Where Modi Has Gone Wrong With India's Economy

As the economy wobbles through muddy waters, two terms that catapulted Narendra Modi into the stewardship of the Indian economy, Modinomics and the Gujarat Model, are heard less and less often. When they are, it's usually not in a positive way. 

Wasn't Modi the great reformer whose bold set of reforms supposedly transformed Gujarat's economy into a model of inclusive growth for other states to emulate? Weren't the tired and discredited policies of the UPA holding down the economy? Wasn't Modi's Midas touch going to make India a world-beating economy at whose door the whole world would have to beat a path? Wasn't anyone who questioned this narrative at best an apologist for failed Nehruvian policies, or at worst, part of an elite plotting to keep the poor down so that they could maintain their privileges (leaving aside the choicest epithets hurled by the troll-army)? 

So what went wrong with this narrative?

To begin with, everyone agrees about the gloomy state of the economy. Let's leave aside the usual suspects - economists who were never sold on Modinomics - and listen to voices that are likely to be more sympathetic. In this op-ed today, Yashwant Sinha, former Finance Minister of the Vajpayee government, a government that, despite all criticisms, can boast of concrete economic achievements, provided perhaps the best one sentence summary: "Private investment has shrunk as never before in two decades, industrial production has all but collapsed, agriculture is in distress, construction industry, a big employer of the work force, is in the doldrums, the rest of the service sector is also in the slow lane, exports have dwindled, sector after sector of the economy is in distress, demonetisation has proved to be an unmitigated economic disaster, a badly conceived and poorly implemented GST has played havoc with businesses and sunk many of them and countless millions have lost their jobs with hardly any new opportunities coming the way of the new entrants to the labour market."

Dr Surjit Bhalla, a member of the newly appointed Economic Advisory Council and an early supporter of Modinomics and the Gujarat Model, said in an interview yesterday that he thought the current growth rate was at least 2 percentage points below normal. He also acknowledged that the economic problems are structural and not technical in nature, and that "something" went wrong.

The self-described right-leaning Swarajya has published one article after another admitting the gravity of the economic situation, cautioning that it is premature to think Modi will win hands down in 2019, lamenting the failure of demonetisation, and criticising the disastrous implementation of GST. The RSS is also reportedly not happy with the state of economic affairs. The only note of "optimism" comes from S Gurmurthy of the Swadeshi Jagaran Manch, affiliated to the RSS, who recently said that the economy has hit rock bottom and can only revive from here. Talk about managing expectations!

So what went wrong? Are there external factors beyond anyone's control that have caused the current crisis? Perhaps the slowdown of the world economy is dragging India down? No, actually the world growth rate has marginally improved between 2014-2017 compared to the last years of the UPA II (2011-2014). Could it be oil prices? No, depressed global crude oil prices actually put crores of rupees at the disposal of the government, as Yashwant Sinha points out. How about unfavourable weather conditions? No, as Dr Surjit Bhalla pointed out in his interview, the dip in the growth rate cannot be blamed on the weather.


Surely, then, a large part of the blame has to lie with the government and its policies. This has to do with problems of omission as well as commission - namely, policies that should have been adopted but were not, and policies (e.g., demonetisation) that should not have been adopted but were. But it also has to do with how policies have been implemented in a top-down centralized fashion without adequate planning, thereby creating an environment of uncertainty that has damaged consumer and investor confidence.

The reality is that Modi's performance as Chief Minister of Gujarat was vastly exaggerated, as many pointed out back in 2014. Gujarat was and is indeed one of the states with the highest growth rates and income per capita, but a careful look at the numbers will show that Gujarat's performance relative to India before and after Modi has been roughly the same. In other words, Modi simply maintained the momentum of the Gujarat economy that started growing faster than the rest of the country in the early '90s after liberalization. This certainly deserves credit, but the fact remains he did not have the kind of transformative effect on the Gujarat economy that he was touted to have.

So, some of the fault for the narrative going wrong lies in creating expectations that were patently exaggerated. Some of it also must lie with a certain centralized style of governance that may have worked in a state that ranks ninth in terms of population but is unsuitable for running the national economy of a country as large and diverse as India. What is called for here is a more decentralized and team-based approach, rather than a one-man show. And that does mean taking on board the views of a range of people within the government in policy-making, from ministers to bureaucrats to advisors. It is good that a new Economic Advisory Council has been appointed. We do need experts. That is the easy step. But we also need a government that listens to them. After all, Raghu Rajan, who had predicted the financial crisis in 2008, was one of the best possible economic advisors available, anywhere. His reported misgivings about the misguided demonetisation exercise surely contributed to his tenure as RBI Governor not being renewed. Another expert, Arvind Panagariya, the former vice-chairman of Niti Ayog and one of the early academic champions of the Gujarat model and Modinomics, has returned to the US after a two-year stint. We sincerely wish the present group of experts have a long and steady tenure, and are given the freedom to pursue policies that will lead to a course correction.

Smooth sailing seems like a distant dream at this point. Wobbling through muddy waters is the reality. A shipwreck is a real possibility. Modinomics has turned into muddlenomics - a mish-mash of renaming existing schemes, blowing hot and cold on MGNREGA, messy implementation of good policies like the GST (whose long-run benefits may well exceed these short-run costs), and completely misguided policies like demonetisation that constitutes one of the biggest self-inflicted negative shocks on the economy in the modern era. Modinomics needs serious "modification" and for once, the pun is desperately not intended.

(Maitreesh Ghatak is Professor of Economics at the London School of Economics, and earlier taught at the University of Chicago. He writes regularly on economic and political issues with a special focus on India)

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