The Indian economy has been in doldrums since 8 pm on 8 November 2016, and the Narendra Modi government has finally begun to admit there’s a problem.
The strongest admission yet came Thursday when NITI Aayog vice-chairman Rajiv Kumar said, “Nobody had faced this sort of situation in the last 70 years where entire financial system was under threat.”
He added that the root cause of the problem lay in the UPA-2 years: “The entire episode started with indiscriminate lending during 2009-14 leading [to] rise in non-performing assets (NPAs) post-2014.”
Yes, Manmohan Singh left the economy in a mess in 2014, we know that. If everything was fine, why would people have voted out the UPA? Modi’s job was precisely to fix the economy, and he contested the 2014 election on that very issue.
The good days will come, he promised. Instead, Modi took a bad situation and made it worse.
Today, there is only one root cause for the economic crisis we are facing: the poor leadership of PM Narendra Modi. Here are some of Modi’s acts of omission and commission directly responsible for bringing the Indian economy to a point of crisis.
1. Letting banking crisis fester
It was only in late 2015, with then RBI governor Raghuram Rajan’s push that the banks started cleaning up their balance sheets, ridden by hidden non-performing assets. The Modi government should have seen this risk, to begin with, and addressed the problem first thing. The bank recapitalisation that began later should have begun much earlier too. Rajan had also sent the PMO a list of top defaulters, but no action was taken. Stressed with NPAs, banks reduced giving out credit to industry, contributing to a liquidity crunch.
2. Not moving projects
Thanks to the ‘policy paralysis’ of the UPA-2 years, a number of infrastructure and industry projects were stalled. Land acquisition and environmental clearances were a major hurdle. Like a statesman, Modi needed to get his hands dirty to clean up the mess, get the projects going. Instead, he made it clear his priority was politics over India’s progress when he went back on amending the land acquisition law. Perhaps just because Rahul Gandhi called him “suit-boot ki sarkar”. The stalling of projects was a big reason why loans went bad, particularly in the case of the infrastructure-lending IL&FS.
3. Gimmicks as policy
Narendra Modi launched one big plan after another, and each one was launched almost as if it was the beginning of a revolution. But nothing has come out of most of them. Make in India, Skill India, Digital India, Startup India, Stand Up India, this India, that India… none of them has brought about the revolution they promised.
The ‘Ease of Doing Business’ rankings have been gamed because the rankings matter more than reality. Arun Shourie will always have the last laugh over Modinomics – headline management over economic management.
Instead of doing what was needed, Modi enforced economic quackery over 1.3 billion people. This plan to finish the black economy overnight was supposed to mop up Rs 4-5 lakh crores, but brought loose change. Demonetisation killed the informal economy, disrupted age-old economic systems and caused job losses. We are still facing its consequences and it brought no benefits at all. The government did what it does best: suppressed a report that showed corporate investments dropped by 60 per cent in the demonetisation year.
The move also scared investors about policy uncertainty in India: no one knows when Modi could come on TV and change everything, just like that. Rumours of the demonetisation of even the Rs 2,000 note keep circulating in the market.
5. Vilification of business
Along with demonetisation came the culture of vilifying business. Business people were being painted as corrupt crooks and Modi made them stand in a queue. The truth is that everyone managed to convert their black money into white through demonetisation, but the vilification of business for political gains further made business reluctant to invest.
Modi did say demonetisation was the first of many things to straighten the corrupt.
6. Messing up GST
You can find nut job propaganda platforms defend demonetisation, but you will be hard-pressed to find anyone explain how the Indian economy has benefited from the Goods and Services Tax.
Unlike demonetisation, this was actually a good idea. But if you want to see how good ideas are turned into nightmares, see the Modi government’s execution of the GST. Modi defined it as a Good and Simple Tax, but it has turned out to be neither. It further made life tougher for small and medium enterprises. With five tax rates and absolute compliance requirements from day one, the GST was launched in a hurry without even testing its software. Its rules were changed again and again, as if chartered accountants were super-computers. Even now, the GST needs a lot of reform.
7. Unprepared for NBFC crisis
Already facing a banking NPA crisis, the Modi government was again caught sleeping at the wheel when crisis hit non-banking finance institutions. This crisis happened partly because of demonetisation.
Flush with funds from demonetisation, banks were reluctant to lend to corporates, and corporates were reluctant to borrow, thanks to regulatory uncertainty. Banks stepped up their exposure to NBFCs.
But NBFCs are now seeing a rise in bad loans thanks to the slowdown in real estate. Now, this, in turn, is causing a credit crunch in the automobiles sector. The government should have foreseen the risk in NBFCs. Raghuram Rajan had warned bad loans risk in Mudra schemes and MSMEs, going forward.
8. Keeping inflation too low
The Modi government’s policy has been good politics with bad economics. They have been reluctant to put money in the hands of rural India, measly with increases in minimum support prices or NREGS wages. Low inflation helps Modi win elections, but it comes at the cost of reduced purchasing power and low demand. People are neither saving nor spending — because their incomes aren’t going up.
9. Not making disinvestment a priority
One of the biggest economic reforms India needs is disinvestment of white elephants – that are the many public sector units. Many of them keep borrowing from public sector banks to make up for their losses. This concentrates the use of capital in unproductive assets.
Unlike Atal Bihari Vajpayee, Modi hasn’t made disinvestment a priority. There’s lip service, and some jugglery, but no real intent. If the Modi way is to revive PSUs rather than sell them, that hasn’t been happening either. In fact, prized PSUs have been going south.
10. Valuing bureaucrats over economists
Much of Modi’s poor leadership of the Indian economy comes from his disdain for economists and experts.
“Harvard versus hard work,” as he defined the binary. Not just inconvenient liberals like Raghuram Rajan, but even supposedly Right-wing economists like Arvind Panagariya haven’t been able to work with Modi, who perhaps thinks he knows economics better than anyone else.
Modi relies on bureaucrats because they are hard-working yes men. He’s installed one such as the governor of the Reserve Bank of India. The result of relying on bureaucrats is a complicated GST, hare-brained ideas like angel tax on start-ups and borrowing money in foreign currency bonds.
11. Commanding heights mindset
Modi’s reliance on bureaucrats is in tune with his command and control mindset towards the economy. His way of looking at the economy is thus similar to Indira Gandhi’s “commanding heights” nonsense. The government needs to be a facilitator of economic activity, smoothening out the edges. Instead, Modi sees himself as the CEO, who will tell various parts of the economy what they should be doing.
He promised “minimum government” but, as is typical of him, is delivering the opposite of what he promised.
12. Tax terrorism
Instead of relaxing tax rates or reforming tax laws to make them simpler, the Modi government has come to be known for “tax terrorism”. Once again, Indira Gandhi would be proud. Faced with revenue shortfall and fiscal deficit constraints, the government wants to extract tax out of an economy that is going through a crippling slowdown. Hence the tax terrorism.
13. Fudging data
Since Modi decided to put his political interests above national interest, his government took to data fudging. No one today believes the Modi government’s GDP growth rate figure. It is laughable to claim the Indian economy grew at 7.1 per cent in the demonetisation year. The Modi government’s own former chief economic advisor says the GDP is overestimated by about 2.5 percentage points.
14. Living in denial
The data fudging is in line with living in denial. Anyone pointing out the structural slowdown in the economy is a “professional pessimist”. A report showing the unemployment rate as highest in the last 45 years was suppressed.
The first step to solving a problem is to acknowledge it. It is only now that the government is beginning to acknowledge the problem.
15. Indifferent budget
NDA-4’s new Budget in July did nothing to spur confidence or revive the animal spirits of the economy. Instead of tax incentives, there were more taxes. The Modi government seems to be at sea with a huge economic crisis facing India. It is bereft of both ideas and ambition because propaganda can keep making them win elections anyway.
Views are personal.