THE Narendra Modi-led government, in its second term, has already acquired a unique but unedifying halo around its economic performance. No other government in post-reforms India has seen the economy plunge into such a serious slowdown problem soon after its re-election, as the one led by the Bharatiya Janata Party in 2019. The contrast between the BJP’s massive victory in the May 2019 general elections and the economic downturn in the months that followed, is too stark to be ignored.

Since 1991, only three governments were re-elected after the general elections. In the 1999 general elections, the Atal Bihari Vajpayee-led government was voted back to rule from New Delhi. In 1999-2000, the real growth in gross domestic product (GDP) was 8%. The general elections in 2009 ensured that the Manmohan Singh-led government returned to power and the GDP growth in 2009-10 was estimated at 7.9%. And in 2019, the Narendra Modi-led government was returned to power with an even bigger majority for the BJP than it had secured in 2014. But GDP growth in 2019-20 has moved in an opposite direction, set to reach its lowest level since 2008-09. The Reserve Bank of India (RBI) has projected growth to be at 5% for 2019-20. The officially released number for the first half of 2019-20 puts it at 4.75%.

No special meaning, however, should be read into the correlation between the return of a government after the general elections and economic growth in the same year. A government that comes back for another term after the elections is both strong and stable. It, therefore, enjoys the natural advantage of continuity in governance and policy, which should result in better economic performance. On the other hand, many experts would argue that it is wrong to draw a cause-and-effect connection between an electoral victory and economic growth. Growth, they would point out, is an outcome of a variety of other factors including the stage of the economy’s growth cycle, global economic factors, impact of policies initiated in recent past and of course the international price of crude oil. Nevertheless, the contrast between the rise of Modi’s political capital and the decline in the economy’s fortunes cannot but be the starting point of discussion for any assessment of the Indian economy.

The BJP had wrested power from the Congress-led United Progressive Alliance (UPA) in 2014 largely on the promise of better governance, a big push to economic reforms, higher growth and more jobs. Five years later, the BJP leadership realized that it had not done too well in fulfilling those promises. Of course, there were no major corruption scandals during the first five years of the Modi regime and a set of reforms were initiated to put in place a regulatory framework for the real estate sector, the introduction of a legal system for resolving insolvency and bankruptcy in a time-bound manner and the roll out of the goods and services tax (GST). But, the challenges of efficient execution came in the way of the economy benifitting from such reforms.

 

The pace of real estate reforms was tardy, with delays in the setting up of the regulatory framework in different states. The Insolvency and Bankruptcy Code made some headway, after initial delays in building adequate institutional capacity to deal with insolvency cases and bringing about necessary amendments to the law, even though achieving time-bound resolution of stressed loans continued to pose a challenge. The launch of the GST was mired in design flaws with many exemptions and multiple rates. This was largely a result of the Modi government submitting to the political compulsions of keeping a tight leash on prices (mandated by a law on inflation targeting), protection of a minimum revenue growth rate for the states and soften the blow of formalization through maintenance of digital records of all transactions. More than two years after its launch, GST continued to be plagued by many execution problems and the revenue growth was far less than projected, with many states clamouring for higher compensation to make good the shortfall in their revenue collections.

The challenges for the Indian economy during the Modi government’s first term became complicated and more formidable by the mindless act of disruptive adventurism when the Reserve Bank of India was pushed to demonetize 86% of the country’s total currency in circulation, in one stroke on the night of November 8, 2016. Its adverse impact on the entire economy – and in particular on the informal economy, trade and the large number of small and medium enterprises – cannot be disputed. Adding fuel to the fire, particularly for the small and medium enterprises sector, the GST was launched just seven months after demonetization. The impact of rapid formalization through the GST soon after an unprecedented squeeze on cash was huge for a large number of small- and medium-scale traders and manufacturing units that suffered a significant decline in output which resulted in job losses. GDP growth slowed to 7.2% in 2017-18, down a percentage point from what it was in 2016-17, the year of demonetization. The unemployment rate in 2017-18 rose to a 45-year high of 6.1%.

 

In assessing India’s current economic slowdown, what is not often recognized is that by 2017-18 the economy under the Modi regime had already begun showing visible signs of weakness. But few had noticed it, nor did the policy apparatus within the Modi government initiate any move to repair the damage. For instance, a large part of the gains from a softening international crude oil prices had already been pocketed by the government through higher retail taxes on petroleum products between 2014-15 and 2016-17. Much of the fiscal deficit reduction during that phase was also possible because of the oil bonanza. But by 2017-18, the overall impact of lower and stable oil prices had begun to wear off and the demand for a roll back in oil prices began rising with the government being forced to concede such a demand, even though only partially.

Total foreign direct investment flows into India, which were booming in the first two years of the Modi regime, with growth rates of 25% and 23% in 2014-15 and 2015-16, respectively, decelerated to single-digit rates of 8%, 1% and 2% in the subsequent three years. India’s merchandise exports presented an even more sorry state of affairs. In two of the five years of the Modi government’s first tenure, merchandise exports contracted and in the remaining years they recorded slow single-digit growth. Annual merchandise exports hovered between $330 billion and $262 billion, even as other Asian countries clocked healthy growth rates during the same period. India’s poor performance in exports was partly an outcome of the pursuit of a robust exchange rate policy that kept the Indian rupee overvalued against other currencies particularly the US dollar. This was a costly mistake. If jobs did not grow at a healthy rate, increasing unemployment, it was largely due to the lack of buoyancy in exports, which was also a reflection of the poor state of India’s manufacturing sector. In the past, India’s healthy economic growth had always been accompanied with a robust double-digit growth in exports.

 

Even as the twin balance sheet problem (a debt-laden corporate sector unable to service its borrowings, which contributed to an unhealthy rise in non-performing loans of banks) was taking time to get resolved, there was a perceptible decline in the pace of investments in the economy. The burden of an inefficient public sector banking system continued to take a toll on the economy. The government went in for the soft option of recapitalising public-sector banks and merging some of them, but that crowded out a good chunk of the government’s resources in equities of loss-making public sector banks, leaving relatively little for kick-starting the much-needed investment in the infrastructure sector. What made it worse was the absence of factor market reforms including the promised relaxation in the land acquisition law and the introduction of flexibility in labour retrenchment.

Not surprisingly, India’s economic growth took a hit. After rising in the first three years of the Modi regime – from 6.4% in 2013-14, the last year of UPA, to 7.4% in 2014-15, 8% in 2015-16 and 8.2% in 2016-17 – GDP growth began decelerating to 7.2% in 2017-18 and 6.8% in 2018-19. This was a trajectory that has not been reversed. Two trends in the economic growth story under Modi’s first five years are unmistakably obvious. One, the average annual growth rate in five years under Modi was 7.5%, just a shade better than the 6.7% growth recorded by the UPA under Manmohan Singh. If growth was not substantially higher during the Modi years, compared to that in the Manmohan Singh regime, and if the unemployment rate had actually increased, the electoral promise of ache din could not have been fulfilled by PM Modi. Two, a drill-down into the quarterly growth rates showed that the Indian economy’s economic engine under Modi had reached a peak of 8.1% in the January-March 2018 period and began decelerating every quarter from then onwards to reach a six-year low figure of 4.5% in July-September 2019. In other words, in just 18 months, the Indian economy’s growth rate had nearly halved under Modi. The growth problem did not erupt one fine morning; the deteriorating situation had grown over a period of a year and a half.

 

Yet, the big surprise of 2019 was that the Modi government remained in denial about the slowdown till as late as three months after its re-election with a greater majority in the Lok Sabha. The government’s first acknowledgement that the economy was in trouble came only in September, with a series of measures to revive demand in a host of sectors including the automobile sector, accompanied by a sharp cut in the corporate tax rates. Following the corporation tax rate cut announcement, the Modi government came out with a few more initiatives on the economy including an ambitious programme for privatization and fresh legislative moves to bring in simplified labour codes to replace over 28 different labour laws. Various penal provisions of the new companies law were also decriminalized in a bid to revive the confidence of industry and dispel the impression that the government was hounding it. The finance ministry even buried the hatchet with the RBI over its long-drawn battle to secure a share of the latter’s reserves, with a committee headed by former RBI Governor Bimal Jalan recommending a more reasonable formula for the sharing of such reserves and the government accepting it without further ado.

 

But when the two Budgets that were presented in 2019 – one an interim and the other a final one for 2019-20, the Indian economy was in the grip of a slowdown. Yet, both the Budgets spoke eloquently about the optimistic growth prospects of the Indian economy, giving little hint of the incipient slowdown that had already begun manifesting itself in many indicators. According to the nominal growth projection, implicit in the Budget’s revenue and expenditure numbers, the Indian economy was set to grow by 12%. Assuming that inflation would be reined in at 4%, the real growth in GDP was expected to be around 8%, according to the Budget documents. The over-optimistic nature of such assumptions was obvious when compared with even how the RBI had begun projecting the Indian economy’s growth trajectory for 2019-20. In the first week of February 2019, the RBI forecast that GDP growth in 2019-20 should be 7.4%, an estimate it would gradually bring down in each of the five bi-monthly monetary policy reviews it would conduct in the remaining part of 2019 – to 7.2% in April, 7% in June (how unrealistic the government was on growth could be gauged from the fact that the final Budget was presented in July 2019), 6.9% in August, 6.1% in October and to 5% in December.

 

A possible reason for the government’s reluctance to acknowledge the growth slowdown could be that it was acutely conscious of the political ramifications of any adverse news on the economy’s performance. Unsurprisingly, Modi rarely talked about his economic promises in the run up to the 2019 general election. On the contrary, his election campaign rode on the theme of robust nationalism and his government’s ability to strike back the enemy on the country’s western borders. The air strike in February at Balakot in Pakistan, in response to terrorist attacks against Indian soldiers in Pulwama earlier that month in Jammu & Kashmir, helped the BJP’s electoral fortunes in a big way. This incident also allowed the BJP to divert popular attention away from the economy or Modi’s economic promises, made five years ago. It was a strategy of using jingoism to overtake immediate concerns of the economy, and the election results in May seemed to suggest the strategy had paid off.

Early in 2019, there was also an attempt by the government to look for ways to present an economy that appeared to be in better shape than it actually was. When unofficial reports of job losses began surfacing, some months after demonetization, a new set of employment numbers began to be released every month, based on the actual additions in the workforce in the organized sector. This, however, failed to correct the overall growing impression of a gradual shrinkage in job creation, particularly in the small and informal sectors. The employment survey reports, prepared by the National Sample Survey Organization or NSSO, were not released and when one of them was leaked in the media showing the unemployment rate in 2017-18 at a 45-year high of 6.1%, the government’s reaction in early 2019 was that the report was only a draft and needed further validation. Senior statisticians associated with the survey quit their jobs. The same report was accepted and released after the elections and the formation of the new government.

The Modi government’s dislike for survey-based data became well known in 2019. When another leaked NSSO survey showed a drop in consumption spending during 2017-18, the immediate reaction of the government was to junk it and seek its review. Already, the Modi government had embroiled itself in a controversy over the way a new series of GDP data had been constructed and used to present revised numbers of economic growth in past years. There were serious questions on data sanctity and the methodologies used to arrive at economic data. But such concerns appeared to have been subjugated to the Modi regime’s broader political goals of not letting any unsavoury economic news come in the way of its political targets of winning elections.

 

The overarching obsession of the Modi regime to further consolidate its political capital was on display even in the government’s interim Budget presented in February 2019. Traditionally, interim budgets stay away from making any big announcements on new programmes or major tax changes as they are presented by governments that are going in for general elections in the belief that only a government with a fresh mandate from the people should present a full budget with all its expenditure and revenue plans. However, the Modi government’s first interim Budget in February 2019 departed from tradition by announcing a big tax giveaway to all individuals earning a taxable income below Rs 5 lakh a year (who got a full tax rebate), an increase in the standard deduction limit to Rs 50,000 for all salaried tax payers, a Rs 75,000-crore annual cash transfer scheme to all farmers in the country with a land holding of less than two hectares and a pension scheme for all unorganized sector workers with monthly wages of less than Rs 15,000.

The number of beneficiaries of the interim Budget’s largesse was huge: about 30 million individual tax payers got a tax benefit, about 100 million organized sector workers got a pension scheme and 120 million farmer families were promised an annual cash transfer of Rs 6,000 each. No interim Budget in the past offered so many financial benefits as did the one presented in February 2019. There was no doubt in anyone’s mind that the entire exercise was aimed at reaping electoral dividends during the polls that were to be held a couple of months later.

 

The interim Budget for 2019 was clearly aimed at extending the Modi government’s welfare agenda to counter the possible adverse impact of a slowing economy . Already, the government had successfully rolled out a concessional cooking gas supply scheme for economically backward households in rural India and made headway in building affordable houses in villages and small towns. The interim Budget announcements, however, came at a time when the government’s finances were not doing too well, thanks to a slowing economy where revenue growth was also decelerating. But it did not wish to compromise either on curtailing its populist expenditure schemes or tax give-aways or on accepting, publicly, any charge that it had been fiscally irresponsible. In a bid to achieve both the goals at the current juncture of the economy, the Modi government embarked on a yet another exercise at tinkering with its data on finances.

 

Thus, the interim Budget projected revenue growth numbers that were highly ambitious. This was done with the aim of showing that the government had broadly stuck to the path of fiscal consolidation, promised by the previous Budget and mandated by the fiscal consolidation and budget management law. By June 2019, the figures released by the Controller General of Accounts or CGA revealed a pathetic attempt by the government to hide its fiscal shame. The unaudited CGA figures showed that the actual net tax revenue for the Centre during 2018-19 was only Rs 13.17 trillion, short of the revised estimates by a whopping Rs 1.67 trillion or about 0.9% of GDP. And yet, the government managed to show a fiscal deficit of 3.4% of GDP, marginally higher than the target.

This statistical miracle of sorts was achieved through a combination of expenditure compression measures and transferring the spending load outside the exchequer and onto the public sector undertakings (PSU). The axe on expenditure fell on the government’s capital expenditure and the transfer of spending to PSUs was done through what is popularly called off-Budget borrowings, to the tune of almost Rs 1.3 trillion, an unhealthy expenditure management practice which undermines the sanctity of the government’s fiscal consolidation commitment and also the autonomy of the functioning PSUs. If the government had not sought recourse to such off-Budget borrowings, its actual fiscal deficit would have risen to 4.1% of GDP for 2018-19, compared to the 3.4% figure announced in the Budget.

A larger problem arose when the Modi government presented the final Budget after the elections in July 2019. Finance Minister Nirmala Sitharaman premised her revenue numbers for 2019-20 on the grossly overestimated revised estimated numbers that the interim Budget had presented earlier in February. She ignored the reality check that the CGA had undertaken to show an 11% drop in the government’s actual net tax revenues, compared to the revised estimates for 2018-19. Ignoring that meant that the actual revenue collection targets in 2019-20 were much steeper – instead of just achieving an increase of 11% in net tax revenue, as given in the Budget documents, the Centre had to actually mobilize 25% more revenue for itself during the year. With the economy slowing down in the first two quarters (nominal growth was only about 7%, compared to the Budget target of 12%), revenue collections have also suffered a big blow and the government’s task to reach a fiscal deficit target of 3.3% of GDP has become more difficult to fulfil.

 

Two more developments in 2019 show how politics continued to trump the government’s concerns for the economy. Even as it announced its plan for privatization, its approach to the idea of the public sector continues to be even more statist than what the UPA had practised. For instance, the Modi government has pumped in slightly more equity into the beleaguered Air India in its five years than what the Manmohan Singh government had done. It has been struggling to privatize Air India for the last three years and the target date for achieving that has now been postponed to next year. Instead of closure of unviable public sector banks, it has given them a fresh lease of life by merging them and investing more taxpayer’s money into their equity. In the last few years under Modi, the public sector banks have received a record equity infusion of about Rs 2.8 trillion.

The other development pertains to how the Modi government has treated the states by effectively reducing the transfer of resources to them. Even as the Fourteenth Finance Commission had recommended in 2014 an increase in the states’ share in central revenues to 42%, the Modi government has tweaked its taxation strategy (increasingly, the Centre has imposed levies and cesses that are not to be shared with the states) and the formula for sharing resources for centrally sponsored schemes. Additionally, the terms of reference for the Fifteenth Finance Commission have been framed in such a way that the states may get a lower share of the central revenues. The Fifteenth Finance Commission has already submitted its report for 2020-21 and is set to present its final recommendations for the remaining four years in about a year from now. But how the commission addresses the question of segregating the Centre’s expenditure on defence and internal security from the divisible pool will determine if the states’ share in central resources will see a further dip.

 

In conclusion, there is no disputing that the Indian economy experienced a slowdown in 2019. What is remarkable, however, is how the Modi regime initially chose to remain in denial for several months, largely because of its political compulsions. Will that approach, where politics trumps concerns over economy, change in 2020? There are no easy answers. But if it remains unchanged, the road to achieving recovery from the current slowdown may get more arduous and longer.

 

* A.K. Bhattacharya is the author of The Rise of Goliath: Twelve Disruptions That Changed India. Penguin, Delhi, 2019.