The five things Modi has got right on the political economy shows good economics isn’t necessarily bad politics.
Depending entirely on where your voting preference lies, the Narendra Modi government has either performed brilliantly or disastrously on the economy in its five years. Its fans say, look at the data. Critics counter, indeed, look at the data, but how do we judge when you merrily fudge? We shall let the experts on both sides wrestle over it, and merely take a broader view of five years of the political economy.
As the Modi government’s five-year term ends, let us list the five things it has got right. I repeat, for emphasis, that I look at this picture from the lens of politics, or political economy, not pure economics. Hence, in my book, the biggest positive is implementation of the IBC, or Insolvency and Bankruptcy Code process.
It is true that only 12 defaulters have been put under bankruptcy proceedings yet. But these are the 12 biggest and the most powerful. What follows is that these are the types with the most number of powerful politicians and civil servants on speed-dial, with many accumulated IOUs. The fact that none of them has been able to secure a “phone-banking” reprieve, not even the mighty Ruias of Essar, shows a new political intent.
See it this way. Once you know there is no possibility of getting a reprieve or evergreening through a “friendly” phone call, you learn to deal with a new era in Indian capitalism. Where bankruptcy is an inevitability if your business fails. For its capitalism to come of age, a society has to learn to accept the bitter fact of failure. In India, bankruptcy has been seen as a family embarrassment to be hidden.
An avowedly Left-socialist, but “phone-banking” state was complicit in this. The Modi government ended that. The big boys are going bust. It is out of this bonfire of corporate vanities that a new Indian capitalism can emerge. I see this as essentially a welcome political and cultural change, never mind the amounts of bad loans it actually brings back to the banks. If no one (in the private sector) is too big to fail, the lesser players will fall in line.
The Modi government has faced much criticism for keeping prices of petroleum high, despite falling crude. But if it hasn’t caused the kind of outcry as it did under the UPA, it is because the consumer also watches the total shopping bill at the end of the month. The Modi years have seen high oil prices, but low inflation overall, particularly food. No one is still calling the inflation data fudged, nor has it been re-set retrospectively, unlike GDP. So we can make a fair comparison.
When the Modi government took over in the summer of 2014, UPA-2 had handed it an economy with Consumer Price Inflation at 8.33 per cent. As of December 2018, it is just 2.19 per cent. This, mind you, despite the government holding its nerve and keeping oil prices high.
Inflation-targeting, therefore, is the second big success of the Modi government’s somewhat instinctive and non-academic doctrine of political economy. Most Indian governments have been tempted to let fuel prices fall and buy peace with the noisy urban elites.
The politics of prices, however, has a mystique of its own. UPA-1 increased farm Minimum Support Prices (MSPs) relentlessly, made the farmer and farm labour feel much better, and easily won a second term. In its second term, consumer food prices rocketed and widespread stress built up, destroying it. The Modi government, now, made consumer food prices crash, some by refusing to increase MSPs, and some by over-enthusiastic encouragement (as with pulses), without bothering about market forces.
As a result, the farmer got pauperised and farm labour wages fell. It was only in the last three crop cycles that the NDA started increasing MSPs. But it is too soon to make an impact. Rahul Gandhi, therefore, is not wrong to say that the farmer has lost out in the five Modi years.
Noted economist and ThePrint columnist Ila Patnaik tells me it is the classical cobweb pattern of farm economics. Prices rise, and, in response, the farmer produces more. Then prices fall with over-production, and he produces less. So prices go up again and so on, weaving a cobweb pattern.
It is fair to say that just like UPA-2, the Modi-led NDA has also been caught at the wrong end of that cobweb. Hence the distress. It is a cruel political truism that as long as interests of the consumer and the farmer are contradictory, a government could lose power as much for high prices as for record lows.
The only way out of that chakravyuh would be sweeping agricultural reform. That, the NDA entirely failed to do. But remember, we aren’t complimenting it for its farm economics or politics.
What did the Modi government do with all this additional money it collected from fuel taxes? The answers lies in the next thing we think it got right — cutting fiscal deficit. Piyush Goyal is right when he says the NDA inherited from UPA-2 a fiscal deficit of about 4.5 per cent of GDP and rising. If it is at 3.4 today, despite all the tens of thousands of crores the Modi government has paid out in voter giveaways, it is in a large part because of this oil bonanza. Oil subsidies had emptied the fisc under UPA-2.
There has been much praise for Nitin Gadkari’s effectiveness in building highways and it is well-deserved. It also misses the larger picture. While enormous investments have been pumped into the highways, we take inadequate notice of the ports, Sagarmala projects, the Northeast and the railways. Broader data tells us that India’s infrastructure spending has increased about three times in the past 10 years as a percentage of the GDP, and much of this has come in the last four.
Helping this along is the fourth of the five successes in our list: Improvement in tax compliances and tax-to-GDP ratio, from about 9 to 12 per cent of a much larger GDP. At higher levels, the taxman has been rough, drawing charges of tax-terrorism. But at lower- and middle-class levels, the reforms in tax administration have been effective, greatly reducing human interface. If you aren’t a sizeable business or specifically targeted by the “agencies” or politically victimised, your experience with the taxman is cleaner. The fifth and last, indeed, is GST. It had its hiccups and discontents in the BJP’s core constituency of traders. But it stayed the course.
Of course, there are many areas of failure, from agriculture to exports, and from jobs to unreformed PSUs and, finally, the globally embarrassing data fudges. There was also demonetisation, which rivalled in its nuttiness Mao’s war on the sparrows. We’ve been complaining about these things and more, and will continue to do so. This week, we acknowledge the rarer instances of a government showing that good economics isn’t necessarily bad politics, or vice versa.