Like millions of Indians, I voted for Narendra Modi based on his electoral promise that he would bring “acche din” (good days) to ordinary Indians. Based on his promise to transform the Indian economy, and make a difference in the lives of the people, he and his Bharatiya Janata Party (BJP) received an unprecedented mandate with a two-thirds majority in the lower house of the Indian parliament.
When Modi assumed the office of the prime minister, it appeared that all the celestial forces had conspired to make him succeed. Oil prices, which were hovering around at $100 per barrel in early 2014, dropped to $60 per barrel in December 2014, significantly improving India’s balance of payments. This unprecedented bonanza, coupled with a slew of populist measures initiated by his government, helped India’s Gross Domestic Product (GDP) growth rate touch a record high of 9.2 percent in the third quarter of 2016. Many of the world’s leading institutions placed their bet on India emerging as the fastest growing economy in the world, even surpassing the Chinese economy.
Unfortunately, two decisions, although well intended, went against the government, plunging GDP growth to 5.7 percent. First, the demonetization of Rs 500 and Rs 1000 notes late last year, which had aimed to weed out black money useless, backfired. The second misstep was the bumpy rollout of Goods and Service Tax (GST) in July.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Demonetization disrupted India’s largely cash-based economy with little good to show for it. People with black money found ingenious ways of converting their cash by illegally opening multiple accounts in multiple banks under different names. This defeated the stated objective of the scheme. Although the government is collecting information on such illegal transactions, it will take years before the culprits are brought to book.
The GST, meanwhile, was a well intended scheme to eliminate multiple tax structures by introducing a single tax. It was felt that the GST would simplify the tax structure and encourage foreign direct investment into India. Unfortunately, the design and execution of the scheme were so complicated that it disrupted business, especially for small traders. However, it must be said in favor of the government that they immediately realized the shortcomings of the tax process and are taking effective steps to streamline the process. GST is a big ticket reform and will take few years before industry realizes its benefits. Many economists have predicted that over the long term GST will translate into boosting GDP growth by at least by one percentage point.
Both demonetization and the GST have been severely criticized, not only by the opposition but also from the former BJP ministers.
Yashwant Sinha, the former finance minister, in a in an article titled “I need to speak now,” published in the Indian Express, held the Modi-led government responsible for the economic slowdown. He wrote that “while the prime minister claims that he has seen poverty from close quarters, his finance minister is working over-time to make sure that all Indians also see it from equally close quarters.” In his article, Sinha squarely blamed the government for the decline in private investment and shrinking industrial production. He also blamed the government for not resolving the non-performing assets of public sector banks, which has extended bad loans to several industrialists.
Another criticism of the Modi government is that, even when GDP growth touched 9.2 percent in 2016, economic growth failed to create new jobs for the youth. According to estimates, against the 10 million jobs needed every year, the government managed to create only 230,000 jobs in the last fiscal year. There are two factors for this sorry state of affairs. First, the government has proved unable to reform labor laws, which make both hiring and dismissal of employees complicated. The government fears that any reform to the present law may severely dent its chances in the next election. Another reason is the inability of the banks to offer loans, especially to small and medium manufacturing companies. That has adversely affected new job creation.
However, the World Bank is upbeat about the Indian economy and feels that any big ticket reform like GST is bound to create temporary disruptions. The World Bank predicts that starting from this quarter (October to December of 2017) the Indian economy will bounce back. Further, the report says that even the “low” GDP growth rate of 5.7 percent is beyond the reach of many economies.
In spite of all these huge problems, the poor are continuing to put their faith in Modi. However, if Modi fails to implement the various promises his party made during the run up to the 2014 elections, he may fail to get a similar majority in the 2019 elections. Modi is aware of his waning influence and is taking steps to revive the economy by introducing certain supply-side structural reforms.
The current confidence in Modi’s leadership was seen in the recent elections held in the state of Uttar Pradesh, one of the most populous states of India, where the BJP won more than a two-thirds majority. This took the wind out of the sails of the opposition, who were hoping that the poorly conceived demonetization effort would lead to a loss at the ballot box.
In fact, the election results exceeded even the expectations of the BJP. This is due to some shrewd efforts on the government’s part. Modi has ensured that essential services, like providing gas cylinders, reach people who live in distant villages.
Further, Modi should also be credited with several welfare schemes like Jan Dhan Yojna, which aimed at transferring subsidies directly into the bank accounts of the poor, thus eliminating the role of middlemen, who were siphoning off a substantial part of the subsidies. Other initiatives, like linking Permanent Account Number (PAN) with Aadhar, mobile banking, and skill development, will soon start yielding results and will take India on a higher growth trajectory.
In order to help public sector banks with mounting non-performing assets, the government has announced a bank recapitalization plan of Rs 2.11 trillion rupees ($32.43 billion) over the next two years, in an effort to revive investment. One of the reasons for the lack of private investment is that most public sector banks had virtually stopped advancing loans to small and medium enterprises because of the drag of non-performing assets. This, coupled with the introduction of the insolvency and bankruptcy code 2016, which lays down a timeline to recover from defaulters, the capping of bank loans to conglomerates, and increasing efforts to minimize the asset-liability mismatch, are promising a new Indian banking landscape.
This will boost private investment, which has been practically stagnant for the last two years. The textile sector, which is one of the important generators of jobs, can now look forward to an infusion of capital for doubling their capacity. More beneficiaries of the recapitalization will be the micro, small and medium enterprises in the manufacturing and service sector, which was hurt the most by the demonetization and imposition of GST. Moreover, companies in the private sector will substantially benefit from this reform and will look for higher levels of investment.
In sum, all is not lost to the government if it takes the necessary steps to increase its investment in infrastructural projects like building roads, power projects, and creating an enabling environment for attracting foreign investment by amending the labor laws, bringing land reforms, streamlining the administrative procedures, and undertaking fiscal consolidation, to name a few steps.
Last but not the least, the present dispensation should also strive for social cohesion. The recent overdrive by cow vigilantes, who have killed several people belonging to minority groups for transporting cows with the intention of slaughtering them. In fact, cow slaughter has become the main livelihood of these communities. Such violence will seriously bring communal tensions in the country, apart from affecting India’ status as the largest exporter of leather. The prime minister criticized such intolerance, but he and his government did precious little to bring the culprits to book. In a scathing article on the Modi government, The Economist has written that, under Modi, the “debate about public policy, and especially communal relations, has atrophied. Hindu nationalist thugs intimidate those who chide the government for straying from India’s secular tradition.”
The prime minister should realize that economic growth at the cost of inclusive growth is bound to flounder, apart from destroying the social fabric of the country.
K.S. Venkatachalam is an independent columnist and political commentator.