Four Years of Modi Government: Two Circles of Growth

The ruling dispensation in India is facing a crisis of low growth, protests by major sections of the populationfarmers, youth and tradersand criticism about non fulfillment of the many promises it has made. It has announced many policies but not only is their implementation tardy, many of them are a continuation of the past policies under different names. This is another kind of policy paralysis which UPA II was accused of. To counter these criticisms, the government has been highlighting its achievements by comparing the present performance of the economy with that of the UPA II.

No doubt the situation today is not what it was in 2012–13 when there was a macroeconomic crisis. But presently a crisis confronts the nation, triggered by two shocks to the economydue to the demonetisation announced on November 8, 2016 and implementation of GST from July 1, 2017. So, the present crisis is a different macroeconomic crisis than the earlier one because it is policy inducedthat is the damaging part. It is brought about by ill thought through policies.

1. What NDA Inherited in 2014

In May 2014, the CPI inflation rate was at about 9%. The quarterly rate of growth in the second quarter of 2014–15 when the NDA government took over was a high of 8.5%. It had recovered from a low of 4.5% in the last quarter of 2013–14. The growth data are based on a revised method of estimation. The Current Account Deficit in external trade was at 1.7 % in 2013–14, a considerable improvement over the high of 4.8% the year before. The Fiscal Deficit of the Central government in 2013–14 was at 4.5% while it was at 4.9% the year before. The Foreign Exchange Reserves were at $304 billion in 2013–14 as compared to $292 billion the year before. Thus, there is no doubt that the economy faced a macroeconomic crisis in 2012–13 but it was recovering from that crisis in 2013–14, just before the NDA government took power in May 2014.

The economic crisis during the UPA regime was triggered by national and international factors. Nationally, there was a loss of confidence in the economy due to policy paralysis brought about by the revelation of massive corruption cases and the massive people’s movements that started in 2010–11. People linked the high levels of prices to corruption brought about by crony capitalism—what went into the pockets of the corrupt came out of the pockets of the public. Droughts led to decline in agriculture and distress among farmers and also higher prices.

At the international level, high crude oil prices and low growth in major economies resulted in declining levels of exports and Balance of Payment (BOP) difficulties. Rising crude oil prices meant a larger import bill, higher trade deficit and inflation. It also led to higher levels of subsidies which meant a higher level of deficit in the budget. The macroeconomic problems led to lower levels of investments in the economy, lower levels of employment generation and crisis in the lives of the young who could not get jobs commensurate with their training. The youth looked for a leader who could get them out of the morass they found themselves in.

2. Government’s Performance Since 2014

The NDA government in May 2014 was lucky to inherit an improving macroeconomic situation. Crude oil prices moderated, drought abated and growth in the advanced countries picked up so that exports improved. In 2018, the CPI rate of inflation is down to about 3%, the rate of growth is at about 7% (official data), Fiscal Deficit of the Central Government is down to 3.6%, foreign exchange reserves are at $402 billion and the Current Account Deficit is at 0.7% of GDP. The PM has argued that the sales of passenger vehicles have grown by 12% and that of commercial vehicles by 23%. Domestic air travel has increased by 14% and international air freight traffic by 16%. This growth is on a low base. But even if it is taken at face value, none of these pertain to the unorganised sectors of the economy. They reflect the growth of the better off sections.

The lower crude prices resulted in lower energy prices and lower levels of inflation. It also resulted in lower import bill and not only lower levels of subsidies from the budget but increased tax collections due to higher excise and sales tax. All this led to lower current account deficit, higher capital flows and higher foreign exchange reserves and lower level of deficit in the budget. However, the farm crisis and the employment crisis are continuing in spite of the much better macroeconomic conditions that the NDA regime has had.

So, why has a better macroeconomic situation not led to improvements in the conditions of the marginalised sections of the country? Income and wealth disparity is on the rise, with the top few per cent cornering all the growth in the economy. According to OXFAM, the top 1% in India own 73% of the wealth while the bottom 50% hardly saw any increase in their wealth. The World Inequality Report of 2017 shows that the top 1% of the income earners got 22% of the national income. This does not include the black incomes that these people generate. If that were to be included, their share of incomes would shoot up to almost 50% of the national income.

India has been experiencing ‘marginalising growth’ for a long time and this process is only accelerating with the pro-business stance of the NDA government. It is creating two circles of growth in the economy with the organised sectors growing and the unorganised sectors in retreat. This has been the aggravated by the twin shocks to the Indian economy since November 2016. So, even if the growth rates rise, the situation of the marginalised does not improve.

India embarked on a ‘growth at any cost’ strategy with the New Economic Policies in 1991. The burden of this growth has been borne by the workers, farmers and the environment. This has meant that the growth has been based on the prosperity of a narrow section of the population and not the entire population. The worsening income distribution has led to an unstable economic climate which has also translated into an unstable political and social situation.

Rising disparities mean that the mass demand from the bulk of the population rises slowly and growth depends more and more on investment and the consumption of the well-off sections. The stock market boom and the rising wealth effect for the well-off spurs their consumption. Post 2007–08 global economic crisis, both these stimuli weakened and growth rates fell. The NDA in its four years has not been able to revive demand and investment since disparities have continued to rise and the twin shocks of demonetisation and GST have aggravated the disparities as discussed below.

In India, investment and especially private corporate investment has been much less than what it was in 2007–08. This is due to lack of broad based demand. RBI data shows that capacity utilisation has been hovering at around 70–75%. No wonder private investment is tepid at best.

3. Analysis of Some Key Aspects of the Economy

i) NPAs of the Banks

The massive buildup of non-performing assets (NPAs) in the banking system of the country and especially in the public sector banks (PSBs) has further crippled their capacity to lend. According to the latest Economic Survey, the Gross Non Performing Advances (GNPA) “ratio rose marginally from 12.5% to 13.5% between March and September 2017. Stressed advances ratio of PSBs rose from 15.6% to 16.2% during the period.” In March 2014, these were 4.4% according to the Economic Survey of 2014. It was 2.09% in 2008–09. So, there has been quite a sharp increase in NPAs since 2008–09 but most of the increase has been in the period after 2014. What are the reasons?

Most of the NPAs relate to the sickness in the infrastructure sector, steel, mining, aviation and textiles. India has gone in for high cost infrastructure which the poor can ill afford. For instance, the government is going in for a bullet train between Mumbai and Ahmedabad. Its viability is in doubt since the ticket will cost as much as the airfare between these two cities, so that only the well-off can use it. When much of the railway infrastructure is woefully weak and in urgent need of improvement, to go in for such a project can only be for prestige (and ego) and not for sound economic reasons.

A package of investment in the banks to boost their capital has been announced but that will not resolve the problem since it emanates from default by industry.

ii) Black Economy Continues to Grow

A major part of the NPAs relate to corruption and widespread crony capitalism prevailing in the banking system. The appointment of the top brass of the PSBs is based on political and bureaucratic consideration. They are open to political pressures to oblige businessmen with connections. So, scrutiny for loans has often been cursory and without proper risk assessment. This has not changed after the NDA came to power in 2014.

The Nirav Modi scam is the biggest one to surface, but many other smaller ones are being unearthed with great regularity, like the Rotomac case. In 2015, a Rs 10,000 crore havala with Dubai and Hong Kong via a private bank in Surat was reported. In 2015, fraud was detected in the Bank of Baroda branch in Delhi wherein Rs 6,000 crore was illegally transferred to Hong Kong.

The problem of crony capitalism is not confined to the PSBs; as the recent ICICI case shows, this is also happening in private banks. In the case of these banks, there are favourites who get easy loans. Investigation is going on into the ICICI case which originated a decade back. Curiously, a whistleblower had flagged this case in 2016, but action has been initiated only recently. Even the media did not pick this up.

During the UPA II rule, massive cases of corruption came to light. The black economy continued to grow and aggravated the growing inequality. NDA came to power promising a clean-up and easing of the tax burden on everyone by bringing back the black money held abroad. It boldly promised that every family would be able to get Rs 15 lakh. The BJP President admitted that it was only a chunavi jumla (meant only for the elections). Not even Rs 5,000 crore has been declared under the Foreign Money Laws promulgated (with draconian provisions). If distributed to the 26 crore families in the country, each would get barely Rs 200. Of course, even this is not going to happen. This has been a huge disappointment for the many poor who opened a bank account under Jan Dhan Yojana in the hope that they were soon going to get free money.

Corruption and ‘black income generation’ have not declined if one is to go by the scams that are now coming to light. It takes a bit of time for the scams to get exposed. The Congress party is accusing the government of a scam in the huge Rafael deal. During UPA I, only a few major scams came to light; what was exposed during UPA II mainly related to the earlier UPA I regime. The reason is that in all major projects, there are corrupt deals, but it takes a while for them to be unearthedusually when a whistleblower comes forward. (Now, even this is getting difficult as the whistleblowers are being threatened and many have even been killed. In the case of the huge VYAPAM scam, 48 people linked to it have died.) In this NDA regime, if the big bullet train project or the highway construction projects have any payoffs, they will come to light in due course of time. Till then the government may look clean.

Black economy is also linked to the flight of capital from the economy. As the Nirav Modi case shows and the revelations under the Paradise and Panama Papers scams indicate, flight of capital continues unabated. So, a poor country which is short of capital for investment in essentials like education and health is losing capital. The government has made no serious attempt to check this. The Supreme Court monitored SIT to unearth black money has been functioning for the last 4 years but it seems to have made little headway in denting black money generation or its flow abroad. It has submitted a few reports but they have not been made public.

The government claims that it has taken several major steps to check black income generation, like the Income Declaration Scheme (IDS) and demonetisation, but as we have discussed elsewhere, these have not helped to check the black economy; in fact, demonetisation cannot really check black money generation. The government claims that GST will also help check black income generation, but reports indicate that a large part of the business is still going on in cash and not via the formal channels. Most importantly, the government has taken no action to check the most important source of black money generation, the corruption in the political process; it has made no attempt to clean it up.

iii) Challenges Regarding Employment

Given that investment is not very buoyant and black income generation continues apace, making the economy inefficient, employment generation remains weak.

The problem in India is that there is no social security, so that workers cannot afford to remain unemployed. People do whatever they cansell a little of something on the road side, drive a rickshaw, do head load work and so on. These people get work for very few hours a day and earn very little in doing so. Thus, while there is massive underemployment, statistics show there is very little unemployment (the way it is officially measured), since everyone is counted as employed one way or the other. But it is clear that many in the work force do residual jobs.

In the Indian economy, the organised sector employs only about 7% of the workforce; the rest are employed in the unorganised sector doing mostly marginal jobs. Within the unorganised sector, the agricultural sector is the largest employer, providing employment to around 46% of the work force. The second largest employment generator in the unorganised sector are the micro units, which are counted under the MSME sector. The micro units constitute between 95% and 99.5% of the MSME sector and employ 97% of the work force employed in this sector, with an average of 1.7 persons per unit. All of these workers work at very low wages.

If the organised sector employment had been expanding, it could have absorbed more and more of the workers from the unorganised sectors. But this is not happening since the organised sector is going in for massive automation. Further, since its share in GDP is rising, the unorganised sector is getting marginalised and so are its workers. Finally, to reduce its labour costs and maximise its profits, the organised sector is utilising more and more contract labour and making them work longer hours and without proper safety precautions. Contract labour is provided by contractors who keep them temporary and they are counted as unorganised sector workers.

Of late, the government has claimed that there is a massive increase in employment of between 7 million and 15 million new formal sector jobs. This argument is being put forth as employment is likely to be a major issue in the upcoming national elections in 2019. If there was such massive employment generation in the formal sectors, why would 23 million people apply for 90,000 low skill jobs in Railways or lakhs of young apply for a few hundred jobs of peons or scavengers in UP, Madhya Pradesh, etc. Youth with engineering, MBA and MCom degrees applied for these jobs—totally incommensurate with their degrees and skills they are supposed to have acquired. The reason why they applied for these jobs is that they are presently also doing menial jobs, and wish to go for a government job which at least gives them some security. This is a reflection of the problem of underemployment.

The official claims of new jobs are based on two factors. First, they are counting the number of new registrants under the Employees Provident Fund (EPF) and other formal sector pension (NPS) and insurance (ESIC) schemes. Secondly, they add the number of potential jobs that may have been created under the Mudra Scheme. It is said that about 11 crore people have taken loans under the scheme, and even if one third of them generate 1 additional job, then about 3.5 crore new jobs would have been created. Thus, the government is claiming that there is no employment problem and the issue is being highlighted by the opposition only for political gains.

Under the Mudra scheme, the average loan taken is about Rs 45,000. This investment is likely to have substituted the more expensive private loans that may have taken earlier. While this loan may lead to an increase in the productivity of the person taking the loan, like for example shifting from doing head load work to keeping a cow for milk, the amount of loan given under this scheme is too small to increase employment even in the micro units where the average employment is 1.7 per unit with an investment of up to Rs 5 lakh. So, this loan may have helped reduce underemployment, but it is unlikely to have led to more employment except at the margins—nowhere near the claimed 3 crore new jobs.

The government is also pointing to new taxi drivers under the taxi aggregators, new delivery boys due to e-commerce, and so on. The issue is how many of them are former taxi drivers at the taxi stands and how many small stores have retrenched staff due to fall in business consequent to increase in e-commerce. As always, the government claims that investment leads to an increase in employment, but does not tell how many jobs are lost due to some businesses closing down or downsizing.

The EPF data on new registrants is not a surprise since firms are registering employees whom they were not registering earlier. There are two policy changes that have led to a spurt in these registrations. First, after 2015, the definition of those required to register their employees has changed. Earlier firms with more than 20 employees were required to register. This was changed to more than 10 employees. So, a large number of firms and their employees came under the EPF. All these would be new registrants, but it does not mean new jobs.

Second, in the recent budgets a large number of concessions were announced for registration of new employees. A tax concession was announced. Further, the provident fund contribution of new employees was to be paid by the government. We need to know how many contract workers were registered as new employees due to these factors. So, those who were not counted earlier are now getting counted. This is not an increase in employment but simply a change of category.

The problem of underemployment remains as before with massive automation in the economy and a slackening of investment.

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