Economy: From Modi 1.5 to Modi 3.0

As we get closer to the final stages of the 2024 general election, we are being told that plans for Modi 3.0 are ready. While expectations among his fans are high that Narendra Modi will put India on a different orbit, I would say we are really at Modi 1.5 now, given the series of ineffective policies, poor governance, and at least one irrational action that has characterised the past 10 years of Mr Modi’s rule. Indeed, for most of the first seven years, the government was struggling to show even a glimpse of its much-touted development model. Part of the blame for this lay with the mess left by the United Progressive Alliance (UPA), but Mr Modi’s entire first term and two years of the second term were largely characterised by wrong, irrelevant and wasteful policies that hobbled the Indian economy. It is only in the last three years that the economy has moved ahead from Modi 1.0 to what I would call version 1.5.
 

One of the reasons for the long period of economic sluggishness was the shock delivered by the government itself — the decision to demonetise 85 per cent of the currency. It remains the lowest point in Mr Modi’s policymaking, causing massive disruption, destroying jobs and businesses, and inflicting widespread misery. By 2019, the combined impact of demonetisation, the ham-handed and rushed introduction of goods and services tax, reduced purchasing power and lack of capital spending meant that the economy was in dire straits. People have a short memory, which helps politicians. To jog your memory, this was the picture in mid-2019: Poor export growth; cries of tax terrorism even from Modi supporters; a collapse of growth in gross domestic product (GDP), a growth rate below 5 per cent (3.5 per cent under the old method); auto sales at a 20-year low; poor manufacturing growth; a crisis in financial services and banking after some big defaults; household consumption at a four-decade low; unemployment at a 45-year high; and so on. In a desperate move, in September 2019, the government cut taxes for the corporate sector to kickstart growth. This knee-jerk move achieved nothing; companies don’t invest just because they have more surplus. They need to see demand.
 

Modi 1.5
 

When Covid-19 dealt another big blow to the economy, the government finally stepped in to generate growth through huge capital expenditure. Strangely, Mr Modi does not take credit for this in his election speeches. The government has spent massive amounts to increase defence production, and on urban infrastructure, railways, renewable energy, transportation, water supply, etc. Government capital expenditure as a percentage of total expenditure hit 28 per cent in FY24 from just 14 per cent in FY14. The government has also incentivised local manufacturing through production-linked incentives for 14 sectors, though it is too early to judge their impact. While the economy and the stock market have benefited from this, such spending will have to continue for a long time because there are many structural impediments to the private sector picking up the baton of growth right now.
 

This is where the picture gets muddy. Does the Indian government have the capacity to continue such high spending (Rs 11 trillion, plus inflation) year after year? Already India’s debt-GDP ratio is 82 per cent, one of the highest ever. A small crisis would push interest rates higher and the rupee lower, ruining government finances, and, the one engine that is keeping the economy running faster: Government capex.
 

On the other hand, have there been any structural reforms to help the private sector fulfil the responsibility of generating consistently high long-term growth? Not quite. We need hardcore reforms such as minimising frictional costs of doing business, reducing time for approvals, reducing the cost of infrastructure such as power, toll, and fuel, and improving labour productivity, which is among the lowest in the world. This ought to be supported by soft reforms such as a fair and speedier justice system and drastic elimination of corruption. The government has made no dent in any of these critical areas.
 

What about corruption?
 

Remember, “development” is not the only thing the Bharatiya Janata Party (BJP) had promised. The primary appeal of Mr Modi in the runup to the general elections of 2014 was his war cry against corruption in the UPA period. Demonetisation promised to end corruption (a peculiar logic accepted by even financial experts), but was a disaster. Not even Modi fans can claim that corruption and the generation of fresh black money have been curbed. Indeed, over the past few years, the BJP has welcomed shady characters from other parties, many of whom had corruption cases dropped against them after they joined the BJP. A party that was dubbed “National Corruption Party” by Mr Modi is now the BJP’s ally. Many economists don’t think corruption is an important factor in economic growth. But high corruption creates wrong economic incentives, leads to a higher-cost economy, saps enterprise, lowers productivity and ultimately shows up in inflation, weak currency, higher interest rates, and reduced consumption. Like corruption, all elements of the economy under Modi 1.0 have remained the same under Modi 1.5, while increasing tax-and-spend to create growth. If these structural issues are addressed (yes, corruption included) we could brand it Modi 3.0 if you like. For India’s sake, let’s hope he tackles these issues.

The writer is editor of www.moneylife.in and a  trustee of the Moneylife Foundation; @Moneylifers