Budget 2019 BQView: The Economy Under Modi - Big Ideas, Small Successes
Prime Minister Narendra Modi’s image has loomed large over the Indian economy in the last five years. Every big project has carried his stamp. From GST, demonetisation and the Mudra Scheme to Swachh Bharat and Ayushman Bharat, Modi has pitched big ideas of change for the economy.
Some of these ideas have drawn praise; others derision. But few have resulted in any large dividends for the Indian economy yet. Yes, structural reforms take years to transform the economy but, in the interim, the only objective way to judge them is by the data available. Over the next two weeks, BloombergQuint will assess economic data over the last five years and outcomes of individual schemes.
Defining Moments Gone Wrong
There have been two economically defining moments for the Modi-led administration. One of them fell on Nov.8, 2016. Few governments can (or should want to) claim that they scrapped 86 percent of a country’s currency in circulation in one fell swoop.
The imagined gains were many — black money will be destroyed, counterfeit currency will reduce, the digital economy will get a boost. The dividends have been far fewer.
As is now documented in data, 99 percent of the scrapped currency was returned. There was no destruction of the stock of black money. The ratio of currency in circulation to GDP as of the end of December was at 10.7 percent of first advance estimates of nominal GDP for 2018-19. Prior to demonetisation, this number was at near 12 percent. Digital transactions have risen and savings in financial instruments have expanded. But these gains don’t justify a move that has been termed as “draconian” by former chief economic adviser Arvind Subramanian.
The implementation of the Goods and Services Tax was the other defining moment for this government. Here too, actual gains have underperformed expectations. The indirect tax base has widened to 1.25 crore but tax collections have remained below estimates. This may lead to the government missing its fiscal deficit target for a second consecutive year. Most importantly, implementation has been messy. Rates have been tinkered with constantly and the threshold for GST has been raised to Rs 40 lakh, in a tacit admission that the new indirect tax system had taken a heavy toll on the country’s small businesses.
Look beyond those defining policies and you’ll find a lot of smartly branded schemes. They broadly fall into two buckets — those that attempt to fill a genuine gap in the economy and those that are more about marketing and political gains.
The attempt to increase the penetration of insurance products falls in the first category. A recent committee on household finance had pointed out that the lack of insurance for crops, livestock and health are among key reasons for rural indebtedness, particularly for the build up of debt from informal sources. Putting in place a crop insurance scheme - Pradhan Mantri Fasal Beema Yojana - in 2016 was a good first step in addressing the vulnerabilities faced by farmers. But reports of implementation issues ranging from delayed settlement of claims to falling enrollment have left a question mark on the effectiveness of the scheme. The view on the recent Ayushman Bharat Scheme is similar. The idea of expanding health coverage is laudable but the funding and design of that scheme needs more attention.
Another area where the Modi-led administration has done well is in pushing access to formal finance. The Jan Dhan Yojana, while admittedly force fed to the country’s public sector banks, has meant that 80 percent of Indians now have bank accounts. Finance Minister Arun Jaitley, in response to a question in Lok Sabha last month, disclosed that about 23 percent of these accounts are inoperative. That’s not a large proportion and with direct benefit transfers being pushed actively, account usage will improve.
The rural electrification scheme - Deen Dayal Upadhyaya Gram Jyoti Yojana - also deserves mention. In April, all villages were declared electrified. The next step is to ensure electricity reaches all homes. But the reform of the electricity sector, particularly distribution companies, one of this government’s earliest schemes, has lagged behind. The Ujwal Discom Assurance Yojana was to have brought losses, due to poor transmission and theft, down to 15 percent. They currently average 20 percent.
The endeavor to push credit to small businesses via the Pradhan Mantri Mudra Yojana seems will also result in limited gains. A lot of existing credit has been reclassified by banks under the scheme and priority sector targets given to banks are already intended to achieve inclusion objectives. There are also concerns that lending standard could be diluted to meet targets set under the scheme. So far, delinquencies stand at 5.38 percent.
‘Make In India’, ‘Start-Up India’, ‘Skill-India’ are all schemes that delivered fancy logos and marketing campaigns but no substantial outcomes.
Institutions And Institutional Mechanisms
A final analysis would be incomplete without mentioning the Modi administration’s track record with institutional mechanisms and institutions.
The government must be given credit for setting up of the Monetary Policy Council in the early part of its term. Most investors, domestic and foreign, will cite that as a significant step in bringing greater predictability to monetary policy in the economy. Equally, putting in place an insolvency regime - Insolvency and Bankruptcy Code, 2016 - and the establishment of the Insolvency Board and National Company Law Tribunals will, hopefully, serve the economy well for years to come. The GST Council too has been institutionalised.
But any gains in setting up new institutional mechanisms have been more than balanced out by the damage done to existing institutions in the latter half of this government’s tenure.
The past year has been littered with examples of attempts to run roughshod over the country’s institutions. From the Supreme Court to the Central Bureau of Investigation and the Reserve Bank of India — the government has not shied away from damaging the painstakingly built standing of these institutions for its own ends.
In Final Analysis....
The Modi government came in with big promises of ‘Achhe Din’ but few will be able to say with any great conviction that it has delivered to what was considered to be its potential.