Three years of Narendra Modi government: Significant change in economy seen, but India must be vigilant, says Surjit Bhalla

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Published: June 3, 2017 6:15:19 AM

In the movie The Graduate, Dustin Hoffman gets advice about the future from an experienced old hand. Only one word was needed to describe the future: Plastic. Narendra Modi-led BJP has just finished three years and I have two words to best describe Modi’s tenure 2014-17 and beyond: Structural Change.

three years of modi government, modi government three years, modi government three years report card, significant changes of modi government, economic growth during modi's three years, surjit bhalla, surjit bhalla financial express, financial express editorialPrime Minister Narendra Modi. (Reuters)

In the movie The Graduate, Dustin Hoffman gets advice about the future from an experienced old hand. Only one word was needed to describe the future: Plastic. Narendra Modi-led BJP has just finished three years and I have two words to best describe Modi’s tenure 2014-17 and beyond: Structural Change.

This structural change has occurred across various dimensions, and is continuing. Whether it be economics, politics, social politics, foreign policy, you name it—a distinct stamp is being placed on India. Let us examine some of these dimensions.

The macro economy: In terms of growth and inflation, the combination suggests that the Indian macro economy, today, is the best it has ever been. The UPA-1 had held the record for best macro performance across the dual indicators of GDP growth, and inflation. For the first three years of the UPA regime, GDP growth averaged 8.7% per year, and inflation (GDP deflator) averaged 5.4%. The inherited data for 2003-04 was GDP growth of 8.5% and inflation of 3.6%.

As we know, the BJP inherited an economy not in the best possible shape—GDP growth of 6.5% and inflation of 6%. (Incidentally, CPI inflation was 9.4% in 2013-14.) The last three years, GDP growth has averaged a healthy (but still well below potential) 7.5% and an average GDP deflator inflation rate of only 2.9%. (Hush—don’t tell this to the inflation professionals at RBI and the Monetary Policy Committee who think that inflation is roaring back to, if not already at, double digits.)

So you can decide—would you prefer 7.5% growth and less than 3% inflation, or growth 1 percentage point (ppt) higher and inflation 2.4 ppt higher? As we know, high inflation may purchase growth in the short run, but often comes with slowing growth, and higher inflation, in subsequent years.

But macro economy is not just growth and inflation, it is also about jobs. Ministers in the BJP government have admitted to the possibility that India is experiencing jobless growth. Because that is what the available data shows. Thankfully, the government has set up a star-studded committee of professionals to examine the data on jobs in India and their report is keenly awaited.

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Till then, we should reserve judgement. My personal view is that the NSS data may not be capturing all the elements of job growth. But if a comparison is to be made with the earlier UPA-1 period, let it be known that in that period of average 8.5% GDP growth, 2004-09, NSS job growth averaged only 0.8% per annum.

Economic reforms: Did we ever think that the ruling government of the day would attack two of the holiest cows in India—sale of Air India and the introduction of agricultural income tax? The Modi government has been more willing to talk economic reform, and enact reform, than any government in Indian history. The set of economic reforms already in place in India—the list is long and expanding: reforms in agricultural marketing and agricultural insurance, introduction and expansion of direct benefits transfer and the corresponding decline in PDS and NREGA corruption, bankruptcy code, beginning of direct tax reform (reduction in corporate taxes with promise of a major direct tax reform next year), GST, and now soon to be comprehensively attacked (and resolved?) NPA problems of banks. These policies add up to more far-reaching reforms than the cumulative economic reforms introduced in India between 1991 and 2014. In other words, the last three years have brought about more reforms than the sum total of the previous 25 years.

Demonetisation: Of course, any discussion of the Modi government is incomplete without reference to that greatest “experiment” of all—demonetisation. As I have consistently forecast over the last several months, that contrary to naysayers (almost the entire in-the-box economic fraternity), demonetisation has not had a very large negative short-term effect on the Indian economy. The just released CSO data indicates a decline in GVA (gross value added, broadly comparable to the more familiar measure of GDP) growth from 7.9% in 2015-16 to 6.6% in 2016-17. However, as several analysts have noted, a slowdown in Indian growth was already present in the July-September 2016 quarter, i.e. before the introduction of demonetisation on November 8.

There will be PhD theses written, and several of us will continue evaluating the effects of demonetisation well into the future. As it should, and must, happen. In terms of short run, there is a negative demonetisation effect of GDP, possibly amounting to as much as 0.5%. This negative effect is much lower than the doomsday forecasts of a 2%, and more, decline in GDP growth.

More on this at a later date, but a discussion of demonetisation would be incomplete without reference to its extremely positive effects on tax evasion. With a 1.3% lower aggregate GDP growth, personal income tax payments were up 25% in 2016-17, compared to a growth of less than 9% in the previous two years.

In any case, like the French Revolution, five months is too short a time-period to do a benefit/cost analysis of as large a structural change as demonetisation. But there is little doubt that, in a few years from now, demonetisation will make it into the history books as one of the most successful economic “experiments” ever undertaken.

Social reforms: Modi’s three years have also been marked by a willingness to tackle some critical social ills. Finally, there is a genuine attempt to bring about an end to the practice of triple talaq and the introduction of a uniform civil code. But this is where the good news ends.

The bad news begins with the introduction of a morality code in the lives of Indians. It starts innocuously, but disturbingly, with film censorship. The stupidity of the Censor Board has to be (not) seen to be imagined. What votes is this morality bringing? For every born-again Pahlaj Nihalani who votes for the BJP, several others are going to leave the camp disgusted.

But it gets worse, and independent of politics, we should recognise that in the social arena, we are handicapped by a problematic Constitution and even more problematic set of individuals (High Court and Supreme Court judges) interpreting the Constitution. How does one justify the Supreme Court ruling that the Constitution requires that the national anthem be played before the start of every movie?

And what part of the Constitution allows the State to set up anti-Romeo squads to investigate personal relationships? And how can an interpreter of the Constitution—like ex-judge Mahesh Chand Sharma of Rajasthan—remark that the national bird of India, the peacock, did not indulge in sex in order to successfully procreate. These masters of virgin morality make laws in India? And yes, Judge Chand also called for the cow to be made the national animal.

Cow vigilantism: This is a much greater threat to the unity and sanity of India than any collection of ghar-wapsi Romeo squads or justices like Chand or moralists like Nihalani. The ban of cow slaughter is not due to a particular (fire) brand of Hindutva, nor due to a particular political party, but rather the Constitution. It is the Supreme Court that prohibited cow slaughter, and it did so because of social and religious “Directive Principles” in our Constitution.

Modi realised the dangers last year when he commented that cow vigilantes were (mostly) thinly disguised anti-social elements masquerading as gau rakshaks. But the problem has only become worse, and it is time for Modi, and the BJP, to arrest the spread of the virus.

Cow vigilantism is no different than communalism. And India is not a theocratic Hindu state, so the dietary or religious beliefs of a section of the majority community should not dictate the law of the land. Dietary restrictions for a diverse country like India is political and cultural suicide.

Let there be debate about our inherited Constitution, and a genuine discussion about human and individual and religious rights, and wrongs. For the first time in independent India, debate is happening. Such open debate is structural change and good will come out of it, Inshaallah.

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