India’s fourteenth Prime Minister (PM) has received fulsome praise from intellectuals, seasoned corporate captains, star fund managers as well as the most sceptical of analysts.

One measure of the optimism generated by the new PM is the stockmarket — the Sensex is up 11 per cent since the day Modi was sworn in and has risen by 27 per cent since January 1. The RBI’s quarterly industrial outlook survey now shows that business confidence is at its second highest level in three years.

Besides indicators of business sentiment, some very real variables too have taken a turn for the better. For instance, the under-recovery on diesel has come down from ₹7/litre in May 2014 to ₹0.5/litre in September 2014. Coal India’s production has improved since the general election — and this could continue over the next three years. Given the big push being given by the Central Government to expediently create coal evacuation infrastructure this rate is likely to rise.

Management style These genuine improvements in the coal and petroleum sector have been driven by certain critical organisational changes initiated by Narendra Modi.

Simply put, Modi has functionalised two basic tenets of management theory, namely ‘unity of command’ and ‘centralisation’. Be it decisions regarding the Union Budget, be it decisions regarding the appointment of secretaries to ministers, or be it holiday dates for ministers, the Prime Minister’s Office (PMO) has the last word on all subjects.

Centralisation also means that even bribe-taking has genuinely reduced and most rents appear to be in the form of contributions by corporates to the party’s coffers (as against being collected by all and sundry involved in political food chain). All of this makes it easier for corporates to get single-window clearance.

Less tea, more work These organisational changes have meant that fewer cups of tea are being consumed in the corridors of power in New Delhi, caddies at golf clubs in central Delhi are unemployed on weekdays and Delhi’s clearance-granting machinery is humming again.

More importantly, these changes make us extremely confident of a genuine improvement in the economic growth rate. (Ambit expects 5.6 per cent GDP growth in FY15 against 4.7 per cent in FY14).

However, what is worrying is India’s growth prospects in FY16. Even as India’s central government now resembles a professionally-run corporate body with a powerful and hands-on CEO’s office,

India’s middle management order remains weak as the heads of key economic ministries are neither seasoned politicians nor subject-matter experts (and worst of all, do not seem to be reaching out for advice from subject matter experts).

Long-term vision Moreover with the Prime Minister playing the role of a profitability-focused CEO (as against a visionary Chairman) there is a clear ‘vision gap’ that will sooner rather than later jam economic growth, if not addressed in time. The best illustration of this ‘vision gap’ was the Union Budget presentation for FY15 which attempted to push through everything from FDI liberalisation to improved sanitation, but lacked an overarching vision that would ensure that the summation of the individual reforms would amount to more than the individual parts.

From a forward looking perspective, two critical sectors are in need of a two-three year vision (as against administrative tweaks and visual effects) for India to continue its growth momentum beyond FY15. The lack of capital in the banking system needs to be addressed and the coal-power-state electricity board tangle in the power sector needs to be resolved.

Banking reforms As regards banking sector reforms, 6.5 per cent GDP growth is expected in FY16 , an analysis of historical trends suggests that such a GDP growth requires 20 per cent bank credit growth YoY.

The Finance Minister has said public sector banks (PSBs) will require ₹2.4 trillion of incremental tier-1 capital (equivalent to 85 per cent of their current market cap) by 2018.

But the Government is yet to lay out a clear roadmap as to how this capital will be raised. Thus the absence of a clear plan on PSB recapitalisation is likely to act as a very real binding constraint to economic growth by FY16.

With respect to the coal-power-state electricity board tangle, there are three challenges in this critical sector: (1) a number of large states have bankrupt discoms; (2) power purchase agreements (PPAs) are such that they fail to cover the cost of generating power; and (3) coal production in India remains woefully low.

While the Government has been targeting the low hanging fruits in terms of the push to augment coal production, the Government is yet to arrive at an internal vision that helps in resolving the other two issues.

While each of the above-mentioned three issues is complex and requires a wide array of institutions to play their part (including state governments, the Supreme Court as well as state-owned entities like Coal India) the onus of propelling this change solely lies with the Centre. Once again, the Central Government’s inability to turn this tangle into a well-functioning triangle will eventually constrain economic growth.

With September 2014 being a month where the PMO has its hands full with foreign visits and the strategically important state elections in Maharashtra due in mid-October 2014, we hope that the new Government will infuse more talent and subject matter experts into India’s cabinet by end-October 2014.

This in turn will be critical for India’s central Government to strengthen its middle-management order, plug its ‘vision gap’ and impart a multi-year momentum to India’s GDP growth rate.

( Mukherjee is the economist and Mukherjea is the CEO of Institutional Equities at Ambit Capital)

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