Little to cheer about

The Modi government’s first year in power has been characterised by a series of missteps, bringing into sharp focus its lack of imagination on the economic issues facing the nation. And there are few signs that a course correction is on the cards.

Finance Minister Arun Jaitley with captains of industry in New Delhi on April 6.

HAVING come to power by fanning high expectations of what it would deliver on the economic front, the Narendra Modi government has completed its first year, which has proved dull and dreary. Dull because there is little the government has to show for its year in office, even on the economic growth front despite all the hype. Dreary because those in the periphery of today’s divided economy find that things have been made worse for them by the new government’s policies.

Moreover, the government, rather than addressing the challenge of indifferent performance with proactive fiscal policies, has chosen to cut back on expenditure, especially social sector spending. This pro-cyclical policy of cutting expenditure during a downturn has been justified by the need to rein in the fiscal deficit, which is a declaration of the Modi government’s commitment to an extreme form of neoliberalism.

There have been three consequences of this desire to make such a declaration. First, the Modi government has tightly squeezed expenditures, so much so that the actual (though still provisional) figures on the Central Budget just released by the Controller General of Accounts (CGA) places the expenditure-to-gross domestic product (GDP) ratio in 2014-15 at 13 per cent as compared with a low of 13.3 per cent in the Revised Estimates presented in the Budget. This implies that the ratio of total Central expenditure to the GDP has fallen from 14.1 per cent in 2012-13 to 13.8 per cent in 2013-14 and to just 13 per cent in 2014-15, the first year of the Modi government. Not surprisingly, besides a number of Chief Ministers, even Maneka Gandhi, Minister for Women and Child Development in the National Democratic Alliance (NDA) Cabinet, has reportedly conveyed her disapproval in writing to the Finance Minister.

Second, with the gross tax revenue of the Centre having come down from 10 per cent to 9.8 per cent of the GDP, the government has had to additionally look for alternative resources, especially receipts from disinvestment (treated as non-debt capital receipts) to meet its fiscal deficit targets. But here it has not been as successful as it wanted to be. The Budget documents for 2015-16 had indicated that against a Budgetary target of Rs.58,425 crore from disinvestment receipts in 2014-15, the government had managed to raise only Rs.26,353 crore. That was not much higher than the Rs.24,362 crore obtained in the previous year. The actual figures suggest that the sum mobilised was only Rs.24,885 crore. So, the Modi government’s disinvestment thrust aimed at raising additional revenues, besides demonstrating its ability to push through reform with the help of a brute majority in the lower House of Parliament, has also failed to take off. This explains the excessive reliance on expenditure reduction. Third, faced with failure on the ground, the government has been desperate to establish its reformist image by diluting labour legislation, getting the Goods and Services Tax passed despite objections from many States, and, above all, pushing through the patently pro-corporate land acquisition Bill.

In the run-up to the 2014 Lok Sabha elections, Modi partly won the battle for prime ministerial candidature within his party by winning the overt support of big business. This he did by convincing capital that he would deliver them a bonanza. After all, what Modi did in Gujarat was to leverage power to win the support of big capital by showering concessions on them. According to Forbes Asia, the Adani group was given 7,350 hectares in Mundra on a 30-year lease at a pittance of between one cent and 45 cents a square metre, which, besides being used partly for a port, a power plant and a special economic zone (SEZ), was partly sublet to even the public sector Indian Oil Corporation at $11 a square metre. Tata Motors is reported to have been given sops totalling Rs.30,000 crore to move the Nano project to Gujarat rather than elsewhere. A Comptroller and Auditor General of India (CAG) report, relating to 2012-13 alone, found that the Gujarat government and State public sector undertakings extended “undue” benefits to major industrial houses such as Reliance Industries Ltd (RIL), Essar Steel and Adani Power Ltd (APL), causing a loss of Rs.750 crore to the State exchequer in a single year.

This history created expectations. The Central government’s failure to deliver such concessions at the same pace has disappointed many in the private sector, so much so that pro-Modi businesspersons have had to come out against his critics. Ratan Tata has had to appeal to his peers to give the Prime Minister more time, and Biocon chairperson Kiran Mazumdar Shaw has been compelled to attack Rahul Gandhi for declaring the Modi government as one that focusses on favouring corporates.

All this is troubling for the Modi government at the end of its first year because it has not been able to deliver on its promise of growth either. This is evident from some of the most obvious indicators to consider. The month-on-month industrial growth rate as measured by the index of industrial production collapsed from a positive 5.9 per cent to a negative 5.6 per cent during the first six months (May to October 2014) of the regime. Though it recovered to 4.7 per cent in November (helped by a low base in the corresponding month of the previous year), the more recent signs are of continued deceleration, with the rate placed at 2.2 per cent according to the provisional figure for March 2015. The performance of agriculture is predicted to be even worse, with truant rainfall and government inaction combining to push down production. For example, according to the official third advance estimate for foodgrain production for the 2014-15 crop year (July to June), output is likely to fall by 5.3 per cent. With foodgrain production having been indifferent in the previous two years, this outcome is close to being disastrous. Meanwhile, reports of suicides by indebted farmers who suffered crop losses because of unseasonal rains crowded newspaper columns for a brief while.

Two factors confound this obvious picture of poor growth performance. To start with, the decision of the Central Statistical Organisation to exploit new data sources and adopt a new methodology while constructing a new series of national income statistics with 2011-12 as the base year. This has yielded absolute GDP figures during 2011-12 to 2013-14 that are lower than or equal to those from the old series with base 2004-05, but rates of GDP growth in 2012-13 and 2013-14 that are higher in the case of the new series than in the old series. Thus, in 2012-13 and 2013-14, while the old series pointed to a rise in the rate of GDP growth from 4.7 per cent to 5.0 per cent, the rate rise based on the new series is from 5.1 per cent to 6.9 per cent. No credit is due to the current NDA government for this since the record related to a period under the United Progressive Alliance (UPA). All that the NDA can take credit for is that the advance estimate (subject to revision) of the GDP for 2014-15 indicates that growth for that year is a relatively high 7.5 per cent. But few believe that any of these figures reveal the true picture. The second confounding factor is the bull run the stock market continued to experience through much of the last year, which took stock indices such as the Sensex to record levels. The media have latched on to this to say that, performance aside, the Modi government has been able to restore confidence among “investors”. It is indeed true that the Sensex climbed to touch the 30,000 mark for the first time in March 2015. But since then there have been signs of a downtrend. Thus, on May 7, the BSE Sensex closed at 26,599. Though high relative to where the Sensex stood even at the beginning of January 2014 (for example), for many reasons, this fall troubled investors used to easy profits. To start with, the climb in the Sensex has been so rapid in recent times that even the relatively high May 7 figure reflected a more than 10 per cent decline from the peak of close to 30,000 realised just two months earlier.

This slide matters because there is little disagreement among market observers that the bull run, which began three years ago when the Sensex was hovering just above 16,000 in May 2012, was driven by the appetite of foreign institutional investors for emerging market paper induced by access to cheap liquidity in their home countries. So, the boom seems to be the result of speculative fever, encouraged by the availability of cheap liquidity in developed economies grappling with recession. The most recent phase in that climb began in early 2014 and stretched until about the beginning of 2015, during which period the Sensex rose from just above 20,000 to touch 30,000 about a year later. That was a remarkable rise of close to 50 per cent with a much lower degree of volatility. However, the investor exuberance that delivered this boom occurred in a period when growth was by all accounts slowing. That meant that such exuberance was in all likelihood irrational. If so, the boom it triggered must end. And when it does, the downturn is likely to be much more severe than witnessed when the taper tantrum based on unfounded fears broke. The indifferent and even poor growth performance during the NDA government’s first year occurred despite a major windfall it garnered over the last year. That was the decline in international oil prices. The price of Brent crude, for example, fell by more than half from $115 a barrel in June 2014 to less that $50 by January 2015. This had four effects. First, it allowed the government to impose additional taxes on petroleum products and offset a part of the potential decline in retail prices, giving it the benefit of additional revenues. Three successive increases in excise duties on petrol and diesel over a short period (on November 12, December 2 and January 1) were expected to provide additional revenues of approximately Rs.10,000 crore.

Second, it helped contain inflation because of the direct effect of lower oil prices and the downstream effects in the form of reduced costs and prices of products using hydrocarbons as inputs. Third, the residual decline in prices passed through to the expenditure side of the Budget, in the form of a reduction in the subsidy paid out on petroleum products. Fourth, it contributed to a reduction in the trade and current account deficits though the government squandered a part of this benefit by reducing tariffs and a quantitative restriction on gold imports. The consequence of this and other developments was a reduction in inflation and an improved balance of payments position—two “achievements” the government has been harping on that actually resulted from fortuitous factors.

However, this has failed to stall the growing perception of economic non-performance. Given the expectations raised by the BJP’s Modi-centred election campaign, the inability to transform major benefits into real growth gains is disappointing even to sections of the elite and the middle class that had turned ardent Modi supporters. The hype remains, but is increasingly ineffective. In these circumstances, Modi, consciously or otherwise, has chosen to focus on his “make in India” agenda that emphasises policies aimed at attracting foreign capital to use India as a hub for world market production and invest in the infrastructure needed to facilitate it. This, perhaps, explains the fact that he has been out of the country far, far more than any other Prime Minister during the first year of a first term. Unfortunately, there are few concrete signs that this is making a difference.