Modinomics is in trouble
Business Standard,
October 17, 2017
When a naturally fiery orator like Narendra Modi turns to something as dull as PowerPoint to explain himself, you know he has a problem. That’s what Mr. Modi did recently in an hourlong address to an institute for company secretaries, amid growing doubts about the Indian prime minister’s vaunted skills as an economic administrator.
Mr. Modi’s performance was characteristically confident, but also oddly bristly. He attacked critics who “take pleasure in spreading pessimism” as forcefully as he defended his government’s economic record. Drawing from the Mahabharata, Mr. Modi likened naysayers to a character known for constantly running down one of the ancient epic’s heroic figures.
The speech came after a triple-barreled assault on the government by eminences associated with Mr. Modi’s ruling Bharatiya Janata Party. Their onslaught began last month with Subramanian Swamy, a Harvard-trained economist and senior BJP leader.
In a television interview, Mr. Swamy claimed that “the economy is in a tailspin,” growing even more slowly than the official 5.7% rate for the quarter that ended June 30. If nothing is done to arrest this, warned Mr. Swamy, India is “heading for basically a major depression” where “banks might collapse, for example. Factories might start closing.”
Some two weeks later, Yashwant Sinha, a successful finance minister (1998-2002) during the BJP’s last stint in office, launched an even more scathing indictment. In the Indian Express, Mr. Sinha accused Finance Minister Arun Jaitley of making a “mess” of the economy. Mr. Sinha claimed that India’s growth has slowed to 3.7% or less by an older method of calculation abandoned by the Modi government in 2015.
According to Mr. Sinha, “private investment has shrunk as never before in two decades, industrial production has all but collapsed, agriculture is in distress” and “countless millions have lost their jobs.” He pointed out the damage caused by the “unmitigated economic disaster” of demonetization, the government’s quixotic decision last year to suddenly scrap 86% of India’s currency bills by value, as well as by “a badly conceived and poorly implemented GST,” or nationwide goods and services tax. The GST, which kicked off in July, is the Modi government’s flagship economic reform.
Before the furore over Mr. Sinha’s comments could die down, Arun Shourie piped up with similarly scathing assertions, including that demonetization was really a giant “money-laundering scheme.” A former World Bank economist, he steered the last BJP government’s pioneering privatization.
How much of this criticism is valid? Many of Mr. Modi’s diehard fans attribute it to thwarted ambition rather than objective analysis. They claim that Messrs. Swamy, Sinha and Shourie all sought to head the finance ministry. Marginalized by the prime minister, they have gone on the offensive.
Some criticism does appear to be over the top. Virtually no serious analyst believes that Asia’s third-largest economy is in a tailspin, or that its troubled state-owned banking system faces imminent collapse. Blaming Mr. Jaitley for the havoc caused by demonetization—as Messrs. Swamy and Sinha did—also seems contrived. Most credible accounts suggest that the hare-brained scheme was cooked up by a handful of amateur economists and cranks who managed to convince the prime minister of its virtues.
Nor is India’s economy in as dire straits as the critics claim. In his speech, Mr. Modi pointed out that sound macroeconomic management has reduced both the current account deficit and the federal government’s fiscal deficit. Inflation has been tamed.
In 2013, Morgan Stanley called India one of the developing world’s “fragile five” economies. But since Mr. Modi’s election, foreign investors have made a beeline for the country. Foreign exchange reserves have ballooned to a record $400 billion.
The prime minister also took credit for speeding up road and rail construction. He brought in a bankruptcy law and enacted GST, widely hailed as among the most significant economic reforms since liberalization in 1991.
Though those “perpetually in a mode of pessimism,” by Mr. Modi’s reckoning, may have exaggerated India’s downturn, their criticism nonetheless signals a new reality. A combination of rash decisions (demonetization), sloppy design and implementation (GST), and overreliance on bureaucrats has dented the prime minister’s economic credentials.
India’s GDP growth rate has fallen for five straight quarters. The International Monetary Fund expects the economy to grow 6.7% this year, a shade slower than China, an economy about five times as large. The Centre for Monitoring Indian Economy estimates that India shed 1.5 million jobs in the first four months of this year in the aftermath of demonetization.
Mr. Modi’s goal of making India one of the world’s top 50 economies in ease of doing business has floundered. It’s currently ranked 130 by the World Bank.
Obsessed with “black money,” the Modi government gave notoriously rapacious tax inspectors draconian new powers of search and seizure. Predictably, this has sent a chill through the business community. Mr. Sinha rightly points out that private investment is in the doldrums.
Many businessmen grumble that bureaucrats designed a particularly unwieldy GST. Reacting to criticism, Mr. Jaitley announced a smattering of rate reductions and simpler filing procedures for small businesses. Nonetheless, numerous slabs and complex filing requirements mean GST remains far from the advertised “good and simple tax.”
On Mr. Modi’s watch, the BJP, historically India’s party of business, has morphed into a party of bureaucrats. Unless this changes, “spreaders of pessimism” will have reason to kvetch.
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