Modi – Economy

Narendra Modi

The idea of Modinomics grew in popularity during his election campaign in 2014 after his success in Gujarat. Modi promised the Indian citizens that he would transform India the same way he had revamped Gujarat. People were eager to know what Modi could do to revitalise India’s economy, which he declared, had been in an ‘economic slump’ back in 2013. His first two years did not come with any revolutionary economic reforms as Modi seemed to be testing the grounds; he might have realised that policymaking in a state was not exactly the same as that for a nation which comes with inherent systemic problems. As a right-wing leader, he did introduce certain policies that benefited the industrial sector.

But Modi’s first drastic economic reform had more to do with tackling corruption than boosting the growth rate. The Demonetisation policy is seen as one of Modi’s biggest failures, even amongst some of Modi’s followers because it failed to battle black money and further worsened the situation of the lower-income groups. This policy along with the implementation of the GST (although theoretically a revolutionary idea) has been pinpointed as the reasons for the deceleration of the economic growth and stability that India had witnessed until 2016.

Gujarat: 3 glorious terms and the birth of Modinomics

Modi was elected as the Chief Minister of Gujarat in October 2001, becoming the longest-serving CM of the state as he held three consecutive terms until he was elected as the Prime Minister of India in 2014. The reason he was revered during his 2014 General Election campaign was for his work in Gujarat. He used the state as an example of how he could transform India. In fact, his economic policies in Gujrat became so popular that they were referred to as ‘Modinomics’.

Under Modi, the state government utilised funds to improve infrastructures such as modes of communication and water supply. He also brought in Foreign Direct Investment as companies such as Ford and Suzuki set up factories in the state, strengthening the manufacturing sector as well bringing him closer to his dream of Gujarat as the ‘global Gateway to India’. Moreover, between 2000 and 2010, Gujarat’s GSDP (Gross State Domestic Product) grew at a rate of 9.8% while the GDP growth rate in India at that point was 7.7%. One of Modi’s shining moments was a record growth rate of 10.75% in the annual year 2005. Modi focused on all the three sectors: agriculture, manufacture and service. By propelling growth in all three sectors, people from different fields felt that Modi considered their issues. Modi’s government implemented easy farm loans that permitted farmers to take loans up to INR 300,000 at a 0% rate. Additionally, before the polls, Modi drastically lowered the rates of the Goods and Service Tax and made the procedure simpler; this, of course, benefited the businessmen. For the industrial sector, Modi used a neo-liberal approach to implement his ‘Gujarat Growth Strategy’ which included improvement in infrastructure to allow corporate investment, development in governance to address the demands of the corporate sector and the provision of incentives and subsidies to attract investments.

But it should be noted that while Modi did transform a state, sometimes, it isn’t as easy to replicate this on a larger, national scale. Without trying to criticize Modi’s efforts, it would be useful to point out that he already had a better starting point than many Chief Ministers of other Indian states. Gujarat has maintained the 3rd position of a developed state consistently, even before Modi. Moreover, with Gujarat located on the West coast of India, it always had the advantage of about 40 ports which aided in the expansion of its industrial sector.

Looking at his victory in Gujarat, people were impressed. And why wouldn’t they be? Here was a man, promising the citizens that ‘Good times were coming’ and he had the backing of over 10 years of growth to show this. But voters must not overlook the fine print in politics and throughout his 2014 campaign, an incident kept haunting Modi- the Godhra riots.

And the drastic policies begin: Demonetisation

The demonetisation policy is so heavily debated because while many Modi supporters argue that he tried to fight corruption, his critics on the other side state that this was a blow to the economy at a time when India was politically and economically stable.

At midnight 8th November 2016, Modi, through an untimely announcement, declared “the most ambitious attack on black money since Indian Independence”.  Modi stated that the INR 1000 and INR 500 notes would become redundant 50 days after the announcement. Thus, the citizens now had deposit this cash in banks in exchange for the new INR 1000 and INR 500 notes. This plan was so secretive that even Modi’s cabinet had no clue about this. Modi did not seek the approval from the Parliament nor the Reserve Bank of India for such a momentous decision either. Only his close advisors knew about this. Without any prior public announcement, this decision took every Indian citizen by surprise.  After a slow-paced first two years in the government,  Modi had taken the long-awaited drastic step that voters sought. But was it in the right direction?

During his 2014 election campaign, Modi had promised his voters that he would bring back the black money that was hoarded in tax havens abroad and redistribute the wealth among the low-income groups. The Indian economy is largely based on cash and this makes it susceptible to corruption not just by businessmen but also by political parties; this also leads to a higher provision of Fake Indian Currency Notes (FICN). Moreover, the readily available cash also makes it easier to finance terrorist organisations without any traceability. It was due to all these reasons, Modi said that such a policy had to be implemented regardless of the great burden that the majority of the middle-class and the lower economic class, who were mostly innocent and diligent tax-payers, would have to bear. Another instrument that Modi wanted to target was digitalising the economy and encouraging citizens to deposit their cash in banks. This would also benefit the government because they would be able to monitor the movement of money more clearly and increase traceability, also making tax evasion riskier. After the demonetisation, the Modi government went on record to say that around INR 16 lakh crore of FICN had been detected between FY17 to FY19 as well as the value of the Indian currency in circulation lowered by INR 2.93 lakh crore. Furthermore, millions of Indians opened a bank account for the first time, especially those from the low-income groups.

Yet, the social and economic impacts of the policy have been debated to this date. As years passed, research that was conducted went against the Modi government’s statements. A report published by the Central Bank, the Reserve Bank of India, stated that 99% of the value of the currency that had been removed from circulation in 2016 had found a way back into the Indian economy which implied that people who did hoard cash and had black money eventually found other means to convert their cash. Moreover, this was also seen in political parties. Cash was seized by the authorities during state elections in three states- and that too at a three-fold increase; corruption in politics had not reduced either.

Yet an unprecedented effect was on the low-income groups because of the acute cash shortage that ensued after the demonetisation. People had to stand in queues for hours to deposit their money either in banks or ATMs which were depleting in cash; cases of suicides as well as heart attacks of people who had been waiting were also reported. But this pain also extended to farmers and low-wage earners. India’s rural wage growth had been 11% between 2013-2015 but plummeted down to 0.45% in FY2016-2018. The agricultural sector also took a big hit as most of their transactions were done in cash. Farmers struggled to earn income because of the chaos in the supply chain and the fall in the prices of the commodity. The monsoons in 2016 had promised a good harvest and food prices but Modi’s decision led a lot of farmers to forcefully cut down their supply to raise the prices of the crops. Protests by farmers in several BJP-governed states across India followed to demand loan waivers amidst the harsh economic times. For a country that so largely relies on the agricultural sector, an impact on the farmers has to be considered by policymakers, not just for the social wellbeing of the low-wage earners but also for the economy as a whole. Adding to that, approximately 1.5 million people lost their jobs and 150 million were unpaid for days after the demonetisation.

Policymakers often implement such policies to diverge the attention of the audience from real issues in the country. But rather than being praised for fighting corruption, Modi’s policies soon backfired. It has been stated by several economists that the demonetisation along with the implementation of the GST in the initial years led to a fall in the GDP growth to 6.1% (January-March 2017 quarter) from GDP growth of 7.4% in the previous quarter.  Moreover, the credit granted by banks also lowered; they had already been feeling the pressure of a weak credit system due to bad loans and the rise of non-performing assets in the balance sheets.

Revolutionary idea but weak implementation: The GST

Another dramatic policy that the Modi government implemented was the Good and Service Tax in July 2017 which would essentially do away with all the previous complicated systems and transform India into one single (common) market. Although the Modi government gets the credit for implementing this policy, this idea was actually put forth by the previous Congress government in 2006. Yet, this bill took around 10 years to see the light of the day. In fact, when Modi was the Chief Minister of Gujarat and a member of the Parliament, he had blocked this Bill presented by the Congress government. Of course, when it came to Modi’s turn to implement this policy, this was no easy feat. Although the Modi government held a majority in the Lower House of the Indian Parliament, the government had little influence in the Upper House. But with the support of finance ministers of various BJP led states, he was able to break the glass in the Upper house as well.

The GST, which stood for the Goods and Service Tax, was a single tax system that would be implemented in all of the 28 states of India where a single tax will be levied on goods and services each segment of the supply chain, from the manufacturing until the sale of the product. Previously, India had a very complicated tax system that created barriers in the supply chain for the manufacturing and sale of goods. Each Indian state had its separate tax system, VAT laws, uneven tax practices, double taxation and tariff barriers which prevented the free flow of trade even within the country.

In fact, people often said that a good transported through several states in India was equivalent to a good that faced tariffs when it was transported from one country to another. In many instances, it was easier to import a good rather than trade within the country. The GST would also help Modi with his ‘Make in India’ campaign which encouraged entrepreneurship and an increase in production of goods within the country. It is often stated that a policy such as the GST can lead to economic growth by 1% or 2%. Going along with Modi’s grander scheme of digitalising India, Modi brought in IT infrastructure to create greater transparency throughout the tax system and increase the ease of paying taxes. Modi had even gone on to state that the GST would be so simple that “even a class 12 student can help a merchant file returns”. The demonetisation along with the GST meant that it was riskier for tax evaders now. It was predicted that the government funds through tax collection would also increase, whereby when it would be time for Modi to run again for election in 2019, the government would have a full treasury and give it the ‘fiscal flexibility’ that no previous government had the advantage of.

Although the concept of the GST is a breakthrough in economic reforms that India truly needed, experts argue that there are still a few issues with the not-so-perfect tax system. The first issue is the number of slabs in the system. Usually, other countries that have the GST only have one slab which entails one tax for all the goods and services within a country. However, India currently has four slabs – 5%, 12%, 18%, and 28% while many other goods fall in the exempt category as well which has created a lot of confusion for taxpayers and businessmen alike. Modi’s response: ‘Can we have milk and Mercedes at the same rate?” Moreover, it also implied that certain essentials such as food items would not have zero per cent tax which exists currently.

Another issue had been the number of amendments in the GST; 125 tweaks since 2017 is no joke when a government is trying to provide an easy tax system. There have been debates not only regarding the number of slabs in the system but also the tax rates. Lobbyists in businesses and the manufacturing sector obviously want lower taxes for their goods. The Council for the GST comprises the Finance Minister as well as the State Finance ministers of 28 states, stating their own demands.  To take the issues of all these different stakeholders into consideration would certainly reflect in the haphazard GST. This consequently also led to tensions between the Centre and the State on the return of funds back to the state.

India did see a jump in the World Bank’s ‘Ease of Doing Business’ index from 134 in 2014 to 63 in 2019 after having stagnated for years prior to Modi’s election into the government. And yet, Modi’s demonetisation and the GST, also referred to as ‘economic shocks’, have been repeatedly blamed for causing economic stagnation in the country. Fortunately for the Modi government, the GST shocks were offset by external factors- “exports, hidden fiscal stimulus and unexpected credit stimulus”. Modi 2.0 promised to improve the GST. But it seems as though Modi’s security and socio-cultural policies have kept him busy.