Decoding 6yrs of Narendra Modi's political economy.

With the slowdown in the domestic economy and the technical recession that has been caused by COVID 19 induced lockdown in the Q1 of 2020 a lot of ‘economists’ have been writing obituaries for the Indian Economy. The Stock market fell about 30% in April and then everybody was projecting the doomsday scenarios and were like ‘look I told ya’ they don’t understand economics. The same guys have now changed their positions as markets traded at all-time high just 8 month after pandemic. Also in a democracy were mandate of the people is considered the barometer, Modi led BJP has not just retained power in 2019 but has also been making gains in the majority states. So what’s the myth and what is the reality. This piece is not about the narrow data point to argue one way or the other but just too simply lay what the trajectory of reform initiated by the Modi government is.

The 1^st tenure: Modi with his 282 was thought of continuing on the ABV path, and initiated with the land reform bill which did not go through in the parliament, and soon he had to change direction after the suite boot ki sarkar jibe. The opposition called this government ‘suite boot ki sarkar’ and ‘adani , ambani ki sarkar’. Modi the politician soon realised after this that to stay in power he cannot just do what the economists talk as ;’Big Bang’ reforms. He recognised that the state capacity is full of leakages and what he 1^st has to concentrate on is the basic state capacity to be delivered to the common Indian. Thus he started on the journey, what a lot of libertarian economists call ‘arch socialism’. A lot of India commentators (including yours truly) forgot that the libertarian economic thought evolved in the western countries after the state capacity had already reached the remotest part of western society, which was not the case in India. Thus Modi’s 1^st term was led by ‘pro poor’ schemes like the DBT (direct benefit transfer), Ujjawala( cooking gas subsidy scheme), PMAY (housing for all), Swacha Bharat(toilet for all), Electricity for all, Kisan credit cards (access to formal credit for farmer)  and Ayushyaman Bharat (medicliam facility for 50cr BPL people), which are classic redistribution schemes. Not that such schemes were not designed by previous governments, but the difference with Modi was he reformed the entire delivery mechanism. Even the critiques of this government had to admit that what was promised was in most cases delivered. Thus Modi in his 1^st term ensured that not just suit boot who had his confidence but both kurta and gaav garib also started trusting him, giving BJP another slogan ‘Modi hai to Mumkin hai’.

While transforming the entire delivery mechanism it was argued again by ‘intellectuals’ that Modi has moved too far left of center and has given up completely on suit boot, but Modi sure has not been on the mute mode nor has he been short of action. In 2016 he embarked on the painful process of formalisation of the economy with Demonetisation which was a shock to the system, GST which subsumed most state taxes into one nationwide tax, IBC insolvency and bankruptcy code which has led to the resolution of most stuck cases in the banking system and has given banks a chance to resolve insolvencies (best and most effective, underrated in my opinion), RERA for the reality sector, JAM, defence procurement, ’Make in India’ and inflation targeting system with MPC to name a few. When Modi came into power he also had got a banking system which was in a mess with plenty of bad loans. The clean-up process of banks was started by Rajan in early 2014, but that was carried forward and even accelerated under the Modi regime. Also he recapitalised the banks so that they could lend and even use the money for provisions. But all these were painful reforms. Also some 1400 archaic laws in the statute books were repealed. Thus even if in the 1^st 5 years Modi provided a lot of carrots to the poor and consolidated political position of BJP in the areas they had not won, it tested the patience of the core BJP voters who were trading business community. For its core the Modinomics in the 1^st term came with a lot of sticks. They were neither satisfied with the Modi on the civilizational issues nor on the economic front as there was sure pain in the process of change. What held them though was probably Modi’s national security posturing. Modi was re-elected for the 2^nd term as a combination of both its core support base and also the newly found love of rural India.

Modi’s 2^nd term: As though stung by the criticism from the core base of abandoning the civilizational side after coming to power, Modi 2.0 delivered on big bang promises of abrogation of article 370, CAA, building of Ram Mandir within 6 months of coming to power. Under Modi, India now has a CDS a head of all three defence agencies for a coordinated response a demand which was made by defence agencies for over 2 decades. Modi government has brought in the New education policy.  The economy meanwhile was facing headwinds and the GDP growth was slowing. Again the intellectuals responded with Modi has left the economic reforms agenda and only concentrated on Hindutva. While the civilizational issues were getting settled, on the economic side Modi introduced corporate tax cuts and brought the taxes to historical lows with special emphasis on new manufacturing. While the earlier reforms were just beginning to settle and business cycle on the verge of turning, all bets were off when we were hit by Wuhan virus. As it is said in economics never let a crisis go waste. Modi has introduced some serious economic reforms under AtmaNirbhar scheme like Subsuming 44 labour laws into 4 codes, decriminalising most of company law provisions, enacting market friendly farm laws, and giving manufacturing the push under PLI scheme for 10 sectors there by incentivising the global manufacturing houses to shift from the China and adopting the China+1 strategy. Also drastically simplifying the BPO sector. Modi is now experimenting with lateral hiring in civil services. In the banking sector they have introduced the bilateral netting. Modi has now signalled that he will bring the land reform bill and also bring in strategic sale in PSU and hopefully also in PSBs. The government has also now completed the merger of all the PSBs which they had announced. One thing that all agree about Modi government is the secular infra push in both Modi 1 and 2 anlong with minor but impactful Fast Tag system for tolls. So if most of Modi 1 was about sticks, most of Modi 2 has been about carrots for the business class.

RBI role in the economy: RBI in Modis term did a good job initially for controlling the inflation and also did well on the recognition of the NPAs which was the need of the hour. The problem was that RBI missed the bus by increasing interest rates instead of cutting them after we had two policy shocks in quick succession (DeMo and GST). Which led to the slowing of the economy. It is often argued that after the present governor of RBI who has come in, he is a puppet in Modi’s hand, the same was argued about Urjit patel till he resigned. I guess both arms of the states do not necessarily have to confront each other which was what was happening. Arguably the best monetary policy measures have come under the present RBI governor especially during the pandemic, were the RBI has stepped up to comfort the market also ensure adequate liquidity is available while managing the macros fairly well. Finally both arms of the state are actually complimenting each other in crisis and managing situation well.

Consequences: The consequences of this have been thus, on the health side the toilet and ayushman schemes have improved rural health and sanitation substantially. DBT and Ksian Samman have ensured the poor get the funds directly in the bank accounts under JAM trinity. Access to formal credit through Ksian credit card for small farmers. Pakka houses for the rural poor. From inheriting the messiest banking system to now being the cleanest in the last 5years (mostly due to RBI measures and IBC). The formalisation of economy which has accelerated in the pandemic (started with DeMo and GST). Reduced transport cost as a consequence of GST. Shifting was supply chains we have started because of global factors incentivised by PLI. iPhone and Samsung manufacturing has already shifted to India making it the second largest export hub for smart phones. With global liquidity being very high the FDI again becoming bullish on emerging markets a lot of jigsaw pieces are in place to attract a windfall of capital.

To conclude if the Covid second wave is not harmful in India to a great extent and Modi is able to complete the reform agenda by simplifying the GST, cutting red tape, transforming the legal system and completing the privatisation process, Modi surely will go down in history who was able to dismantle the Nehruvian socialism to its core and truly unleashing what the socialists mocked Indian people for, the real ‘Hindu rate of growth’ as opposed to the ‘Nehruvian socialist’ rate of growth which the left had given for 5 decades. Modi is not Reagan nor he is Thatcher as was expected by some people, he is Modi who is devising economic and political responses to the current Indian reality.  To end this the last thing I I have to say is, there is no reason to lose hope on India and as the popular series SCAM 92 dialogue goes “Lala India pe paisa laga do, India ka bhav badhne wala hai.’ Invest in India…!!