Why is Modi Not Deploying Brahmastra to Fix Oil, Rupee and IL&FS?
Producer: Anubhav Mishra
Video Editor: Mohd Ibrahim
Brahmastra, in the Mahabharata, is a “single projectile that is able to destroy the Universe.” I am going to talk about the Brahmastra as a policy tool to fight three of India’s current economic crises. But first some background and context.
The Lehman bankruptcy and American subprime meltdown had completely dislocated the global economy in 2008. The West collapsed, China braked hard, and oil spiked near $150 per barrel.
UPA to the Rescue
India’s UPA government trotted out the Brahmastra of stimulus to keep economic growth humming and healthy. Inevitably, our fiscal deficit almost touched 5 percent of GDP, inflation breached 8 percent, rupee slipped to 62/dollar, and interest rates zoomed to 8 percent; but mercifully, the Indian ship stayed afloat.
The Honeymoon Period of ‘Modinomics’
Now enter the Modi government in 2014. For the next four years, it enjoyed a charmed existence. Oil prices fell to $30 per barrel, America got grooving at 3 percent annual growth, Europe shrugged off its Armageddon, China turned around – and within such a benign environment, India’s macro-economy repaired itself. The fiscal deficit fell to 3.5 percent, inflation went under 5 percent, American dollars poured in, and the 10-year treasury sank below 7 percent. Modi was Napoleon’s proverbial “lucky general”.
Trump and His America-First Approach
But then, it was President Donald Trump’s turn in 2017/18! He cut taxes, hiked the deficit even as America’s economy turned red hot, choked off Iranian oil supplies, and triggered global trade wars.
American interest rates promised/threatened to touch 4 percent. All hell broke loose in emerging economies as billions of dollars flew back home.
From Napoleon’s ‘Lucky General’ to Trump’s ‘Fall Guy’
Today, India is again teetering at the edge of a severe macro-economic imbalance: treasuries have crossed 8 percent, the rupee has plummeted by 15 percent to over 74/dollar, oil is perilously close to three figures, and hundreds of stocks are in a severe bear grip even as market indices have crashed by over 15 percent.
Modi, once Napoleon’s “lucky general”, is in danger of becoming Trump’s “fall guy”. After four years of a blessed existence, Modi is facing his first acute economic challenge. Does he have the gumption to deploy a policy Brahmastra, to kill the crisis before it careens out of control?
Unfortunately, within just the last month, the Modi government has failed to deal with three crippling economic crises.
Crisis 1: Ever Increasing Oil Prices
Oil is the most treacherous fault line in India’s economy. It’s also the Modi government’s biggest policy failure. When he took office, India imported 77 percent of its oil requirement. Today, that’s up by nearly 6 percentage points!
Crude oil imports have galloped by a debilitating 56 percent over the previous year. Nearly a fourth of our $400 billion of foreign exchange reserves shall be consumed in importing oil this year. And yet, all that the prime minister could do is plead with the world to help India.
Now take the case of Cairn, which produces nearly a quarter of our crude oil, and pays out 85 percent of its revenues to the government. You would expect any sovereign to give a very fair deal to such a critical enterprise, right? Now think again.
Our rulers have gouged nearly $2 billion from the company in various punitive taxes, even as their arbitration case in the UK is being argued.
Is this taxation? Or extortion?
But if you think our government exploits only foreign producers remember how it denuded ONGC’s balance sheet by $6 billion forcing it to buy HPCL. And how it rolled back the policy of free fuel pricing by forcing oil companies to cut by Re 1 per litre that destroyed Rs 1 lakh crore of public sector wealth in one hour!
Crisis 2: Weakening Rupee
The Indian rupee is joined at the hip to oil prices. The Modi government has spent an eye-watering $40 billion since April in trying to stem its fall. Earlier, in 2013, the UPA government had sold $20 billion to stabilise the local currency but those were crisis-ridden days, with oil at $100 per barrel.
Today, what Modi’s government is doing is short-sighted. And ineffective. I cannot, for the life of me, fathom why Modi has not floated $40 billion of NRI Bonds yet.
Here’s yet another Brahmastra which has remained inexplicably parked in the hangar.
Crisis 3: The Domino Effect of IL&FS Default
IL&FS’s repeated defaults could trigger a devastating contagion which is painfully evident. Forced to write down IL&FS debt to zero, mutual funds have stopped lending to NBFCs, who in turn have switched off credit to housing companies.
So, one Supertech defaults, which causes Indiabulls Housing to crash by 15 percent the next day, which lowers the NAV (Net Asset Value) of several funds who face redemption pressures forcing them to sell, good paper prices fall further, credit dries up completely more companies default, more write-downs happen followed by higher redemption, more distress sales… until the credit economy grinds to a halt.
Since IL&FS’s default, the top 20 NBFCs have obliterated over Rs 3 lakh crore of investors’ money. That, in simple, graphic language, is a contagion.
The government must underwrite a superior debt/equity instrument of Rs 30,000 crore (now that’s the Brahmastra) for IL&FS, to be paid off before any other creditor or equity holder.
That would secure the taxpayer’s risk. The contagion would abruptly stop. Markets would calm down. And then the new board could oversee an orderly rescue of IL&FS, including asset sales over the next few months.
Unfortunately, this government’s half-hearted actions have converted the possible Brahmastra into a boomerang of contagion which can be lethal for a $3 trillion economy now held to ransom by a few billion dollars of liabilities.
It’s a shame, really!