Is the Modi magic waning?

India’s triumphant re-elected government is beset by an increasingly gloomy economic climate. Jayanta Roy Chowdhury reports

Despite winning a massive mandate, there-elected Narendra Modi government has started its second term in power with the economic odds stacked heavily against it: a slowing domestic and global economy, unprecedented unemployment rates, a huge shortfall in tax collections, a volatile stock market and pressures from the Trump administration to open up its economy to more imports.

Expectations were initially high as markets cheered Modi’s rollercoaster victory in June’s India-wide elections. But since then the Modi magic, which many hope will see India coasting towards a GDP of $5 trillion within five years, seems more chimera thanreality. The question haunting both Indians and foreign investors interested in India is, ‘Will Modi 2.0 turn the tide of bad news on the economic front, or will it end up tying itself in knots trying to push the envelope on the economy?’
India’s much touted growth story seems to be unravelling as the country’s GDP dipped to an anaemic 17-quarter low of 5.8 per cent in January-March 2019.With reduced consumer spending, a slower pace of private investment and government expenditure, GDP growth last year hadalready dipped to a five-year low of 6.8 per cent. These fresh statistics merely confirm the slowing trend and have done little to inspire confidence amongconsumers and investors alike.

Passenger vehicle sales,for instance, fell for a seventh straight month in May, with car sales contracting by as much as 26 per cent. An uneven monsoon, the annual rains which sustain much of India’s agriculture, has added to doubts over an early economic recovery.
‘Consumers always reduce purchase decisions in a slowing economy and investors sit and wait out the recessionary trend. We are seeing just that,’ says Dr M Govinda Rao, a former member of the Prime Minister’s Economic Advisory Committee.

On top of that, the country’s unemployment rate hit a 45-year high of 6.1 per cent in 2017-18, according to recently released official estimates. Private research firm Centre for Monitoring the Indian Economy (CMIE) estimates this has increased since then, with unemployment surging to 7.4 per cent in December 2018.

The Modi government is already slated to borrow an unprecedented Rs 7 trillion

Yet job losses did not seem to impact Modi’s election run as lack of opposition unity and the absence of a viable alternative prime ministerial candidate saw voters rallying to Modi’s standard. However, since then demonstrations by workers given their pink slips by liquidated airlines and factories, and protests by unpaid workers in ailing state-run firms, have increased in frequency. From small factories and export units to large airlines such as Jet Airways to software giants, the news on the job front is dismal.

Silver bullets to solve those problems were anticipated from the new Modi-led government in a budget which was expected by many, including industry leaders, to be bold and decisive. But the story so far has been a muddle of missed opportunities.

A lacklustre, gradualist budget presented by newly appointed finance minister Nirmala Sitharaman, who replaced an ailing Arun Jaitley as India’s top economic czar, seemed to complicate the economy’s recovery. Instead of cutting taxes to try and revive consumption, new taxes and surcharges were added. Among other measures, a new super-rich tax on those earning over Rs 50 million a year saw the Bombay Stock Exchange’s benchmark index – Sensex – drop by 1900 points in the fortnight after the budget was presented.

In protest, foreign portfolio investors, who must also pay the new impost, pulled out some Rs 77.12 billion in July. Fresh import taxes on a host of goods, including imported books and news-print and parts for mobiles, haveled to howls of protest, not only by foreign chancelleries negotiating trade treaties with India but also Indian businessmen who have been hit by rising import costs of their raw material.

Despite the new taxes, the budget targets both on spending and revenue do not seem too convincing and some feel they will be difficult to attain. The government’s revenue receipts are estimated to grow by 25.6 per cent over last year’s actual revenues, with a massive 25.3 per cent rise in net tax revenues and a significant 27.2 per cent in non-tax revenues such as money raised from disinvestment in state-run firms and auction of spectrum. Most economists seem to feel this is too tall a target, given the government’s Rs 1.65 trillion shortfall in tax collections last year.

‘The targets are just too ambitious… if we are not able to mop up the kind of revenues that the government wants, it will have to under-spend as well as borrow far more than planned,’ said Prof. Biswajit Dhar of Jawaharlal Nehru University.
The Modi government is already slated to borrow an unprecedented Rs 7 trillion, including $10 billion through sovereign bond issuances abroad. India’s general government debt to GDP ratio stands at 69 per cent, though its foreign borrowing to GDP ratio is a favourable 5 per cent. Many feel the fresh dollar denominated debt coming on top of a continued running up of debt in the domestic market may not be a good strategy.

Well-known economist Rathin Roy, a member of the Prime Minister’s Economic Advisory Council, is among those who came out publicly seeking a discussion on the issue of taking foreign loans. ‘I have grave concerns about this proposal on the grounds of economic sovereignty, and about the macroeconomic consequences… the government should instead look at relaxing the rupee bond limits for foreign portfolio investors,’ Roy said at a public event recently.

Traditionally, economists espouse the Keynesian prescription of increased public spending on infrastructure to create jobs, as well as demand for goods and services, which industry rushes to provide. This circle of spending and production creates fresh jobs, which results in another cycle of consumer spending, feeding industrial demand.
The Modi administration did honestly try to move in that direction, allocating some Rs 3.4 trillion to capital expenditure on a host of infrastructure projects, about 12 per cent more than what was spent last year. However, the biggest increase in spending was in subsidies from Rs 2 trillion to Rs 3 trillion, with the food subsidy bill alone going up by 80 per cent to Rs 1.8 trillion. ‘The problem with this government, like many previous governments, does not lie in intent. It intends well, but it has limited money and hasn’t managed to figure out how to grow the economy and grow taxes,’ says Prof. Dhar.

Adding to the government’s woes has been a slowdown in its exports, even as its main trading partner, the United States, has stopped allowing duty-free Indian exports till it agrees to demands that the South Asian nation relaxes import norms to allow American firms including Apple, Walmart, Ford and Citibank better access to the relatively less open Indian economy.

India’s exports shrank 9.71 per cent last month to $25.01 billion in June, with key sectors such as petroleum, gems and jewellery, rice, ready-made garments and engineering goods registering steep falls. ‘Obviously,’ says Prof. Dhar,‘trade wars, protectionism and a slower world economy which is forecast to grow at 3 per cent is taking its toll.’

Jayanta Roy Chowdhury is a Senior Indian journalist

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