PM's Burden Lies in Over-Selling "Acche Din"

Published: June 27, 2014 12:10 IST
(M.K.Venu is Executive Editor of Amar Ujala publications group)

Prime Minister Narendra Modi has claimed that his government has got much less of a "honeymoon period" than other regimes in the past. Indeed, the NDA government has looked somewhat besieged from the word go, and as it completes one month in office, there is worry over many economic challenges the government is likely to face in the months ahead.

The sharp increase in railway fares and the subsequent roll-back did dent Modi's image as a decisive leader. Mind you, this time around, the blame for the partial roll-back cannot be put on some intransigent ally because the BJP has a majority of its own. "Coalition Dharma" had ceased to be an excuse anymore.

Why did Modi roll back the hike in fares for suburban Mumbai trains? If it was because of the impending Maharashtra state elections, then Modi hasn't shown himself to be any different from other coalition regimes in the past which would constantly put off economic decisions with an eye on some assembly election around the corner.

The fact that Modi has chosen to do it so early in his tenure, even after winning so convincingly in North and Western India,possibly betrays an attitude that can best be described as defensive. Why such defensive behaviour so early in the tenure?

The answer to this lies in the huge over-expectation of "Achhe Din" (good days) that Modi had built in his election campaign speeches. He promised everyone the moon against the backdrop of  sharply slowing growth and rising inflation which had essentially done the UPA in. But Modi realizes only too well that many economic problems are beyond the government's control and that his promise of "Achhe Din" will take time to materialise. Even with reasonably good economic management, it could take nearly two years to get growth crawling up to 6% and inflation down to 5% on a sustained basis.

We don't realize that cumulative consumer inflation of about 50% over the past four years has deeply eroded both rural and urban incomes. The negative wealth effect in terms of real erosion of real estate and stock values, especially in urban India, has caused lasting demand pessimism.

True, the arrival of Modi government and the perception of relative stability has taken the BSE Sensex to over 25,000, but real problems on the ground such as inflation appear to be intensifying again. In any case, the stock market directly impacts only about 3 to 4% of the population which is invested in shares.

So Modi is now busy lowering the expectations that he had built before the elections. Consequently, there are tentative statements coming from the government about the common man having to swallow the bitter pill. The economic managers of the government sound very defensive when they say it will take two years to merely repair the economy. The idea is probably to keep blaming the UPA for sometime to come. This would be a bad strategy. Even Prime Minister Vajpayee who had inherited a much worse economy in 1999, post the East Asian crises, did not say he would need two years to repair the economy!

Modi's first month was marked by news of a particularly bad monsoon in North and West India with 43% deficient rainfall. Modi is acutely aware that it was  these two regions which gave the BJP a massive mandate. He could quickly lose some of the support of farmers and rural folk in UP and Bihar if he is not seen as tackling drought on a war footing. Modi must be particularly worried that the widespread drought in the North and West, which produce upto 50 % of food grains, pulses and vegetables, could send food inflation spiralling. On top of all these problems has come the Iraq crises and the consequent increase in oil prices by over $10 per barrel in the past few weeks. This will further fuel inflationary expectations and tend to weaken the rupee.

In the midst of these externally-driven economic ills, Modi's economic managers have taken some bad decisions which by themselves are inflationary. For instance, the government took the ill-timed decision to help the sugar industry by raising import duty on raw sugar from 15% to 40%. The idea was to improve the balance sheets of the sugar companies so that they are able to pay farmers' dues. The intention seemed right but the outcome was a 35% to 40% increase in sugar prices in the market at a time when inflationary expectations are building on account of bad monsoon and the Iraq crisis. The sugar package was badly timed.

Modi had also promised farmers the moon. He has specifically offered them 50% profit margin over and above all their costs. If implemented at this stage, this would also fuel inflation. The BJP -affiliated Kisan Majdoor Sangh is in no mood to take a "no" from Modi and is demanding the promised profit on the farmer's produce.

The problem is all the measures so far, starting from the Railway fare hike and sugar package, have hit the common man. The BJP is also grappling with a power crisis, particularly in North India. There is talk of power tariff hikes across the board in order to make the power sector viable. This will also hit the common man. The NDA government has deferred the decision to double the price of gas - a decision already taken by the UPA Cabinet. This shows a growing tentativeness creeping into what was repeatedly promised as a decisive government under Modi's Prime Ministership.

One had thought Modi would use his considerable communication skills to explain tough economic decisions to the people. He has shied away from doing so. It is one thing to speak with flourish in an election campaign, it is quite another to do so in government when you are dealing with complex realities.

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