Prime Minister Narendra Modi’s ability to repeatedly reorient the focus of his administration has been key to his political rise and resilience, but his administration’s unwillingness to have and communicate a uniform economic ideology is hamstringing the Indian economy. While an ever-evolving agenda makes Modi appear proactive in the eyes of his supporters and India’s hyperactive media, constantly changing what policy trade-offs are acceptable to the government leaves market participants confused about the government’s priorities. Economic policy dissonance has spanned a number of issues.
Financial Sector Stress: The Modi government inherited a bad loans crisis in the banking sector. The government initially backed the central bank’s attempts to force banks to recognize the problem, proclaiming that the government would not allow corrupt lending practices to continue. It also passed a bankruptcy code, which has improved conditions even though it has moved slowly. However, as banks were forced to disclose troubled loans and provision against them, and as the enormity of the problem became evident, the government’s will to tackle it began to wane. The Modi government pushed out two central bank governors who heralded more transparency, moved away from forcing greater recognition as the economy slowed, and now is pushing banks to make questionable loans in “loan melas.” As the problem has spread from banks to India’s shadow banks, the lack of transparency in the sector has led to confusion about the extent of the problem and possible solutions.
Corruption: In November 2016, Modi surprised everyone by demonetizing 86 percent of the currency in circulation, with the stated goal of combatting black money and corruption. While the move led to economic chaos that lasted a few months, it paid political dividends as Modi’s party resoundingly won the state elections in Uttar Pradesh, India’s largest state, that followed. Yet, only a few months later Modi approved a new system for political contributions called electoral bonds, disregarding concerns from India’s central bank about money-laundering and donations through shell entities. Data indicates that Modi’s BJP has received up to 95 percent of all donations made via electoral bonds.
Budget Discipline: The Modi government early in its tenure worked to reduce India’s high budget deficit, benefitting from the substantial fall in global oil prices. While the government has officially stuck to its deficit reduction plan, as the economy slowed after demonetization and the introduction of a new goods and services tax (GST), the government pushed state-owned companies and departments to increase spending and borrow off-budget. Without credible budget data it is difficult to determine the extent of the problem — a recurring problem with the Modi government — but some experts estimate that the combined government deficit in India is almost 9 percent of GDP.
Trade: While touting its goal of “Make in India,” the government became the first in decades to increase tariffs on imports, hurting India’s potential to integrate into global supply chains. India remained in discussions over the Regional Comprehensive Economic Partnership, a regional trade agreement with China and major Asian economies, and as discussions concluded Indian Minister of Commerce Piyush Goyal sent signals that India would join the agreement. However, as the government received criticism from India’s left and elements of their own base, Modi decided not to join the trading bloc.
In its sixth year in office, the Modi government’s political and societal vision of creating a more Hindu India is clear, but its economic record is full of contradictions. While it has announced many high-profile programs, it has not been able to stitch them into a coherent policy direction.
Modi has articulated “ease of living” as a goal and highlights how the government has used technology to stem corruption and leakages in India’s bureaucracy. As the same time it gave the bureaucracy unprecedented power during demonetization and is considering doing so again with a citizen registry, even though these measures are beyond the capacity of most efficient organizations, let alone the short-staffed and under-qualified bureaucracy that India possesses.
Similarly, the government is obsessed with its ease of doing business rankings but is unwilling to definitively tackle the stress in the financial sector needed to spur investment.
Policy Reincarnations Without a Core Economic Identity
Modi’s ability to reinvent his political identity has been a successful electoral strategy. He won the 2014 national election on the promise of good economic days, triumphed in UP as an anti-corruption crusader, and was re-elected nationally by touting improved provision of government services and a tough foreign policy. The current “anti-immigration” push is reportedly tied to upcoming state elections in West Bengal.
Any party in India’s diverse and multi-party system only needs a plurality of voters to hold enormous political advantage; in 2019 BJP received over 37 percent of the vote, which led it to win more than 55 percent of seats. The reincarnations have allowed Modi and BJP to stitch together a plurality of voters, and ally or buy coalition members when necessary, but left behind a dizzying array of policies that are implemented partially and discarded once the political mileage from them is maximized.
Successful economics, on the other hand, requires supporters, opponents, and apolitical participants to understand and adapt to the policy priorities of the government. Even if it is assumed that everyone who voted for the BJP knows the government’s policy priorities or is willing to act on trust and faith, the over 60 percent of the country that didn’t vote for the party needs a clear idea of what policies to expect and how to plan around them, which the Modi government has not laid out or demonstrated.
Economic studies in the United States suggest that economic policy uncertainty dampens investment decision and employment creation, which is precisely the crisis facing the Indian economy. Total investment as a percent of GDP peaked in 2011 at almost 40 percent of GDP, but has declined steadily to little more than 31 percent in 2019, according to IMF data. While Indian employment data is poor, anecdotal evidence including several instances of thousands of job applications for low level government jobs, highlights the enormity of the job crisis in India.
Adding Intolerance Fuel to the Uncertainty Fire
This lack of economic policy direction is exacerbated by the government’s intolerant social agenda. While Modi’s government gave social space in its first term to cow vigilante groups that largely targeted Muslims, it has steeply intensified its Hindu nationalist agenda in the last few months.
In August, the government unilaterally removed the special status for Jammu and Kashmir. Fearing a backlash from the state’s populace, the Modi government has orchestrated a prolonged crackdown in the former state, including the longest internet shutdown in any democracy.
Then, in December, the government passed a Citizen Amendment Act (CAA) creating a special citizenship path for all religious groups from Pakistan, Bangladesh, and Afghanistan – except for Muslims. It has tied the move to the promised National Registry of Citizens (NRC), which would require all residents to prove their citizenship. While all other residents who could not prove their citizenship would have the recourse of regaining citizenship through the newly created path, millions of Muslims could face legal limbo and detention.
The size of India’s Muslim population, combined with the broader repercussions of the Modi government’s policies, make these actions not only an attack on India’s secular identity but a threat to the economy.
The approximately 180 million Muslims in India would themselves be the eighth most populous country in the world. Jeopardizing the social standing, identity, and potentially safety of such a large number of people would inevitably reduce the trust and faith they need to invest and participate in a thriving economy.
Meanwhile, the government appears to have not expected the protests that have sprung up against the CAA and NRC. Its decision to curb internet services and use strong arm tactics to combat protestors in multiple states is not only hurting India’s image abroad, including among foreign investors, but hampering everyday economic life.
The government recently implemented a citizen registry in Assam, and while most residents made the final list, almost 2 million people were left off. While the registry was intended to target Muslims and migrants, the difficulty of enacting such a list combined with shortcomings of the Indian bureaucracy has led to people of all backgrounds being left out. Expanding this move to the rest of the country would leave over a billion people scrambling to prove their citizenship, divert strained government resources to administer such an endeavor, and leave tens of millions in legal limbo.
Crisis Should Reveal Character
A slowing economy has brought India’s long-standing economic problems to the forefront, but instead of leveraging the moment of the crisis to move boldly to reform the economy, the government has continued its policy of half-measures and combined them with Hindu nationalist policies that divide and distract the nation.
The government’s former chief economic adviser has compared the depth of the current slowdown with the macro-economic crisis India faced in 1991. In response to that crisis, the government began to dismantle India’s “license raj,” which not only averted the crisis but also provided the momentum and direction that has powered India’s economic growth for multiple decades.
In response to the growth slowdown, the Modi government announced a reduction in corporate taxes, a long-standing complaint of businesses, and a privatization program that has yet to bear any fruit. The targeted measures, while being helpful, are not sufficient to address the systemic problems, especially in the financial sector.
Ramming through divisive social policies as the economy is facing a severe slowdown indicates that the government either is intentionally trying to distract the populace from the state of the economy or is not taking the economic slowdown seriously enough to devote its entire effort toward it.
It is inevitable that the economy will eventually bottom out from the current slowdown in a few months or a few quarters. It will be easy for the government to claim victory and state that things are fine as economic numbers, which likely overestimate growth, rebound. That, however, will be short-sighted. If the government cannot provide clear direction on what types of policy trade-offs it is willing to accept and what economic model it is willing to subscribe to, India will continue to not live up to its economic potential.
Shezad Lakhani is a former economic analyst with the U.S. government whose career focused on South Asia. He is located in Santa Clara, CA. Follow him on Twitter @Shezadl1. The views expressed in this article are the author’s alone and do not reflect those of his employer.