IN THE winter of 2015, nearly a third of the way into the Modi government’s tenure, the general comment in many circles was that after promising much, Narendra Modi had attempted little, and achieved perhaps even less. Now, more than two-thirds of the way in, and a year before the fever of the 2019 election campaign catches, the operative word is change. Change not because of the Gujarat state elections, which irrespective of what the opinion polls say about the final outcome being another BJP victory, have given the ruling party a bit of a cold shower; but the longer-term change wrought on the economy, the polity and society at large. By the end of the Modi government’s term, two if not all three of these may have changed more than in any five-year period since the Narasimha Rao quinquennium, which was marked by the watershed events of economic reforms and the demolition of the Babri masjid.

Seminal change is more obvious in the case of the polity and on the social front. Public discourse has moved away increasingly from the Nehruvian framework towards the reference points of Hindutva; the gaps between party and state, and state and religion, have narrowed, while the political centre has shifted tectonically to the right. We see the sustained popularity of a strong, nationalist leader for the first time since the days of Indira Gandhi, who was as polarizing as Modi has been in terms of the chasm between faithful followers and bitter critics.

Then as now, some of the faithful have demonstrated through word and action that they have only a tenuous commitment to the liberal order that is the core of the Constitution. Witness also the erosion of the rule of law when the UP chief minister threatens to deal with criminals through police encounter killings; and the proscription of free expression when a non-documentary film that almost no one has seen is banned in state after state – on the basis of yet another case of myth being treated as historical fact. The ancient Greeks knew the difference between mythos (storytelling) and logos (reasoned argument based on supporting evidence), but we seem to confuse between the two.

Consider the implications when judges, duty-bound to rule against censorship, issue orders for prior restraint on the media – gagging even the reporting of proceedings in open court. Inconvenient editors are shown the door, and journalists face harassment and even death while trying to do their job. This has happened in other regimes too, as has the banning of books and films, including sight unseen (remember Rushdie’s Satanic Verses). Sometimes it is not ruling politicians but middle-level officials who get on a high horse, like the district collector who ordered the arrest of a cartoonist. But there is no denying that the pressure on the media is at a new level. And the social fabric must surely be tested when Muslims can see that no one responsible for lynching them has been brought to justice, and that ruling party politicians repeatedly make ugly comments in public.

 

More surprisingly, Pew research shows that the public’s commitment to democracy itself is now more tenuous than what most people might have imagined. To quote from the findings of the Pew opinion poll, conducted fairly early in 2017 and published in November: ‘A majority (55%) of Indians also back a governing system in which a strong leader can make decisions without interference from parliament or the courts, while 53% support military rule. Support for autocratic rule is higher in India than in any other nation surveyed. And India is one of only four nations where half or more of the public supports governing by the military.’

One could dismiss such findings as reflecting nothing more than the kind of idle drawing room chatter that people sometimes indulge in, perhaps half-seriously. On the other hand, though, does it fit the evolving pattern? Perhaps the thought of a purposeful Narendra Modi with a free hand, and without institutional constraints, appeals to a lot of people. But it may be more than that. While all the evidence is that people value their vote, is it possible that the frustrations wrought by a system that is at best half functional (think of the courts, the police, the state of schools, hospitals like the one at Gorakhpur, the job market) is prodding people to think of strongman oriented options? After all, they have delivered rapid growth and development in some other societies (especially in East Asia).

 

The problem with strongman solutions is that there are no systemic correctives available should things go wrong. Indeed, autocratic leadership is harmful in the long run because it damages the institutions that are the essence of successful societies. One has to look no further than clampdown Turkey under Erdogan, bankrupt Venezuela under Chavez and now Maduro, and crisis-ridden Pakistan to see the roads down which one travels when assertive nationalism combines with revivalism and populism.

Closer home, 35 years before Yogi Adityanath’s preferred solution for tackling crime, another UP chief minister (V.P. Singh) had launched a high profile campaign to get rid of dacoits. The trigger-happy police got a free hand and ended up killing a lot of innocent people as they totted up the numbers on ‘dacoits’ taken care of. Notably it didn’t harm Singh politically, since he went on to acquire a short-term halo and become prime minister.

The pity in all this is that a BJP that criticized Congress failings over the years, like making the official electronic media into government hand-maidens and packing quasi-government offices with apparatchiks, has taken to doing the same thing and more. It has taken pages from the Congress play-book, and then added a few of its own. So there is change, but also continuity!

 

The changes in the economy are less unidirectional. The government has got a lot of stick over the past year because of the twin shocks that it has delivered – first demonetization and now the botched introduction of the long awaited goods and services tax (GST). These have drawn attention away from the many other initiatives that the Modi government has taken with a rare display of energy and zeal. The multitude of programmes is long and impressive – even those adapted from programmes already in existence have usually been expanded in scope and scale: like Swachh Bharat, which is a determined campaign to end open defecation; the Aadhaar drive aimed at reducing waste in government subsidy programmes; the neem-coating of fertilizer that has tackled urea diversion to non-agricultural uses, thereby reducing the subsidy as well as imports; the quantum jump in targets (and achievements) for the clean energy programme; the massive investments being made in hitherto fund-starved railways; the scale-change when it comes to financial inclusion.

The difficulty is that these and others have made little difference to the growth rate of the economy, while the twin shocks have almost certainly delivered a setback to growth. There is also little to show on a key promise: jobs. It has been argued variously that this is because the multiple programmes have not really delivered as much as is claimed, or that Modi is more interested in programmes than policies (the former emphasizes doing something right, the latter looks at moving the right levers). It is of course true that the prime minister and some of his ministerial colleagues talk up their act like never before – the instances that come readily to mind are Nitin Gadkari’s endlessly exaggerated claims on the pace of highway construction and Piyush Goyal’s claims on how much revenue the auctioning of coal mines would deliver. But these cannot take away from the real achievements on many fronts, including in the actual pace of the highway programme and the power sector – both conventional and renewables.

Nor is it really true that the government has ignored economic policy. For while it is no secret that Modi has no patience for the policy debates that so preoccupied previous governments, it is under him that the framework of monetary policy has been changed systemically, to sharpen the focus on controlling inflation to four per cent (against the historical average of more than seven per cent). Equally, fiscal rectitude has been placed at the centre of the drive to restore macroeconomic stability – with the government staying the course so far on deficit reduction (from a starting point of 4.5 per cent of GDP to a target 3.2 per cent this year). This, when the temptation has been there to spend more in order to counteract slack private investment.

 

These have delivered admirable macroeconomic stability, but not growth. As things stand, growth in the five years of the Modi government should average about 7.3 per cent, which is pretty much the same as the 7.4 per cent for the five years of UPA II. The facile and heady talk in the initial Modi years, of growth accelerating to 8, 9 and 10 per cent, took time to die down as the cold reality of the investment slowdown hit home.

As for the context in which the two governments functioned, both started with problems. The Manmohan Singh government at the start of its second term was grappling with the backwash effects of the 2008 western financial crisis. In turn, the Modi government started with the twin balance sheet problem, a stretched fisc and a vulnerable external situation. But it enjoyed a massive stroke of good fortune: a halving of oil prices, from an average of over $100 per barrel for India-related crude in the last three years of UPA II to less than $50 per barrel in the first three years of Modi rule. This helped stabilize the economy: reducing the fiscal deficit by slashing subsidies on petroleum products without increase in consumer prices, bringing down the current account deficit (through lower oil imports) and also curtailing inflation. The oil bonanza also boosted GDP growth by a couple of percentage points.

 

If growth did not accelerate beyond the blip that was enabled by the oil bonanza, it is now evident that a major cause has been a private sector overburdened with debt, and banks stuck with mountains of bad loans. Both have resulted in an investment slowdown that has been difficult to tackle. Certainly, the government has taken its time figuring out the solutions, in the form of a new bankruptcy law and bank recapitalization, which will now roll out over the next couple of years. By then, Modi’s term in office would have ended – with investment as a share of GDP having fallen over the period, to a level last seen around 2003, before the growth surge of 2003-08.

The fact is that macroeconomic policy has not supported growth processes. Fiscal policy has been contractionary, since the deficit has been steadily squeezed. Monetary policy was cautious even when inflation fell, with cuts in interest rates generally reckoned to be fewer than they might have been. Such cuts as there have been were not fully passed on by commercial banks, partly because a spurt in state government borrowings kept bond interest rates high. The rupee’s external value has also been allowed to stay high, thereby constricting exports.

 

Still, it is clear that the drop in growth rates in the first three quarters of 2017, compared to a year earlier, would have been less severe, or not there at all, without demonetization. Whether the GST’s teething problems have also had a negative effect on economic activity is yet to be figured out, because the July-September GDP numbers (which showed an uptick from the previous two quarters) do not really account for what has been happening in the informal sector, for which there is a data lag. Nevertheless, the tentative conclusion is that the informal and unorganized part of the economy has borne the brunt of the twin shocks. And it may be that this is reflected in the reports concerning the mood of Gujarat voters, especially small businessmen, and those looking for jobs. A final assessment on this must wait for the election results. Since pre-poll surveys uniformly predict a win for the BJP, any conclusions on the business sentiment must be cautiously reached.

If Modi does a rethink on the thrust of some of his actions, he may have to consider whether the push for ‘formalizing’ the vast unorganized sector of the economy (which one would ordinarily argue for) has been too drastic, sudden and sweeping. Is disruption the appropriate word when vast numbers of people lose their businesses, wealth or jobs? The benefits of formalization (eg. roping more players into the tax net, offering better terms to employees in the organized sector, etc.) and the associated transition costs would have to be assessed in the context of the country having no social safety net to offer those who drop off the edge. Some have pushed the idea of a minimum basic income, but this is simply unaffordable, since the bill will run to 4-5 per cent of GDP.

As things stand, the informal sector of the economy is the country’s ‘employment sink’, where people find low income, low technology, low productivity ways of making a living when, on the one hand, agriculture becomes unviable and, on the other, they are excluded from the formal sector with its more exacting demands in terms of skills, language abilities and plain education. Take away that enormous shock absorber in the job calculus, without putting new ones in place, and economic distress could erupt in the form of social discontent, manifested through violence that gets channelled almost inevitably into old cleavages.

The numbers are stark. The sixth economic census, conducted in 2014, showed that India had 58.5 million economic establishments, of which 72 per cent were single-person outfits – like your roadside tea shop or bicycle repair outfit. These had grown 56 per cent since the previous census of 2005, while those that had paid employees (fewer than five, in most cases) had grown only 16 per cent – the difference in growth rates tells its own story. Fewer than a million establishments employed ten or more workers and, therefore, belonged to the organized sector. There is simply no way in which such an economy can be ‘formalized’ quickly, or the role of cash hammered down, through the scrapping of most of the money supply and then by introducing a new, complex tax that places the smaller players even in the organized sector at a disadvantage.

 

At the other end of the economic scale, the change is no less momentous, though less obvious. If poor banking practices have contributed significantly to a decline in investment, we may now be able to look forward to a much better credit culture for the first time since the bank nationalization of 1969. The bankruptcy code enacted two years ago makes it abundantly clear that the relationship between banks and their business customers is about to change for good. Continuing with the old game of company or project promoters taking money from the banks and siphoning it off could henceforth mean that banks can auction your company to recover their loan. You will also show up in the records as a poor credit risk, and that will cost.

 

Potentially, this targets the conglomerate business groups that have dominated the business scene, bagged most of the PPP (public-private partnership) contracts and, in the end, saddled the economy with the twin balance sheet problem – heavy debt on corporate balance sheets and bad debt on those of banks. Much attention has been focused on the poor quality of management in public sector banks as a causative factor. Ironically, since the bankruptcy process will almost certainly mean more loan write-offs, not less, the banks themselves are not keen on the process. Meanwhile, the flip side of the problem is the private corporate sector, which can be blamed for either rapacity or poor assessment of business risk – puncturing the usual binary that the public sector is the one that performs poorly, while the private sector does well.

Irrespective of who gets how much of the blame for today’s situation, India’s credit system is in for major overhaul. Lenders will at last have the whip hand when it comes to recovering assets. Second, the larger companies will increasingly access the bond and stock markets for funds, bypassing banks which henceforth will have to find customers for credit in the small-medium sector (which until now worried less about the cost of credit and more about getting credit at all). This is change that has been long overdue.

 

Cleaning up the system also means dealing with corruption. Whatever the merits and demerits of demonetization, no one can be in any doubt now that Modi intends to deal with corporate and business corruption more seriously than his predecessors. There is, however, less enthusiasm in evidence when it comes to tackling retail corruption and illicit political funding. But whether it is going after shell companies, directors of dubious enterprises, benami property holdings, and money stuffed away in tax havens or round-tripping back into India, indeed changing the taxation rules with those tax havens, there has been a sustained campaign to deal with dubious business practices.

It may work, or it may not work because many kinds of corruption are not in the klieg lights. What we do know at the moment is that the involuntary disclosure scheme that demonetization turned out to be – done in tandem with massive money laundering, or simply as a way of avoiding the complete write-off of cash hoards that was the alternative – has left tax officials with a mountain of work, separately from the sharp increase in tax filings that has been claimed. The tax department has severe capacity limits when it comes to dealing with the lakhs of income tax cases that need investigation with regard to suspicious cash deposits made. Potentially, this could yield a tax bonanza, and the government’s supporters have put out heady numbers. The government on its part has raised the year’s target for direct tax collections by Rs 20,000 crore – though whether that is because of an expected revenue bonanza or merely an attempt to control the deficit remains to be seen.

Meanwhile, cash is back in the real estate market, driven perhaps by the high stamp duties that go with real estate transactions. Petty bureaucratic corruption still thrives. Nor can it be easy to change a business culture that is heavily oriented towards tax-evaded cash in the same towns where businessmen have been protesting, like Surat. In any case, the fountainhead of corruption is political funding, which has not been cleaned up. The steady string of tax raids on politicians might have been seen as one step in this direction, except that they target only those opposed to the BJP.

 

One could argue that even if he does not succeed in his campaign, Modi gets credit for trying. And that is a fair point. But this may be a good example of what happens when his instincts on what to do lead him away from policy advice. Early in his tenure, the new prime minister had launched, from his official residence, a book on policy issues edited by Bibek Debroy and two others. After removing the wrapping, he held up the book and told the assembled audience: ‘Don’t expect me to read all this.’

At subsequent meetings with economic writers and at Niti Aayog, Modi would listen but with little signs of real engagement. What he wanted in place of the policy debates that had flourished in the Sonia Gandhi-Manmohan Singh decade was actionable agenda items and programmes to be rolled out with accompanying fanfare – to be implemented by bureaucrats who would be monitored and held to account.

When it came to demonetization, Modi had been advised against the step by the governor of the Reserve Bank of India, Raghuram Rajan, and by other economists who enjoyed his confidence and whom he consulted. The chief economic advisor in the finance ministry was not consulted, but then he has made his views obvious by maintaining a studied silence on the subject. But evidently the prime minister was looking beyond economics. As he has said privately and even publicly, he was willing to accept some economic damage as the price for a blow against corruption and the black economy. He may also have calculated that there were brownie points to be won by buttressing his positioning as an anti-corruption campaigner (Na khaoonga na khane doonga).

If the anti-corruption campaign delivers only partial results, it will buttress the arguments that Modi ignored – that most unaccounted wealth is not held in cash, that the flow of black money transactions is more important than the stock of unaccounted cash at any given point of time, and that reform of markets (for urban land, for instance) and administrative systems will do more to achieve his objective.

 

The real problem on the economic growth front may well be that Narendra Modi did not give it primary importance once he had gained power on the strength of a series of promises that had to do with the economy – including jobs. In general, for those in the Sangh Parivar, the economy plays second fiddle to broader political and cultural objectives. In the summer of 2014, capturing power in the states (and through them the Rajya Sabha) was more important than taking economic steps that might upset voters. The Sangh Parivar, in turn, was more interested in what it calls cultural nationalism, and associated issues to do with history, education and assertions of identity.

There was, of course, much talk of stepping up the economic growth rate, but no real action. As Modi told a group of economic writers whom he met in 2014, he would not do labour reform that upset trade unions, or agricultural reform that upset farmers; instead, he would find what he termed a third way. Perhaps he meant the kind of electricity distribution that he did in Gujarat – instead of tackling directly the issue of underpriced power for agriculture finding its way to other sectors, he introduced a parallel distribution system. It is certainly interesting that of all the promises he made during the 2014 election campaign, the one that he acted on fastest was the assertion that he would build toilets before temples. The Swachh Bharat campaign was launched from the Red Fort during his first Independence Day address. If it works, it will make a difference to health and nutrition, and the stunting and wasting of children. Perhaps this is a third way of addressing an endemic problem.

 

Looking back, it is undeniable that the price for sidestepping a more traditional economic reform agenda – in essence, freeing the factors of production – is being paid by the economy. Modi has shied away from structural reform of markets and institutions. Thus, banks will be recapitalized with public money, and remain government controlled. Massive investment will be poured into the fund-starved railways, but their dated and ossified management structure will not be addressed. The only real case of privatization, if it eventually happens, will be Air India.

As is becoming clear, this approach is not going to deliver faster growth or jobs. Nor does the bank loan refinance programme that operates under the Mudra rubric have the capacity to make India an entrepreneurial society, as both Narendra Modi and Amit Shah have asserted at different times (the subtext being that entrepreneurs create jobs, they don’t ask for them). Jobs will not materialize if ‘Make in India’ fails, as it shows every sign of doing on a macroeconomic scale. The core target is that manufacturing should increase its share of GDP from 14 per cent in 2012 to 25 per cent by 2022. It was an impossible target to begin with. And it has not helped that, through these last five plus years since the launch of the New Manufacturing Policy (reborn under the present dispensation as Make in India), the national accounts show that industry (broadly defined to include construction) has grown slower than GDP in all but one year; sometimes significantly slower. From 29.8 per cent of GDP in 2011-12, industry has shrunk to 26.6 per cent in 2016-17. We have been in reverse gear.

 

What about trade – that other harbinger of rapid growth and jobs in labour-intensive export sectors? The unhappy truth is that imports and exports have shrunk in recent years. If you take out swing factors like oil and gold/silver, both imports and exports show extreme stagnation – at about $270 billion for one and a little over $240 billion for the other. Technology, solar power, telecom – they have all been growth sectors for the economy. But while there is little domestic manufacture of what goes into these sectors, the import of electronic goods surged from 6.7 per cent of the total import bill in 2011-12, to 11.2 per cent in 2016-17. So when it comes to the nature of economic growth, the bulk has been accounted for by the main services sub-sectors, which are not where the jobs are. With agriculture too having slowed down, the base of economic growth has narrowed, causing the growing inequality that is a separate and growing area of concern.

It is possible that more broad-based growth will recover from the coming financial year, 2018-19. Almost all forecasters expect growth to be better than in 2017-18 and 2016-17, helped by the fact that the global economy has regained momentum, and international trade growth picked up. On the domestic scene, the government banks will have been recapitalized – removing one bottleneck in the way of credit growth. Whether the demand for credit will grow by much remains to be seen, given that most large corporate houses are still trying to de-leverage their balance sheets and that consumption is tending to slow down, as the Reserve Bank noted in December. For new projects to get under way, the existing capacity utilization has to improve, and companies must regain the wherewithal to invest afresh. If there is room for optimism, it lies in the fact that corporate performance may be set to improve. Corporate profits as a share of GDP have slipped to an unusually low level; certainly, the sustained optimism on the stock market is borne out of the belief that a corporate uptick is round the corner.

 

If growth does pick up from its present low point, the government can go out on the front foot when talking of the economy, instead of being aggressive in defence as it has been through all of 2017. Even if the BJP gets an electoral warning shot in Gujarat, Modi has the political skills and the economic wiggle-room to muster voter support afresh. How much of the Hindutva agenda to push (the Hindutva brigade is hoping for a breakthrough at Ayodhya that will permit temple construction to begin) will depend on how strong or embattled he feels in the run-up to 2019. It is hard to see a political scenario today where the BJP will not be the pole party. Perhaps the operative question is whether it will once again win a majority on its own, or need the support of allies to form a government. Much could hinge on that answer.