Hobbled Economic Performance during Modi’s Eight Years: Solution has been the Problem

Mr. Modi has completed 8 years as PM. His achievements have been extolled by the government and the ruling party. No celebration was possible in the last two years due to the grim situation brought about by the rampaging pandemic and the weak governance that was on display. Lost ground was sought to be made up (till the storm erupted on the blasphemous statements by the ruling party leaders) by highlighting the 8 years and not just the 3 years of the second stint.


The government is taking credit for Indian economy becoming the fastest growing (8.7%) major economy in the world. But, there are doubts about this figure. The picture is clouded by high retail inflation at 7.8%, fiscal deficit of 6.3%, unemployment at around 8%, labour force participation rate at 40%, consumer confidence at 72, current account deficit rising rapidly, foreign exchange reserves dipping and the rupee declining against the dollar.


A distinction needs to be made between the first 5 years and the crisis ridden last 3 years. By talking of the 8 years government could show case schemes like, Jan Dhan, Ujjwala, Kisan Samman Nidhi, toilets for all, etc., to mask the crisis of the last 3 years. Many of the schemes like, Aadhar, electrification, toilets, housing for all and right to food are continuing schemes from the past. Credit can nonetheless be taken for pushing them further. But, the first 5 years were also crisis ridden though for a different reason.


  • Eight Years Split into Two

The main difference between the two periods is that in the first 5 years, the crisis in the economy was induced by policies while in the subsequent 3 years the crisis emanated from events beyond the government’s control and aggravated by inadequacy of its response. 


Pro-business, `supply side’ policies, unsuited to the needs of the country, have been a constant through the 8 years because of the ruling party’s ideological baggage. Before coming to power, it had decried welfare schemes (like, MGNREGS) initiated by the previous government. However, it has been forced to continue and enlarge these schemes since its policies have led to a growing crisis in the lives of the marginalized. These schemes perhaps prevented a social explosion.


The government has claimed that it has pushed for structural changes which will benefit the economy in the long run. For instance, the implementation of the Bankruptcy code, GST, digitization, checking corruption, etc. While some of these are useful, many of them have proved to be counter-productive because they were implemented without adequate thought, like, in the case of demonetization, GST and digitization. The negative impact of these policies far outweigh the benefits from the other schemes.


Any economy growing at 5-6% per annum will show improvements in various socio-economic parameters, like, access to education, travel by air and ownership of mobile phones. These should not be allowed to obfuscate the underlying difficulties. For instance, India’s global rank improving from 10th to the 6th or the emergence of a hundred unicorns only masks the challenges building up in society and especially for the marginalized. The challenges that emanate from the macro aspects of policies have overwhelmed the achievements of specific policies.


  • The First Five Years

The first five years saw the announcement of demonetization in 2016, implementation of the structurally flawed GST in 2017, the NBFC crisis in 2018 and push for digitization. These economic shocks were administered in quick succession aggravating the underlying crisis caused by the `supply side’ policies and caused further distortion of the structure of the economy.


The vast unorganized sector, employing 94% of the work force, has been irrevocably damaged. This is the economy’s marginal sector which provides refuge to those who are left out of the more lucrative organized sector which is capital intensive and offers few jobs. The unorganized sector consists of the self-employed, small and micro units. It is well documented that the shocks referred to above marginalized this sector further. Employment and incomes declined leading to a fall in demand and slowing down of the economy.


The shocks also vitiated the data base of the economy. Since data for the unorganized sector comes occasionally, in the intervening years, it is proxied by the organized sector. But once the structure of the economy changed due to the shocks, this method becomes irrelevant. The declining unorganized sector cannot be represented by the growing organized sector.


This is the invisibilization of the unorganized sector. If this sector is not independently measured and the rate of growth looks good then policy, especially to take care of it, is not required.


II.1 Background to the First Period 

During the UPA II regime, the economy faced a crisis in 2012-13 due to an external shock impacting the balance of payments, high inflation, exposes of big corruption cases and the policy paralysis. This has enabled the government of Mr. Modi to pin the blame for all its problems on the mismanagement of the UPA II. Is this true?


During the crisis of 2012-13 in Q3 and Q4 the economy grew at a tepid 5% and 4.44% respectively. In 2014, when Mr. Modi became the PM the economy had already recovered to grow at 7.76% and 8.52% in Q1 and Q2 respectively. Subsequently, growth touched 8% several times. The crisis of 2012-13 had got washed out. 


But from Q4 of 2017-18, there was a secular decline in the official growth rate from 8.1% then to 3.1% in Q4 of 2019-20, just before the pandemic hit India. This decline was a consequence of the policies pursued by the Modi government.


Assuming that the official data is correct, the average growth rate was less than the potential (the peak rate) by 2.5%. For an economy of about Rs.170 lakh crore, the loss was Rs.8.5 lakh crore in two years. If to this one adds the loss due to the decline in the unorganized sector (say, 5%), the total loss would be about Rs.13.5 lakh crore. Mostly this was the loss of the unorganized sector and it far exceeded what all the welfare schemes gave them. 


II.2 Growing Disparities 

Income surveys are difficult to carry out since people do not report correctly. Yet, the PRICE survey shows that the bottom 60% lost incomes between 2015-16 and 2020-21 while the richest 20% gained 39% in income. This is partly a result of the pandemic. The implication is that there is rising disparity in the country and rising distress of the bottom half. The Delhi Socio economic survey of 2018 projected to the all India level showed that 90% of the households spent less than Rs.10,000 per month and 98% spent less than Rs.20,000 per month. This indicates the extent of poverty in 2018. These figures when combined with the PRICE survey suggest that poverty increased dramatically during the pandemic. But for the government’s provision of a few essentials like, foodgrain and gas, poverty would have been worse.


Data on wealth disparity released annually by OXFAM and Credit Suisse presents an even starker picture. They show that most of the wealth is with the top 1% (51.5%) and the top 10% (77.4%). The bottom 60%, only had 4.7%. The `supply side’ policies aggravate the income and wealth disparities due to their focus on giving concessions to the well-off. 


The poor have politically responded to the welfare schemes by voting for the ruling party except where the opposition was strong. They do not link policies to the slowing economy and to their loss of incomes.


The ruling party itself realized the failure of demonetization and the crisis due to GST. While these were announced with much fanfare, they have not been used as election campaign planks. 


  • The Second Term

In the second term, starting May 30, 2019, the economy continued to decelerate. The government persisted with `supply side’ policies rather than change track. For instance, Corporation tax rate was reduced. It led to a decline in direct tax collection and an increase in the Fiscal Deficit without stimulating additional investments and boosting the economy. The investment rate in the economy fell to 32.2% from 32.7% the previous year. It was 35% in 2012.


The situation is aggravated by the pandemic and now the Russian invasion of Ukraine. The world is headed to a new `Cold war’ with severe global disruption of supplies. While these are not of government’s making, the issue is how well has it coped with them?


In 2007, when the Global Financial crisis hit the world, India’s economic parameters were robust. That was not the case in 2019-20, growth rate had dipped, fiscal deficit was higher and exports were stagnant. So, the economy found it difficult to tackle the unprecedented challenge posed by the pandemic. The government needed to change track, but it persisted with the same `supply side’ policies. The marginalized sections though hard hit were provided only a minimal amount (about 1.5% of GDP). So, among the major economies, India faced the sharpest decline of 24%.


The suddenness of the lockdown in March 2020 impacted the marginalized severely. The mass migration witnessed in India in terrible conditions was not seen anywhere else in the world. It also exposed the pitiful conditions of living of the vast majority of Indians in spite of the claimed success of the welfare schemes.


The crisis in the unorganized sector meant decline in employment generation, rising under-employment and low Labour Force Participation Rate (LFPR). LFPR declined from 47% in 2016 to 40% in 2021. The decline is particularly sharp for women. The implication also is a) that 60% the working age population is not working, b) large number of people in this group are not even looking for work, c) the unorganized sector is declining and d) with so many people withdrawing from the workforce, growth rate of the economy cannot be robust. The data also shows that the more educated a young person, higher the level of unemployment she faces.


III.1 Government Overconfidence

The government displayed overconfidence. In spite of warnings about a second wave, it did not prepare in advance and there was devastation with unprecedented number of deaths and a health crisis. Though the government denies it, according to some experts millions died unrecorded. The preparation for vaccinating the population was tardy. In spite of India being the largest manufacturer of vaccines, the vaccination drive started on January 16, 2021 with a plan to vaccinate 1.5 crore frontline workers, etc. in 1.5 months. At that rate it would have taken 23 years to vaccinate the entire population. Later, vaccination was speeded up but by then the Delta wave had taken its toll.


`Supply side’ policies, to favour businesses, led to initiation of changes in labour laws and trade in farm produce. It was assumed that during the pandemic opposition would not be able to mount a challenge. The farmers protested strongly for over a year and forced the government to retreat. 


Disinvestment of PSUs is another `supply side’ policy. It weakens the government’s capacity to intervene in the economy precisely when the need is for a stronger public sector to boost the economy given the crisis brought about by the pandemic and now the war.


The welfare schemes saved the day for the poor who received free rations and cooking gas, etc. But this highlights the contradiction in policies. The macro policies are marginalizing the poor while the micro policies are trying to give them the basics to survive. This cannot be a robust solution since it raises the fiscal deficit which the `supply side’ economists frown upon. As the budget deficit grows there would be pressure to dilute these policies leaving the poor in the lurch since their incomes would not have increased due to lack of employment.


Government’s claim that it has managed to check the growing black economy is not borne out by evidence. Yes, major cases like the 2G scam have not erupted during the last 8 years. But, big scams like, the Rafael deal, massive drug haul at the Adani port in Mundra, corruption in cooperative banks and their failure, havala through banks (even PSU banks) have been reported. They have not been pursued vigorously by the media which is tightly controlled by the rulers. Smaller cases are being reported daily. During the Delta wave, there was massive black marketing of oxygen cylinders, medicines, etc. but no one has been prosecuted.


The government has pointed to the rise in stock market valuations in spite of the pandemic as an indication of global capital’s confidence in India. This has largely been a speculative rise since the profits do not justify such high valuations. That is why the markets have declined in the last 6 months as foreign capital has pulled out consequent to the US Fed raising interest rates and reducing liquidity. 


  • Looking Ahead

The war in Ukraine and the new `Cold War’ between two capitalist camps will further disrupt the already fragile global supply chains. Thus, the high levels of inflation are likely to persist and production will not only decline but a recession is possible. One can say, the Indian economy is in stagflation.


The pandemic was leading the world to a `new normal’ with many new challenges and the war is aggravating them and adding newer ones. There is likely to be de-globalization and de-dollarization which will throw up new challenges for employment, exports, finance and technology. The unorganized sector at the bottom will get further marginalized. 


  • Conclusion

In brief, the policies considered to be the solution are the problem. `Supply side’ policies to favour businesses don’t work when demand is short. They aggravate stagflation. Government counts as its success the welfare policies targeted at the poor. Given their marginalization, these policies have become a necessity to forestall social collapse. The economy is not growing at the officially claimed rate but much less than the potential. This has depressed their incomes and this loss far exceeds what they get through the welfare policies. 


The policy stance needs a basic change. Invisibilization of the unorganized sector in data and policy has to be ended. That would boost demand and simultaneously reduce supply bottlenecks within the country. 


The answer to how is India doing economically depends on who one asks. The organized sector will largely say it is doing well. But, the vast majority of Indians working in the unorganized sectors – farmers, workers, self-employed, artisans, micro sector, etc. – will answer in the negative. When they go to vote, for social and political reasons, they may favour the ruling dispensation, especially where the opposition is weak. So, electoral victories cannot be read as an endorsement of the economic performance of the ruling dispensation in the last eight years.

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