Rahul Jacob: Why Narendra Modi alone cannot solve India's economic woes

The job of a central banker, the old line goes, is to pull away the champagne bucket just as the party is getting interesting. Investment bank Credit Suisse apparently feels it is the role of investment analysts to sometimes play spoilsport as well - just as Indian businessmen and foreign institutional investors alike appeared to have reached the cheery consensus that a Bharatiya Janata Party (BJP)-led government is the answer to India's economic problems. Many among our businessmen believe we are at the dawn of GDP growth of eight per cent, 10 per cent, pick your favourite number… But, Credit Suisse's Neelkanth Mishra and Ravi Shankar declare that the election will change nothing. "Only a fourth of projects are stuck with the central government, and two-thirds of these are in power and steel, both wracked with massive overcapacity; thermal power utilisation is at two-decade low. Only state governments can revive power demand. Even elsewhere, solutions will take years," their report released Wednesday says.

Indecisiveness in New Delhi turns out to be little more than gloomy mood music. The sad truth is that the solution to India's biggest problems lies with its mostly apathetic state and district governments. From the absenteeism of government school teachers who are never disciplined to the inability of state electricity boards who are unable to push through tariff increases to the poor state of health care and sanitation, this country needs a hundred Thatchers in state capitals across the country. If he wins, even Narendra Modi, with his reputation for speedier administrative action, is unlikely to be able to make much of a difference to the lethargy of the civil service at the state level. In New Delhi, he may succeed in lighting a fire under the bureaucracy's cushy chairs, which would be no bad thing, but it is not nearly enough to change the economic realities we now face, which include a huge overhang of corporate debt.

It speaks volumes for how desperate the country is for a messiah that so many well-educated, wealthy people believe otherwise. This suspension of disbelief works if you choose not to look at the numbers, ranging from our fiscal deficit to the levels of drop-outs in our primary schools to thousands of crores in the banking system of non-performing loans. By contrast, Credit Suisse's premise is based on hard numbers. The problem in power generation is not clearances, but a kind of forced overcapacity that will seem bizarre after the elections when the air-conditioners and fans go silent at regular intervals. Plant load factors for thermal plants are below 60 per cent.

"The critical issue here is weak demand from the state electricity boards [SEBs]... the unwillingness of banks in extending further working capital loans to SEBs is the root cause of the dramatic slowdown," says Credit Suisse. SEBs are shying away from signing agreements to buy power because they lack confidence that they will be able to push through higher fuel prices to consumers since the SEBs' masters are populist politicians. To make matters worse, the slowdown in the economy makes it harder to increase cross-subsidies because electricity usage by factories and commercial users, where tariffs are about 40 to 60 per cent higher, is growing too slowly. And, electricity, like education and health care for that matter, remains a subject where state governments' fiat counts for much more than inspiring leadership from New Delhi.

Coal production has also slowed sharply for both Coal India and private miners alike. Given the headlines over Coalgate, auctions are the only way to go. The government has been promising auctions for three years, but as Mishra and Shankar observe, "the ministry may be apprehensive of the winning private bidder in the auction managing to increase reserves estimates in a short time." Reserves will have to thoroughly updated to avoid banner headlines of perceived corruption. Nor is the pressure to meet environmental demands of local communities likely to abate. This has made state governments think twice about clearing coal mining projects. We now have an overlay of caution on an eternal bedrock of bureaucratic bumbling; 150 Coal India projects are awaiting forestry clearances at the state level, many for a number of years.

An earlier epidemic of over-optimism in the years leading up to 2008 led to a huge run-up in corporate debt. Corporate investment as a percentage of GDP has slumped from 17.3 per cent then to 10.6 per cent, according to Sajjid Chinoy of J P Morgan, who estimates that almost a quarter of BSE 500 companies had negative operational cash flow in fiscal 2013. Again, it is hard to see how different political leadership could turn that situation around quickly. Chinoy is predicting growth of 6.5 per cent only when the deleveraging has started to happen in earnest - the year ending March 2016. And to all of those yearning for strong leadership and political stability, Chinoy points out that over the past 20 years, periods of political stability have been periods with high fiscal deficits and lower growth. Perhaps if Mr Modi wins, the BJP will be different in this regard, but Arun Shourie on Thursday ruled out privatisation because Mr Modi believes the public sector can be turned around. This sounds not very different from the point of view of the Congress. It may be the job of politicians to say they can fix everything, but it is the duty of citizens to be more questioning of such claims. Intoxicating as the prospect of a new government may be, the alternative is waking up with a hangover.