Slogan as solution

Faced with weighty economic problems on all fronts, the Modi government has had nothing but flowery rhetoric to offer.

Published : May 27, 2015 12:30 IST

Sona, a former manual scavenger, sharing her story at a gathering associated with Rashtriya Garima Abhiyaan, a national campaign for the eradication of the practice. The campaign has facilitated the rehabilitation of several manual scavengers by offering them alternate employment in the MNREGS.

Sona, a former manual scavenger, sharing her story at a gathering associated with Rashtriya Garima Abhiyaan, a national campaign for the eradication of the practice. The campaign has facilitated the rehabilitation of several manual scavengers by offering them alternate employment in the MNREGS.

Achche din aane wale hain , the jingle that conjured a thousand dreams as the Narendra Modi-led government strode into office in May 2014, sounds awfully discordant a year later. Jokes abound in social media, the very platform that a year ago appeared to have been captured by Modi in the run-up to the elections in which he was the star campaigner for the Bharatiya Janata Party (BJP). Since then, the defining feature of his administration has been the centralisation of all authority in the Prime Minister’s Office (PMO). However, the excessive centralisation of authority in the hands of one person (or, a triumvirate, as some political observers say) also brings into sharp focus persons popularly seen as being responsible for things having gone awry. The state of the economy, a year later, is one such case.

A defining feature of the Modi regime’s approach to the country’s vexatious economic problems has been the tendency to resort to sloganeering or the mouthing of banal platitudes. Finance Minister Arun Jaitley’s recent utterance that the government is committed to improving the “ease of doing business”, or Modi’s cliche of “less government, more governance”, or his exhortation from platforms around the world (including recently, from Seoul) to “make in India”, barely address the crucial problems facing both agriculture and industry.

To be fair to both, the Indian right wing, especially of the extreme variety, has historically never had either the intellectual bandwidth or the political commitment to social equity to be able to address the grave structural issues that afflict the Indian economy. This constrained approach of the government was visible right from the start, when, with much fanfare, it vowed to “bring back” the black money stashed overseas. Its failure to dovetail the zeal to get the money back with a resolve to plug loopholes in the tax regime (such as those that allow investments to be funnelled in from places such as Mauritius) that allow this to happen in the first place has been a major cause for the failure to deliver on its promise.

This government’s attitude on the issue contrasts sharply with the realisation even in developed countries such as those in the European Union, Australia and even the United States, where there is a growing debate about the need to plug tax loopholes that allow the parking of funds by large companies in tax havens. This correspondent, while on a recent visit to Australia, noticed a lively debate within the government, among political parties as well as in the media, about the need to plug loopholes that allow global corporates such as the fast-food giant, McDonald’s, apart from Google, Apple and Microsoft, to park profits in offshore locations such as Singapore. The issue has gained public attention in Australia, especially as the country veers towards a recession induced by the collapse of the prices of minerals, which are a key export item.

The pains taken by the Finance Ministry to assuage foreign investors’ concerns (read threats as visible in the recent move by foreign portfolio investors to pull out funds) on the Minimum Alternate Tax and on the issue of retrospective taxation in the Vodafone case are in sharp contrast to the concerns raised by tax authorities across the world.

On the issue of the Goods and Services Tax (GST) too, there has been no effort to maintain a balance between the objectives of increasing efficiency and of equity within the Indian Union, especially because States would completely lose control of raising resources. The government’s approach to the GST is to treat it as some kind of magic wand; it is another matter that India’s media or industry does not see the issue either in the context of the need to arrest the decline of taxes as a proportion of national income or in the context of a decline in fiscal transfers to States. The implementation of the GST, especially after the pan-Indian coverage of the Value Added Tax (VAT), threatens to completely strip the States of even a vestige of autonomy in taxation. It is significant that none of the political parties, including those on the Left, has offered a critique of what is in store for Indian federalism if and when the GST is rolled out.

Almost all sections of Indian industry—even sections that unabashedly sang paeans to Modi a year ago—are now saying that an industrial recovery is only a distant hope. The figures lend credence to their worries. Recent official data revealed that Indian manufacturing output increased by a measly 2.3 per cent in 2014-15. But even this increase has to be tempered by the impact of a low base effect because manufacturing output declined by 0.8 per cent in the previous year. The single-minded focus on the fiscal deficit in the face of the slowdown, as if it were a divine ordainment, has robbed the government of its own power to reverse the slowdown. This self-abnegation has meant that the government has refused to even countenance the judicious use of public investment as a countercyclical measure during a slowdown.

T.K. Ramesh, CEO of Micromatic Machine Tools, a medium-sized company, told Frontline that the performance of his industry had “only marginally improved” from the “best years” between 2010 and 2012. The slackening demand for two-wheelers, cars, trucks and tractors, the makers of which are his company’s major clients, has meant that the slowdown has hit machine tool manufacturers too.

During the boom in demand, companies like his had invested in capacity expansion, anticipating a further expansion in demand. “Expansion in capacity takes 12-18 months to materialise, but meanwhile the demand from industry slipped,” Ramesh said. Consequently, the machine tool industry is currently saddled with an excess capacity of about 25 per cent. Another 15 per cent of capacity is in a “half-finished” state, which could come alive at short notice if there is a pickup in demand.

“At the ground level nothing has changed,” Ramesh said. He pointed out that state-promoted investment corporations such as the Karnataka State Finance Corporation and the Tamil Nadu Investment Corporation, financial institutions, and banks are “extremely cautious” in lending to tier-II and tier-III industrial units. He attributed this risk-averse behaviour to their “fear of mounting non-performing loans” in the banking system. For small and medium-sized enterprises, this has resulted in “extremely tight money market conditions”, according to Ramesh.

To make matters worse, the possibilities for an industrial revival have also been hit by the slowdown in agriculture. Ramesh referred to the case of the two-wheeler industry, which has registered its slowest growth in 12 years, to buttress the point that the impact of a slowdown in farm incomes cannot be contained within that sector alone.

On the agricultural front, the Modi government’s actions have been just as inexplicable. Modi’s mann ki baat (heart-to-heart talk) with farmers was utilised mainly to justify the government’s land acquisition measures, instead of addressing the issues that have resulted in the spate of farmer suicides across the country.

The virtual abandonment of the employment guarantee scheme as a means of supporting rural incomes has robbed the government of an avenue of boosting rural demand. Indeed, even sections of industry have decried the strangulation of this scheme by the niggardly budgetary support for it.

A senior Confederation of Indian Industry (CII) official expressed his “concern” about the slashing of expenditure for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS). Observing that the cuts have been made in the name of fiscal consolidation, he pointed out that the allocation of about Rs.45,000 crore for the scheme “is only a small fraction of outstanding dues of the corporate sector to the Indian banking system. This is not the time to be cutting” funds, he said.

Make in India bandwagon

Much has been made of the “make in India” campaign. Indeed, the Governor of the Reserve Bank of India, Raghuram Rajan, was quick to express his scepticism about the campaign. He argued that the global economic environment, characterised by anaemic growth and stagnation, was hardly conducive to India becoming a manufacturing base for the world. Instead, he suggested “make for India” that would entail the development of Indian manufacturing to serve the needs of the domestic market.

“Make in India is an outcome, not a strategy for industrial development,” the CII official told Frontline . While the freeing of bureaucratic procedures governing industry is welcome, a lot more needs to be done to ensure that manufacturing happens in India, he said. For that to happen, “an ecosystem conducive to manufacturing needs to be in place. Today there is too much focus on the slogan and too little change on the ground,” he said.. He pointed out that much of the limited new investment that was happening was “tagging itself” to the “make in India” campaign, which gave the “mistaken impression” that things were happening because of the new thrust, whereas, in fact, the investment may have happened anyway.

The government’s aggressive focus on land acquisition, as if that were the primary constraint on industrial development, is indeed puzzling. Industry leaders admit that the land costs for a large industrial project, such as a steel plant, are an insignificant proportion of the total cost. Moreover, many large companies that have received huge parcels of land have taken no significant steps towards actually investing in projects. For instance, Arcelor Mittal received 2,659 acres (one acre is 0.4 hectare) for its steel plant project in Karnataka last year, but progress has been slow. The example, and many more from across the country, demonstrates the utter vacuity of those arguing that land acquisition is a major constraint on industry.

Many from within the ranks of industry do not share the contention of sections of industry, especially big business, that a cut in interest rates by the central bank would be the magic bullet to reignite growth. Industry leaders are generally wary of speaking their mind, as it may be seen as an affront by those in authority. However, one industry insider told Frontline : “The feelgood factor that prevailed a year ago has definitely evaporated.”

The promoter of a medium-sized company that specialises in the manufacture of speciality fibres for industrial applications said that a rate cut of anything less than two percentage points would make no difference to demand. Moreover, such a cut would have an effect only in some segments of industry, such as housing and automobiles.

“The razzmatazz is well ahead of the ground reality,” he said, observing that most companies do not expect even a marginal improvement before the second half of the fiscal year. Referring to the key element of the new regime, which places the PMO at the heart of all decision-making, he said: “Over-centralisation is a definite reality with the PMO and this is hampering many things. I also think a bigger administrative vision is missing. The ministerial talent pool is poor and I definitely think the RSS right-wing is a dangerous trend we have to be very careful about.”

Welfare derailed

It is thus evident that just like its predecessor, the Congress, the BJP too is content to address “supply side” issues even in the face of mounting evidence that slack demand is having the effect of a powerful decompression on the Indian economy. Indeed, falling demand is perhaps why the official rate of Indian inflation is at its lowest in several years. While industry celebrates, citing this as yet another reason for the central bank to lower rates, the government seems to be smug that all is well. Indeed, Jaitley’s junior in the Finance Ministry, Jayant Sinha, a former investment banker who now stalks the corridors of power, believes that arresting supply side pressures are necessary to prevent the rural economy from overheating (Reuters, May 19, 2015). This is indeed curious because all the evidence seems to suggest a severe demand compression in rural incomes, especially during the last year, when widespread unseasonal rains in many parts of the country, and drought conditions in other parts, had an adverse impact on rural demand.

While Jaitley and P. Chidambaram, his predecessor in the Finance Ministry, have both doggedly denied any evidence that the Indian economy was fundamentally suffering from a demand constraint, there is a germ of truth in the contention of some that there is some difference between the two approaches. While the Manmohan Singh-led UPA government too adopted a neoliberal approach focusing on the supply side, in practice it initiated, under pressure notably from the Left, especially during its first term, countervailing measures that ameliorated the effects of its otherwise neoliberal policies. The MNREGS and several other measures were a part of this political mindset. However, unlike the Congress, the BJP does not have the historical baggage of a commitment to welfare to fall back on, which explains Modi’s recourse to flowery rhetoric in response to weighty problems. The excessive centralisation of authority, coupled with the intolerance of anything suggestive of state intervention in favour of the poor, the marginalised and the weak, is bound to make this kind of governance unsustainable. There are already stirrings of dissent. Faced with massive cuts in social sector spending, Union Minister for Women and Child Development Maneka Gandhi has, according to Reuters, written to Modi complaining that the spending cuts would affect 300 million people. She warned that the budgetary cuts would impair the “focus” of critical programmes targeted at the poor. “I am afraid to point out that political fallout of such a situation can be grave,” she said.

While Maneka Gandhi may not exactly be the lodestar around which dissent could centre in the future, it does provide an indication of how quickly things have begun to unravel for the BJP. The aura of invincibility that surrounded Modi as he assumed charge may have well and truly dissipated.

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