Economy: From Modi 1.5 to Modi 3.0
As we get closer to the final stages of the 2024 general elections, 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. 
 
A part of the blame for this lay with the mess left behind by the United Progressive Alliance (UPA), but Mr Modi’s entire first timer 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 past 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% of the currency. It remains the lowest point in Mr Modi’s policy-making causing massive disruption, destruction of jobs and businesses and inflicting widespread misery. 
 
By 2019, the combined impact of demonetisation, the ham-handed and rushed introduction of the goods and services tax (GST), reduced purchasing power and lack of capital spending meant that the economy was in dire straits. People have short memories 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, collapse of the gross domestic product (GDP), growth rate below 5% (effectively 3.5% 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; corporates 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 of money to increase defence production, urban infrastructure, railways, renewable energy, transportation and water supply.
 
Government capital expenditure as a percentage of total expenditure hit 28% in FY23-24 from just 14% in FY13-14. 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 massive government spending, 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 (Rs11 lakh crore, plus inflation) year after year? Already India’s debt-to-GDP ratio is at 82%, 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 capital expenditure.
 
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 Narendra Modi in the run-up to the general elections of 2014 was his war cry against the corruption of 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 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 BP. A party that was dubbed the National Corruption Party by Mr Modi, is now BJP’s alliance partner. 
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.
 
(This article first appeared in Business Standard newspaper)
 
 
Comments
jaydesai1
3 weeks ago
Frustrated, anti BJP/Modi, feeling left out, ignored by those who matter, struggling to survive in a group that is scaling down in size, have pity on the writer
Pragna Mankodi
3 weeks ago
I am sure the author would have done a similar analysis of the past dispensation that governed the country for 6 decades and that too only by one family. If so, such interesting analysis can be furnished for the readers. I would surely look forward to an interesting read.
yerramr
4 weeks ago
It is a fond hope the country looks to realise. Media hype and sloganeering have marked the hallmark of BJP and the promise of distancing corruption is no where in sight. Hopefully, these will take a reversal in Mody 3.0.
Kamal Garg
4 weeks ago
I think the UPA mess and compulsion of a democratic country are the main culprits of a not-so-good performance. It was partly due to flip-flop and clumsy political taxation policies adopted during Arun Jaitley as FM which includes demonetizing also. But now things are improving slowly and steadily. Let's hope for good.
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