PM Narendra Modi
PM Narendra Modi | Photo: Praveen Jain | ThePrint
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One of the perils facing incumbent governments that receive renewed electoral mandates, especially of the kind Narendra Modi received in May this year, is the tendency to believe that you got everything right. If it ain’t broke, why fix it?

The Prime Minister can certainly assume that he did many things right in his first term, but it is less easy to concede that he did many things wrong. Or that he didn’t do more things right. Unlike the United Progressive Alliance (UPA) government, which did practically no reforms in its first term and still won a second term with an improved mandate in 2009, the National Democratic Alliance (NDA) government did many reforms (the goods and services tax, the insolvency and bankruptcy code, subsidy delivery reforms through direct benefits transfers, etc) and won. So, if one were to ask which improved mandate was genuinely well-deserved and not the result of pure luck, one would have to choose the Modi track-record as the clear winner.

But here’s the problem: if you think what got you here will get you another win in 2024, you are likely to be proved wrong. I predict that if the Modi government does more of the same things that it did in 2014-19, it is going to be defeated in 2024. Its economic underperformance did not matter in 2019 because the electorate was presented with alternatives that were worse than a BJP under Modi. By 2024, this may not remain true, and even if the opposition does not get its act together, the state of the economy (especially jobs) will matter more than ever. Even if the alternatives to Modi are poor, the electorate will vote negatively to oust him and his party.

Here’s what Modi got wrong in 2014-19, and which he needs to fix by 2022 so that these reforms and corrective actions will start delivering by 2024.

First, taxation. The emphasis on compliance is good, but only if tax rates are reasonable for individuals and corporates. The Modi government has compounded its blunders not only by raising tax rates for the better off in the recent budget, but by adding surcharges and cesses. And let’s not forget, for some sectors like telecom or mining, the taxes aren’t even called taxes. When you extract a high spectrum fee upfront, it’s like asking a company to pay taxes even before it starts any business.


Also read: Modi govt’s Budget 2019 as a platform for uplifting India to $5 trillion economy


This is not to suggest that spectrum must be low-priced or arbitrarily handed over to favoured corporates, as Andimuthu Raja did in 2008, but surely it can be linked to growth of the customer base and revenues rather than just unrealistic base prices that leave everyone a loser? And what is the 2 per cent levy on post-tax profits, called corporate social responsibility (CSR), if not an additional tax?

In 2019-24, Modi has to cut taxes – and fast.

Second, banks and the public sector. India’s public sector banking has not been fixed; it has only been recapitalised so that it can continue lending. Merging banks or asking the LIC to buy one staggering under huge losses is no solution. Barring four or five large banks that can always remain in the public sector, the rest must be privatised.

The same applies to other white elephants like Air India or Bharat Sanchar Nigam. If they are not sold for a song, we will be perpetually hearing a dirge as they continue losing money hand over fist. Privatisation, in these cases, is not about earning money for the exchequer, but to avoid future liabilities of a permanent nature. Modi’s touching faith in making the public sector more efficient, given our venal and extractive system of political and bureaucratic governance, is misguided. He has to change course.

One cannot also forget the non-banking financial companies (NBFCs). The sector is teetering on the brink, and even though the stronger ones will survive, the weaker ones are afflicted not by just a liquidity problem, but a solvency one. NBFCs need to be capitalised and or merged with stronger banks, apart from being given better liquidity support. Modi must work with the Reserve Bank of India to see that one or two major NBFC failures do not lead to a systemic crisis. The financial sector is already facing headwinds, and adding one more is not what the doctor ordered.


Also read: Here’s how Modi govt can help make India a $5 trillion economy


Third, real disinvestment and strategic sales. Selling IDBI Bank to LIC or Hindustan Petroleum to ONGC or REC to Power Finance Corporation are not strategic sales. They are mere transfers from one pocket of the government to another. The rescue of failing public sector IPOs (New India Assurance, GIC, etc) with money pumped in by other public sector entities is also not disinvestment. Nor is the budget-announced decision to let government holdings fall below 51 per cent in case other public entities also hold shares in them. If government is going to reduce its stake and LIC or State Bank of India are going to hold the balance, what we will have is public sector financial institutions stuck with illiquid holdings – a deadweight. What government gains by way of one-time revenues the others will lose.

Fourth, government accounts. These are a scandal. The scandal began under UPA, but Modi has not corrected it. If one were to read the comments of the Comptroller and Auditor General on India’s fiscal deficit in 2017-18, the real figure was 5.85 per cent and not the official version of 3.46 per cent. This is because a lot of budget expenses were shifted to public sector undertakings, and what ought to have shown up as a high fiscal deficit merely showed up as off-balance-sheet borrowings by state-owned companies like NHAI, Food Corporation of India, Nabard, etc. Another technique used to show a lower fiscal deficit is to shift current year expenditures to the following year, and hoping for the best in terms of higher revenues in that year.

This kind of accounting fiction should stop, and it is no better than a Ramalinga Raju cooking his books to show higher profits to shareholders. Finance Minister Nirmala Sitharaman ought to advocate a gradual shift to an accrual-based system of budget accounting, where both cash-based fiscal deficits and accrual-based figures are shown juxtaposed to one another.

Fifth, the emasculation of the public sector. Fiscal deficit window-dressing requirements are forcing the government to demand buybacks of shares and higher dividends from public sector companies – a practice started by P Chidambaram, and continued under Modi as if nothing is wrong with this practice. When public sector companies are not allowed to retain their profits for investment in expansion projects, why are we surprised that investment is not picking up in the economy? A simple truth the Modi government needs to internalise is this: money left with companies will always be better spent than money transferred to government coffers. If we must have a public sector, the least the government can do is to let them be reasonably profitable and investment-worthy.

Sixth, GST. India’s biggest tax reform is floundering on the rocks of a bad design and complex rate structure. This is not Modi’s fault at all, but having legislated it, if he does not fix it in the first half of his second term, he will face electoral trouble. He avoided being defeated in his home state of Gujarat in 2017 only because of adroit political moves at the GST Council before the state assembly elections; by 2024, if GST is not fixed once and for all, he will face not only an irate business community and sour-faced consumers, but shrinking government revenues and angry state politicians who will lay all the blame for it on Modi.


Also read: Modi’s new budget key to unleashing Indian economy’s animal spirits


GST has to be quickly brought down to three basic rates, with 15-16 per cent being the middle range, and exemptions and abnormalities being reduced to a minimum. The political risk that needs to be taken is actually an economic one: if fixing the design were to result in a short-term fiscal overshoot, so be it. This is the right time for adopting a looser fiscal policy, when inflation rates are benign. Later will be too late.

Seventh, the Monetary Policy Committee (MPC) and inflation targets. The MPC was given an inflation target that was too low at a time when central banks all over the world are finding it tough to raise inflation to levels they are comfortable with. The only thing worse than high inflation is very low inflation, for when prices don’t move, we get stagnation and misallocation of resources. It is only when relative prices move in different directions that economic agents can take the right investment decisions.

Modi needs to do two things. One is to give the MPC a dual mandate, both growth and inflation. The new target middle rate ought to be 4-5 per cent and not just 4 per cent. In the absence of a producer prices index, the wholesale prices index, probably updated and reformed, ought to be given some weightage in the MPC target setting. Modi should not wait for 2021, when the current MPC mandate ends, to make these changes.

Eighth, statistics. Whether it is jobs or growth, India’s statistical system is being questioned for its credibility. Some of the criticism may be politically motivated, but surely the government can invest a bit more to find out a real figure on the jobs situation and not just rely on Employees Provident Fund data to show that the jobs market is fine. These figures may be proxies for formal jobs, but not the real thing. We need a well-funded and simply-designed monthly jobs survey, and throwing a few hundred crores to overcome the current data lacunae is well worth the investment. If you don’t know whether the economy is creating jobs or destroying them, how will you ever draft the right kind of policy on jobs?

Ninth, Modi is simply not using the economic think-tanks available to him wisely. He either thinks they offer no useful advice, or believes that his vision of doing the right things for the poor will help him cross the finish line in 2024. He could be seriously wrong.

In 2024, it will be good economics that will deliver him a good political outcome. He needs advisers he will listen to. Maybe he needs politically savvy economists, or economically-savvy political advisers, but he cannot do without them.

The author is Editorial Director, Swarajya. He tweets at @TheJaggi. This article was originally published in The Swarajya.

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24 Comments Share Your Views

24 COMMENTS

  1. loved the fear i your eyes i am sure and out of tension now by voting modi atleast antinationalist like you are crying fouls and ass are burning really well proud of modi will give him 3rd tenure for sure

  2. Only tbe print ndtv wire can say this..
    CoZ these peopple are officially spokesperson of congress pakistan and others antinational orgnaisatiom

  3. Hope there will be Election in 2024…. Hahaha… Discussing Economics…… What are you People Stupid… Hahaha.

  4. Modi picked up Ms Nirmala Sitharaman to implement Modieconomics which basically is to rob rich and middleclass to pay for poor. There is no fundamental policy to transform India’s economics. He may waste another five years without improving Economy . Reaching $ 5 trillion economy is just a dream.

  5. Why are we even discussing economy this country has voted for what it wants. This system can produce only this standard of governance and this what this country deserves. Let them have what they wished.

  6. Those who have black money , they can’t spend because of restrictions on cash transactions, as a result economy is down eg car sale is down and similar effect on other industries , real estate etc .

  7. Come what may it will be modi in 2024 voters are interested not in economics .Their interest is Hindu Muslim.India Pakistan.Modi is past master in playing this game.So author should worry for himself.The nation is in firm hands.

  8. The views expressed are real. Election outcome depend on these parameters, nationalism can win only one election, performance to enhance living of every one is essential. सबका साथ, विकास now shall be in action, not just rhetoric. No doubt, there is massive push in infrastructure, on ground, even to farm a lot has been done, but still lot more is needed. But better sense will prevail,

  9. Elaborately explained. Hope Modiji gets a chance to read it and discusses with Finance Minister and economists.

  10. This is what well meaning folks on either side have been seeing ever since. Glad the author has woken up to the reality predicted basis action/results in the first term. It is a whole other story that Congress fought on issues that very few cared about really. Pains to see an economy with such potential being dragged down every other day!

  11. You were overwhelmed by bhakti all these days Mr Jagannath. Has the govt stopped giving you advt that you have suddenly felt compelled to advise Modi?! For you he could do no wrong all these days. In your opinion you have practically called him a liar and his govt inept on the economic front. This is like closing the stables after the horses had bolted. Every indicator you have talked about existed before way before the 2019 elections…what made you economical on truth if not bhakti?!! Now what’s changed?! It’s your ilk that’s the real problem for India’s emergence as a great nation. People who sell their conscience for ….. and do disservice to the nation. You are to tell the truth always!! That’s your job. Not tell it when convenient or otherwise. Disgraceful.

  12. I think any new election in the near future won’t be working by bjp . Though I am a bjp supporter and an ardent fan of Modi, still I won’t bite for him because he doesn’t have economic sense and he will take this country backwards not forward economically

  13. The current economic problems are ironically related to Modi’s war on black money. Modi is committed to the rule of law and eliminating corruption. However, following rules in India is not easy. GST is the prime example – it is a excellent long term idea but in the short term it has made life difficult for thousands of small businesses who didn’t follow any rules (arcane or not) because they operated outside the law. What we see is the resulting contraction in demand as black money is squeezed. It should be an eye opener because we are conditioned to think of the underground economy as undesirable. However, it is a large part of our economy and provides jobs and fuels consumer demand. We need to bring the underground economy out of the shadows and this requires easing the rules of businesses. It’s not clear if Modi govt fully understands how important it is to ease the rules of running business in an environment of strict enforcement.

  14. Very good analysis. India needs a big push to revive the economy. The tax increase and various forms of cess need to be optimized. We don’t doubt Modi’s intentions, but the fact is there is some reform looks needed to take the economy forward.

  15. Radha Mohan Singh was brought in as a “ forward “ who could be projected as CM of Bihar, He was dealing with Agriculture, long in distress, affecting the livelihoods and well being of one half of the population. Despite his inadequacies becoming apparent early on, he was left undisturbed in Krishi Bhavan for five long years, till finally, deservedly, being dropped altogether. 2. India’s economy did not stumble for the first time after the Budget was presented in an elegant bahi khata, with the floor of the stock exchange bathed in its hue thereafter. It has been drifting downward for at least three years. The electoral verdict fortunately was unaffected by its condition. However, too many smart people in government not to recognise its true condition and that things can continue along the same trajectory for another five years. Before thinking of 2024, we have to get through the next five years safely. More than advisers – politically savvy economists or economically savvy politicians, both somewhat rare at the moment – what is required is a finely crafted economic team that becomes the locus of primary decision making. Each Cabinet Minister has to be effective in his domain; the alternative model has not worked. A dazzling FM on top of the economy, with global stature and credibility.

  16. If 2009 and 2019 are to be compared, in both cases the incumbent won a second term and the dominant party added to its seats, the place to look for is not the reforms that were carried out. In both cases, hardly anything of note. At the moment, IBC has yielded very little in terms of amounts recovered against NPAs. GST is like cataract surgery that has got badly botched up. One cannot see anyone, either the business community or the wider public endorsing the incumbent on this ground. The winning impulse in 2009 was generated – the farm loan waiver was a smaller factor than projected – by the years of high growth, tax buoyancy, welfare spending, even the lack of enthusiasm for L K Advani. The seeds of scandals sown in UPA I were yet to sprout with a vengeance. The second term earned in 2019 merits deep analysis. Whatever the factors responsible for it, the economy is not the place to look for them. The issue to consider is how long the growing distress and pain in the economy can fail to register in political results.

  17. The article is good …. But PM Modi rather than concentrating on these reforms is still banging in EVMs to win the next election . We need ballot boxes back ….

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