Economy Under Modi [Part II]: The ‘Achhe Din’ that Never Came

March 18, 2019

In 2011-12, the Central Government Expenditure was 14.77% of GDP. If we add to this the share of states in central taxes, the total expenditure financed by Central Taxes or borrowing was 17.66 % of GDP. In the 5 years of the Modi government, this total has never touched even 17 % of GDP. The Central Government Expenditure proper is now below 13 per cent of GDP. Thus, there has clearly been no stepping up of public expenditure by the Modi Government. This acquires significance on account of the fact that, off the total Expenditure by the Central Government, almost half goes towards expenditure of running the Government’s own establishment and paying the rich interest on past government borrowing from them. It is only the rest that is spent mostly on over 100 schemes – which serve to window-dress the government not doing much in any field as doing many things to benefit the people!

Over the last 5 years, two measures were announced as the big-ticket measures of the Government to increase tax compliance and unearth black money – namely, Demonetization and the introduction of the Goods and Services Tax (GST). Both of these produced disruptive effects on the economy which aggravated the employment situation. Both served the objective of the rich and wealthy who don’t want to pay more taxes – demonetization by propagating the myth that most of the tax evasion happens in the cash using part of the economy and not by those who have PAN numbers and move crores of rupees and dollars every day through electronic transactions, and GST by pushing the burden of generating more revenues on to the indirect taxes ordinary people pay rather than the direct (income and corporate) taxes which the rich would have to pay. Neither, however, produced any positive effects on the revenues of the Central Government and both income tax as well as

GST revenues have fallen short of targets in the last two years.

If there is any measure that propped up the Modi government’s revenues, it was the not so publicized measure of raising excise duties on POL products, taking advantage of the opportunity offered by the fortuitous decline in international oil prices from July 2014. Thus, by paying more than they needed to for petrol, diesel, etc. and the products transported by vehicles using these fuels, the common people were made to pay more taxes. And these were then not used to increase expenditure but to cut the fiscal deficit of the Government, which was brought down from 4.4 per cent of GDP in 2013-14 to 3.5 per cent towards the end of the term. Excluding the GST Compensation Cess and POL taxes, the Central Taxes-GDP ratio in 2017-18 (last year with final figures) was less than in 2012-13 and way below the level in 2007-08.

Thus, what the Modi Government pursued relentlessly through its 5 years was austerity rather than the stepping up of public spending – a pre-occupation with slashing the fiscal deficit by curbing public expenditure growth rather than increased revenue mobilization. It is not surprising therefore that it has done immense damage to the economy and to the livelihood situation of common people.

Persistence of Slowdown and Deepening Agrarian Distress

Agricultural production in the five years (2014-15 to 2018-19) does not compare very favourably with that in the past. Indian agriculture’s average annual output of cereals and total foodgrains over the five-year period ending in 2018-19 were 247.80 and 268.97 million tonnes respectively. These were almost the same as the 245.79 and 265.04 million tonnes produced in 2013-14 – in other words there has been no growth. Even more stark is the picture of non-foodgrain crops, which have suffered a fall in production in the 5 years of the present government. Annual average Oilseed production in the 5 years of Modi Raj was barely above 29 million tonnes as against 32.75 million tonnes in 2013-14. Cotton production similarly was down to 32.66 million tonnes as against 35.90 in 2013-14, and sugarcane rose only marginally to 354.92 from 352.14 million tonnes. If agriculture and farm incomes have suffered due to poor production in some years, they have also been hit by poor price realizations in what were production-wise better years.  The state of the rural economy is most clearly expressed in the return of stagnation in rural wages.

Apart from agriculture, the industrial and construction sectors have also continued to be laggard sectors in the 5 years of BJP rule.

A rapid growth of construction activities, at an average of close to 10 per cent per annum in the previous decade, made it the most important employment outlet for those leaving agriculture. The sector has, however, been doing poorly since the beginning of the current decade and has become a major source of the Non-Performing Assets (NPA) problem of banks. Despite repeated revisions of GDP data in successive years which have continuously ‘improved’ the results, no significant revival of growth of construction has been exhibited   in this scenario in the last five years. Even the GDP ‘data’ show construction to have grown at an average of about 5.5 per cent per annum between 2014-15 and 2018-19. However, cement production, which is also an index of the scale of construction activities, has grown at an average of less than 4 per cent per annum over the same period.

The real story of Indian industry also tends to be obscured in the GDP data of the CSO’s new series. The persistence of industrial stagnation is, however, confirmed by the new series of the Index of industrial Production (IIP) Indian industry issued by the same organization and introduced after the new GDP series was started, with the same base year. The growth in IIP for manufacturing as well as the general index have stayed well under 5 per cent per annum for the entire decade and shows no visible turnaround at any point during tenure the Modi government. Even the latest data till January 2019 shows both indices to have grown by merely 4.4 per cent in 2018-19 over 2017-18.

Industrial stagnation in itself is proof of the failure of programmes like ‘Make in India’. Trends in India’s foreign trade reinforce the picture. Because of the decline in international oil prices after 2014, the value of India’s oil trade (both exports and imports) has declined. But if we look at the non-oil trade, the average annual value of exports during the period 2014-15 to 2017-18 was US $ 248909 million, which was lower than the level of US $ 251236 million in 2013-14. On the other hand, non-oil imports averaged an annual value of US $ 315522 over the same period as compared to US $ 2854443 million in 2013-14. In other words, exports have stagnated while imports have increased. The non-oil trade deficit in 2017-18 has grown to more than twice the level in 2013-14 and is likely to be even higher in 2018-19. So much then for ‘export-led growth’.

It is hardly surprising given all the above that the stagnation in investment has persisted through all the attempts of the Modi regime to increase the ‘ease of doing business’! GDP data confirming this have been also been ‘revised’ upwards in the last two years – even that data, however, shows the ratio of Gross Fixed Capital Formation (GFCF) or investment to GDP ratio fell from 31.3 per cent in 2013-14 to 29.5 per cent in 2018-19.  Moreover, data on both the production as well as imports of capital goods – both of which show that the levels every year since have been almost the same as in 2011-12 – combined with the cement production data to establish conclusively that investment has been stagnating – since investment involves expenditure on either construction or on machinery and equipment (capital goods).

The trends in bank credit also reaffirm the absence of any investment revival and of industrial stagnation. Outstanding non-food bank credit growth between May 2014 and January 2019 has been less than the increase in nominal GDP – but within that while the figure for personal loans, not typically used for productive activities, has more than doubled, the nominal value of credit to the industrial sector has not even increased by 10 per cent in nearly 5 years. Indeed, personal loans which accounted for 18.5 per cent of non-food bank credit in May 2014 have cornered as much as 42 per cent of the increase in credit since then. In contrast, MSME’s – the much talked about job creators in the Modi Government’s campaign – have seen their share fall. The MSME sector accounted for over 13 per cent of outstanding non-food bank credit in May 2014 but received only 11 per cent of the increase between then and January 2019.

Summing Up

The evidence is thus crystal clear. Over the last 5 years there have been concerted attempts at providing a “friendly” climate for private capital to make large profits and for the rich to accumulate more wealth through that. While cronies have benefitted from this, this has failed to entice them to invest widely in productive activities to generate large employment opportunities. Disruptive actions like demonetization, GST introduction and even banning of the cattle trade have made such investment even more unlikely. In such a scenario, the beneficiaries of the Modi regime’s largesse have created very few jobs while the deepening crisis in agriculture has only swelled the numbers seeking these jobs. The gulf between requirements and availability has thus grown even bigger - leaving millions of Indians in desperate conditions. The Government’s formal and informal propaganda machine will of course roll out figures of GDP growth, number of beneficiaries of multiple schemes, and of the lowered inflation rates, etc. However, the precarious state of the household economies of India’s working millions, and the state of many small businesses, will not resonate those figures. The fact is that ‘Achhe Din’ looks even more distant now than 5 years ago.