Modi’s Iron First May be Crushing India’s Economy

The choice for the government is thus a choice between populism and progress – a choice that will shape its path for years to come. The only question is, which one will it choose?

By Prabhav Kamojjhala

Narendra Modi’s second term as Prime Minister of the world’s largest democracy has been fraught with crises at best. From the controversy surrounding the removal of special autonomy for the state of Kashmir to his handling of the protests surrounding a contentious citizenship bill, regardless of one’s own opinion on the Indian PM, there’s no question that he’s losing the game of international optics. From the Economist to TIME magazine, Modi has gone from India’s globetrotting hope for new economic growth to a majoritarian nationalist. While it’s easy to get caught up in the headlines, the important question to ask here is what this means for the Indian economy. 

India’s present macroeconomic performance has been a hard pill to swallow. With reports of the third consecutive year of slowdown in growth, a significant shortfall in government tax revenues, and an acute youth unemployment crisis, India’s economic performance leaves much to be desired. But that begs the question, how did we get here? 

Roughly speaking, one can imagine the macroeconomy as a stool supported by four legs – spending by households, private sector spending, government spending and net exports (the difference by revenues earned by exporters and spending on imports). The issue with India’s economy is that each of these stool legs are slowly breaking. Following a liquidity crisis in the NBFCs (Non-Banking Financial Companies) and a scourge of NPAs (assets that don’t generate income for the owners) that sent Public-Sector Banks (some of the largest banks in India) in a tailspin, credit flows have essentially wilted away, with larger businesses being the only institutions to receive money. Attempts to increase cash flows in the economy have essentially been too little, too late. In an environment where banks are too afraid to lend money and businesses are unwilling to borrow, the short to medium term prospects of the economy are grim. 

For consumers and smaller businesses, the scene isn’t rosy either. The government’s attempt in 2016 to formalize India’s economy and reel in on terrorism funded by fraudulent notes through demonetization had an unfortunate side effect – it cost 1.5 million jobs and almost all the demonetized notes in circulation (99.3%) had been returned to banks i.e. at least 99.3% of all notes in circulation were legitimate. Prospects have not improved since – for the first six months of FY 2019-20, domestic consumption growth was at a meagre 4.1%. The situation is paradoxical in that growth is required for jobs, but people need jobs to spur growth through spending. 

The Narendra Modi administration, however, seems to have its heart in other places. The Ministry of Home Affairs (MHA) has been busy at work routinely shutting down the internet in places where dissent may be brewing and beating university students in their own libraries (through the MHA controlled Delhi Police). Regardless of the motivation, the optics are not ideal; experts have been losing confidence in the Modi Government’s ability to get its priorities straight. S&P recently downgraded India’s rating to BBB- (the lowest rating above a junk bond), and foreign portfolio investment has also taken a hit, with news of Western Asset Management Co. selling its Indian bond holdings out of a lack of confidence. While supporters cite an uptick in Foreign Direct Investment, the Government does not appear to have a long-term plan to inspire confidence in investors, either foreign or domestic. 

The road ahead for the Modi government is long and difficult. With the onset of COVID-19 and the accompanying (and much-needed) nation-wide lockdown, an already frail economy is now in doldrums. Bleak economic projections lay ahead and an economic rebound is going to take well thought and inclusive growth strategies. Moreover, historically, developing countries have often been forced into political upheaval in times of recession. The choice for the government is thus a choice between populism and progress – a choice that will shape its path for years to come. The only question is, which one will it choose?