Modinomics - What He Promised And What We Got

As we approach the 2019 elections, five years after Narendra Modi was elected with a thumping majority on a plank of economic development, no one talks of achhe din or Modinomics any more. Is it a case of mission accomplished - or topic-change out of necessity? How does the Modi government's economic scorecard look if we consider some key indicators of the country's economic health? 

Modi had promised to revive the economy and reverse the economic slowdown in the last years of UPA II. Despite the controversies over data, all the estimates of the growth rate range from a little below to a little above 7%. It is ironic that the man who promised to unleash India's economic might on the world stage using the magic of Modinomics now boasts of an average growth rate of around 7% during his term, especially as India's growth rate dipped below the 7% level only five times in the last 15 years - right after the global financial crisis, in the last three years of UPA-II (the so-called policy paralysis phase), and in the year after demonetization.

If we use a different benchmark and compare India's growth rate with the average growth rate across the world, even then the last four years do not stand out. Yes, it is one of the countries with the highest growth rates in the world, but that was true in the previous decade too. In fact, the gap between India's growth rate and the global average growth rate has shrunk, not widened, between 2014 and 2017 compared to 2004-2014.

However, GDP growth rates are only meaningful to the extent they capture improvements in the standard of living of ordinary citizens. Modi's promises pertaining to livelihood were ambitious: 250 million jobs over 10 years, or 25 million jobs a year. If we look at a CMIE series based on household surveys, the number of employed persons declined from 406.7 million in 2017 to 406.2 million in 2018 (and to 400 million in February 2019). During 2017, 1.8 million jobs were added but that is only 12% of the net addition to the pool of job-seekers, and a mere 7% of the annual job creation figure of 25 million promised by Modi. For 2016, the corresponding figure was 1.4 million.

If we look at data from government sources, the unemployment rate was at 3.7% in 2015-16 according to the Labour Bureau. Press reports on the latest National Sample Survey Office (NSSO) survey indicate unemployment rate was at a four-decade high at 6.1% in 2017-18 and nearly one in five rural or urban youth are unemployed. No wonder that this report, too, is being withheld by the government despite having been approved by the National Statistical Commission.

The problem is far worse in the agricultural sector that accounts for over half of India's workforce. Modi's assurance to Indian farmers was clear: 50% profit over their cost of production and doubling of farm incomes by 2022. Not only has this not been delivered but the Indian farm sector is crippled by a widespread crisis.

At an average of 2.51% for 2014-17, agricultural growth has been much lower under the Modi government compared to the previous decade (2004-17), when growth averaged 3.7%, or the decade before (1994-2004), when the average was 2.88%. It follows from simple mathematics that to double something in eight years, a sustained growth rate of at least 9% is needed. Short of an agricultural revolution, this was an absurd promise to start with.

Rural wage growth rates are at a 10-year low and in 2018, growth was less than the rate of inflation, so it was negative in real terms. Prices of agricultural produce have increased at a much lower rate than that of non-agricultural goods over this period, and after demonetization, crop prices have tended to be deflationary. This has squeezed rural income and purchasing power relative to the non-agricultural sector.

In the last five years, the corporate sector has been marked by abysmally low growth and an unwillingness or inability to invest in new capacity and jobs. Curiously, even as GDP numbers supposedly continue to grow at a reasonably healthy rate, at least as per declared data, corporate profits have languished over the last four years. Most companies have massive unutilised capacity, which is why they are loath to invest. Gross Capital Formation (GCF) - which is investment in plant and machinery - has dropped from 34.3% of GDP in 2014 to 30.7% of GDP in 2017. The average of GCF as a percentage of GDP during the Modi era is 31.8%. This is considerably lower than the average of 39% during the decade of UPA rule. 

When companies do not build new capacities and credit dries up, jobs vanish, which is precisely what is happening. If we look at other sources of demand that could potentially provide a boost to the economy, e.g., exports, there, too, we see a dip in performance under the Modi regime. Since 2014, Indian exports have grown at a dismal average pace of 1.6%, while in the two previous decades it was 13% to 14%. This, in turn, has increased India's current account deficit (CAD) to 2.9% of GDP, contributing to the rupee's collapse to 70 versus the US dollar. 

Outside the organised sector, the problem is graver. The Prime Minister's demonetization scheme dealt a deathly blow to medium and small enterprises (MSME) and unorganised units, from which they are yet to recover. The CMIE estimates that 3.5 million jobs were lost in the unorganised sector in the aftermath of demonetization. A ham-handed implementation of the Goods and Services Tax (GST) has only exacerbated this trend.


Much is made of the government's fiscal rectitude - how it has managed to rein in the fiscal deficit to 3.3. Yes, the Modi government has marginally reduced the deficit to GDP ratio relative to the UPA. But reports from the Comptroller and Auditor General of India (CAG) suggest that this is largely due to creative accounting methods to roll over subsidy data, and the windfall of falling oil-prices that allowed the government to raise fuel taxes.

Another oft-repeated claim is that inflation was consistently higher under the UPA. Indeed, if we take the annual inflation rate in consumer or retail prices as measured by the Consumer Price Index, the average for the UPA period was 8.1% while that for NDA-II is 5%. However, if we take the difference between India's CPI inflation rate and the world average, the corresponding figures are 3.7% and 3.1%, respectively, for the two regimes. Therefore, while the Modi government deserves some credit for fighting inflation, this seemingly dramatic improvement can be partly attributed to external factors affecting the global economy.

To be fair, "achhe din" is not all about economic prospects in the narrow sense. If we look at some other indicators of quality of life or welfare, such as infrastructure and public services and amenities, there has been some progress. For example, the total number of rural houses constructed under various central government schemes since 2013-14 has more than doubled, and so has rural road construction. There has been significant progress in building rural toilets under the Swachh Bharat Abhiyan, and in providing electricity and liquefied petroleum gas (LPG) connections under the Saubhagya and Ujjwala schemes. Considerable progress has been made in financial inclusion: more than 33 crore bank accounts have been opened, with 19.75 crore accounts in rural areas under the Jan Dhan Yojana. However, improvements in these areas notwithstanding, there are concerns about the extent to which the government claims success under these schemes.

Moreover, it is notable that in the December state elections, the ruling party suffered electorally in some of the key heartland states which suggests the crisis in people's livelihoods has dominated any improvements in other aspects of quality of life. 

Five years down the line, this then is the inescapable summary of the economic scorecard: job growth at multi-year lows, an agricultural crisis, a crippled unorganised sector, currency value at near all-time lows, a soaring current account deficit, high interest rates, a half-frozen banking system, a struggling corporate sector, sinking exports and a GDP growth rate that does not stand out compared to the earlier decade, in spite of constant revisions. 

No wonder no one talks about Modinomics anymore.

(A longer version of the essay was published in The India Forum)

Maitreesh Ghatak is Professor of Economics at the London School of Economics. He was recently elected Fellow of the British Academy.

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