Mr Modi's populist note

India needs to move away from itemised interest subventions

Prime Minister Narendra Modi’s address to the nation on New Year’s eve played a populist tune by providing some tax relief to those who were reportedly most affected by his decision to demonetise. Mr Modi did not say how the government would pay for the measures, although the consensus is that the package is unlikely to be too costly. The target groups include senior citizens, women, farmers, small traders and others involved in small enterprises — essentially those belonging to the informal economy, which is, for the most part, heavily dependent on cash for its functioning. The sops, however, ignore the conventional wisdom that the country needs to move away from such itemised interest subventions.

The bulk of the relief has been provided in the form of lower interest rates on housing and farming loans. Mr Modi also announced a 33 per cent increase in houses to be constructed under the Pradhan Mantra Awas Yojana. For small traders, the government will now provide a credit guarantee of Rs 2 crore instead of Rs 1 crore earlier. Similarly, there is a new scheme for senior citizens wherein their 10-year deposits of up to Rs 7.5 lakh will earn an interest rate of eight per cent, paid monthly. In essence, Mr Modi attempted to make it easier for the informal economy get on with business. 

Demonetisation has disrupted private consumption, which is not only the key contributor, along with government expenditure, to India’s existing economic growth but is also seen as the engine to kick-start the stalled investment cycle. The extent to which Mr Modi’s initiatives will reduce that pain is an open question. For instance, people in the rural economy, who are struggling with receiving payments for their crops and whose income prospects in the next quarter are bleak, are unlikely to enthusiastically line up for home loans of Rs 12 lakh. Similarly, the “new scheme” for pregnant women, which involves providing financial assistance (Rs 6,000) directly into their bank accounts, is actually an existing provision in the National Food Security Act, 2013, which Mr Modi’s government has not yet implemented.

The weakness of Mr Modi’s message was three-fold. One, there was no clarity on when the cash withdrawal limits would be lifted. It is clear that unless the economy is fully monetised, the demand contraction because of the note ban is unlikely to be reversed. Two, he did not provide any details on the demonetisation experience and its ability to curb black money, considering that most of the banned currency notes have come back into the banking system. But he, paradoxically enough, treated that very fact as clinching evidence of the success of the exercise. Three, Mr Modi did not provide any account of how much of the demonetised currency came back into the banking system at the end of the 50-day period.

The productive area to focus on is how to clean up political funding, which Mr Modi mentioned in his speech and sought a debate on. He asked all parties and leaders to move away from a “holier than thou approach,” come together in prioritising transparency, and take firm steps to free politics of black money and corruption. The starting point is transparency about all aspects of how political parties operate, including submission to the Right to Information Act.