicians are not those who command the airwaves from and in New Delhi, but powerful state-level chieftains. If a thousand crore rupees in assets could be seized from relatively minor figures like Marans and Jagan Reddy, it is easy to conjecture on the scale of wealth of some other, more established regional satraps in Punjab and Maharashtra, for example. In Haryana, the influence peddling over getting ‘change of land use’ permits is an infinitely more lucrative racket than anything involving large business houses.

 

If the Lok Sabha elections involve total spending by all parties of about Rs 16,000 crore (an average of Rs 10 crore per constituency by each of three serious candidates), that is barely a tenth of one per cent of GDP. Add the cost of state elections at the same level of spending, and the political system needs electoral funding of one-fifth of one per cent of GDP every five years. But India’s governments spend 100 times that sum, not every five years but every year. A lot of that spending is on salaries and goes as interest on borrowings, but skimming a bit off the top of what remains should be easy as pie, especially when it is known that subsidy programmes and various schemes in the name of the poor routinely involve large-scale siphoning off of cash. In other words, it is conceptually possible for Indian politics to be financed without big-ticket corruption involving large businessmen.

Party treasurers at headquarters may or may not have to fret about being able to extract large contributions on the strength of a phone call (many pay up to not be in the bad books of the party in power, not necessarily to win any favours), but even treasurers depend mainly on regular contributions to the party kitty by their chief ministers. That is why a party has fallen on bad days if it loses control of the important states. The real money in Indian politics is in the states, not at the Centre; and much of it does not involve the large business houses.

 

Cronyism has also taken a back seat because of the backlash to what went before, perhaps because greater caution is being exercised. If Reliance Industries had got the gas price it asked for, with a multi-year lock-in just when global gas prices tanked, it would have looked today like a massive scandal to benefit one business house. Arguably, the Congress-led UPA would have given the company what it wanted – it had, after all, prepared the ground through some obliging committee reports. The Modi government dealt with the issue differently – and thereby saved itself a pile of downstream embarrassment. Similarly, if Vijay Mallya had continued to get the kind of accommodation from government banks that he did in the past, it would certainly have sullied the image of the new government. Instead, the banks (some of them driven into desperate financial straits by dodgy lending in the past) are seizing Mallya’s assets with the same forthrightness that they have started converting loans into equity in other companies, and then taking control of their affairs by ousting the promoter family.

A third development is the acceptance of auctioning as the chosen method for handing out scarce resources – such as mineral deposits and spectrum. As experience has shown, this may not always lead to optimal results. For instance, the coal auctions for power stations, much touted for the revenue they would generate for the government, will not deliver the kind of results pronounced from rooftops. With auctions, there is also the ever-present risk of the winner’s curse – i.e., of people bidding excessive sums that prove unsustainable. This has led in the past to aberrations like unwarranted charges levied on passengers at Delhi airport, and of high charges on airlines using the terminal (the private partner was chosen on the basis of a bid to share a very high 46 per cent of all revenue with the government).

But even after acknowledging these drawbacks, this much can be said: the big-ticket deal-making of the past is now much more difficult to pull off. Other straws in the wind, suggesting a waning of big business’s ability to twist the system to their will, include the Reserve Bank’s refusal to give new commercial bank licences to the large business houses that sought them, and the massive penalties imposed on some well known companies by the Competition Commission for abuse of market position. The big houses no longer have it all their way, and cannot quite so easily buy protection when in trouble.

 

Coterminous with this is the interesting pattern that has emerged on the stock market. The shares of the companies and groups that have featured in sundry controversies have done rather poorly, while those who have a reputation for playing with a straight bat have done much better over time. There is no need to take names, which might get one into trouble! A quick check will show any reader the existence of such a trend. What is emerging as a real factor, therefore, is shareholder credibility, including credibility with foreign institutional investors who tend to be more finicky than domestic institutional investors. If the lack of credibility affects your share price, it affects your ability to raise fresh capital – and automatically weakens anyone with a dodgy reputation. It is the way the market acts to clean up the system. As investment rules become more open (such as on foreign investment), and as it becomes easier in general to do business in the country, the fostering of more competitive markets and of counter-balancing forces should logically move the system further away from crony capitalism of the big ticket kind.

 

Separately, the subaltern corruption that continues to flourish could be challenged because of the technology revolution and the ways in which the government is putting it to use, on the basis of the Aadhaar number and the Jan Dhan bank accounts. More than Rs 10,000 crore are being saved annually by the switchover to cash payments of the cooking gas subsidy; some union territories are now experimenting with doing the same with the public distribution system for foodgrains. These and other changes in the offing cut at the root of waste and corruption – which the smaller branches of the political system use to sustain themselves. If the change actually does come about, then government contracts at local and state level will remain the principal form through which political players fund themselves and amass wealth. Perhaps new ways of milking the system will also emerge, because the universe continues to need dark matter.