Make up for lost time

Narendra Modi must leverage the public trust voters have placed in him to get the economy on track

Published - June 03, 2019 12:02 am IST

The economy’s structural problems cannot be resolved with the sort of political balm Mr. Modi resorted to earlier this year; they demand well-crafted economic remedies. (Representational image)

The economy’s structural problems cannot be resolved with the sort of political balm Mr. Modi resorted to earlier this year; they demand well-crafted economic remedies. (Representational image)

Prime Minister Narendra Modi’s election campaign, staying clear of bread-and-butter issues, successfully swayed voter attention away from economic hardships. Having won a thumping mandate, his government in its second tenure must now devote itself to a well-thought-out strategy for economic reforms.

The bad news

Official estimates released on Friday, the new government’s first day in office, show GDP growth slowed to a five-year low of 6.8% in 2018-19, even as the unemployment rate rose to a 45-year high of 6.1% in 2017-18. Agriculture gross value added (GVA) growth is estimated at negative 0.1% and manufacturing GVA growth at 3.1% in the January-March quarter.

The economy is struggling with an investments and a manufacturing slowdown, rural distress, unremunerative farm incomes, stagnating exports, a banking and financial mess and a jobs crisis. Sales figures from fast moving goods makers and continuing production cuts at car manufacturers confirm that consumption spending have slowed. The top economic priority for the new Modi government ought to be credible course correction in its attitude to policy — its formulation, articulation and the setting of goals.


The previous Modi government began well but soon lost direction. The announced plans for what looked like a blueprint for structural reforms — spanning an overhaul of labour and land policies and a much-needed manufacturing push, ‘Make In India’, for absorbing the slack from the farms — had been abandoned by the end of 2015.

The initial energy and enthusiasm gave way to misadventures such as demonetisation and the poorly designed rollout of the Goods and Services Tax (GST) regime. Despite repeated reminders to the Prime Minister’s Office from Finance Ministry bureaucrats, the decrepit public banking system and the problems of the financial sector received little policy attention. Even the insolvency and bankruptcy reform, a sound economic reform, that got rolled out rather gradually and tentatively is already in danger of getting diluted.

The cumulative neglect of reforms over the years by Mr. Modi and his predecessors, including Manmohan Singh, has ensured that the economy is falling short of both its growth potential and the people’s aspirations.

That the Constitution was hurriedly amended for rolling out reservations based on economic criteria and that fiscal giveaways for middle class Indians and farmers dominated the Interim Budget presented in February suggest Mr. Modi was not wholly unaware of the magnitude of the challenge on the economic front.

But now, is he listening to sound advice on the solutions needed? The economy’s structural problems cannot be resolved with the sort of political balm Mr. Modi resorted to earlier this year; they demand well-crafted economic remedies.

Sustainable livelihoods

Public provision of toilets, cooking gas connections and dwellings or Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) wage jobs and income supplement schemes are temporary sources of relief. They are not an economic growth model or strategies for reducing poverty. They can help the poor survive by providing meagre resources for subsistence. Reducing poverty needs economic growth to generate sustainable livelihoods for the poor.

This cannot be remedied by redistributive taxation policies alone. Deeply entrenched factors hinder the poor’s access to income-enhancing skills, education, health and job opportunities and obstruct the trickle-down of growth to the poor. For instance, the Modi government’s ‘Make In India’ strategy was a step in the right direction, and needs to be revived. Done right, it can absorb the slack from the farms.

Few organised sector jobs get generated in India because industries prefer capital-intensive production despite the economy’s relative abundance of low-wage labour. With many seekers per job opening, labour has low bargaining power relative to employers. If production were less capital-intensive, more organised sector jobs would be created. Plus, labour’s bargaining power would improve.

Successive governments in recent years have only ended up deepening this structural weakness by yielding to the constant clamour by industry lobbies for lower cost of capital. The first Modi government’s record was no different. The economic strategy embedded in ‘Make In India’ got completely side-tracked as its plan for economic revival was reduced to a clamour for fiscal and monetary stimuli.

Mere pursuit of fiscal and monetary policy adjustments is not going to unlock India’s economic growth potential, which is impossible without banking, land and labour reforms that no government so far has been able to deliver.

Will Mr. Modi persist in populism of the past, or take up the backlog of economic reforms pending since the first burst in the 1990s? Will sound economics inform his policies, or will he retain a disdain for economists, preferring instead simplistic, quick but ineffective fixes?

Take small firms. For the role they play in jobs creation, smaller firms ought to be incentivised with easy credit and taxation norms. Instead, the messy GST compliance and refunds framework imposed uneconomic compliance costs on them. These were explained away by the Bharatiya Janata Party’s national executive in September 2018 as ‘creative destruction’, a supposedly necessary culling of informal firms so that the formal economy can thrive. The only way the GST may lead to more formalisation of the economy is by putting bigger companies at competitive advantage over smaller ones, a policy outcome that no government should want.

Data collection

Lastly, no evolution of the policy paradigm will be possible if the crisis of credibility in the collection, estimation and presentation of official statistics is not addressed appropriately. In response to the questions raised over unemployment and GDP statistics, including by well-meaning and eminent economists and statisticians, the first Modi government did little else than to suppress inconvenient data or allege political motivations. A more mature way of engagement with constructive criticism is called for.

Puja Mehra, a Delhi-based writer, is the author of ‘The Lost Decade: 2008-18’

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