Modi's world vs Manmohan's world: What makes things quite different now

For a prime minister who spent considerable time globe-trotting, Modi would be hoping that the world pays back when he wants it the most

In 2013, months before the Parliamentary election, one often heard a bad economy, policy paralysis and rampant corruption would be the Manmohan Singh government’s undoing. In 2018, months before yet another Parliamentary election, the rhetoric surrounding the Modi government is a bit different. There is no sign of policy paralysis or a corruption scandal capable of derailing Modi yet. The economy looks better than before. The world in which the Indian economy is trying to steam ahead, though, is radically different.  

If the International Monetary Fund’s (IMF) world economic outlook is anything to go by, the Indian economy would get back on its high growth trajectory in 2018-19. The IMF has predicted the economy to grow at 7.4 per cent in its latest outlook published in October. That it comes almost six months ahead of the next Parliamentary elections, which some political pundits predict will be won by Bharatiya Janata Party (BJP) and its allies, should be good news for Modi and his party.

The last time the IMF had such an optimistic outlook for the Indian economy in a comparable period before a Parliamentary election. was in October 2008. In its world economic outlook then, it predicted the Indian economy to grow at 7.9 per cent in 2008-09 -– comparable to China’s. Not surprisingly, the Manmohan Singh-led United Progressive Alliance (UPA), which had engineered some path-breaking social security schemes during its first tenure, was voted back to power in 2009. IMF’s projections convey the same message for the present government -– higher growth, lower inflation and better fiscal parameters in 2019. The Modi government’s universal health insurance scheme (Ayushman Bharat) too has the potential of achieving what the rural employment scheme delivered for the erstwhile UPA government in terms of electoral results.  

Leaning on Opec

What should perhaps worry the Modi government more at the moment are external factors over which he has little control over. This became clearly evident when Modi himself had to ask Opec and the Saudis to go easy on payment terms for Indian companies buying oil from them, including accepting a part of the payment in rupees in a bid to stem the Indian currency’s free fall over the last year. A significant difference between the year before the UPA government lost power in 2014 and the present times is that the Modi government faces a situation of extremely high retail fuel prices despite the fact that Indian basket of crude oil is not as expensive as it was back then. In 2013-14, the Indian basket averaged $106 a barrel. In 2017-18, it stood at around $78. Yet the Modi government’s move to increase taxes on fuel to shore up its revenues to fund its ambitious social security programmes such as higher crop prices for farmers and free medical care for the poor before an election year means that despite international crude prices being lower now than in 2013-14, retail fuel prices are much higher. In 2013-14, petrol and diesel in the national capital Delhi averaged around Rs 72 and Rs 55 respectively. In 2018-19, despite crude oil prices being 42 per cent lower, the common citizen is paying almost 16 per cent and 43 per cent more for petrol and diesel at fuel pumps, respectively. The government earned Rs 2.3 trillion as revenue from excise duty on fuel in 2017-18 -– more than twice its earnings in 2014-15. With little room for further tax cuts in view of its ambitious social sector pre-poll bonanzas for the poor, the Modi government has been left with little option but to use international diplomacy with Opec and others to assuage its domestic concerns.

While the Modi government looks cornered on fuel prices, it has little control on the US Federal Reserve’s consistent raising of interest rates, which is leading to a dollar exodus from India and further putting the rupee under pressure. According to the Reserve Bank of India (RBI), foreign portfolio investors have withdrawn more than $14 billion from India’s capital markets in 2018-19 till date. On the brighter side, Foreign Direct Investment (FDI) in India was $37 billion in 2017-18; twice that in 2013-14. A falling rupee should have helped exporters, but is doing exactly the opposite – exports have fallen in 2017-18 as compared to even their 2013-14 levels, while imports have increased marginally.

Domestically, things for Modi look under control. The country has reported no major terror attack on civilians since 2014, consumer inflation was at its lowest ever in recent years, the index of industrial production looks brighter than before, the opposition is yet to find someone to match Modi’s voter appeal and charges of defence corruption and impropriety of some ministers have failed to generate enough anger among Indians against the government. For a prime minister who spent considerable time of his tenure globe-trotting, forging personal and diplomatic bonds, Modi would be hoping that the world pays back when he wants it the most.