Narendra Modi has proved to every pundit in the country, that we don’t understand how the Indian economy works. Every single measure, that commentators traditionally use to gauge the health of the economy, was going against the Modi sarkar.
On paper, India might be the fastest growing economy in the world, but the middle-class is experiencing a slowdown.
The government’s record on jobs was poor and that reflected in the slowdown in demand. The sale of homes, cars, two-wheelers, shampoos, soaps and almost every other good had either dropped or slowed down. Investment in factories and machines had dropped. Fewer projects were getting completed. And, as people were buying fewer things, corporate profits were getting squeezed.
Yet, despite this lacklustre economic performance, Narendra Modi is back with a bigger mandate than what he got five years ago. Of course, national security, polarisation and the TINA factor worked for him. But, these were add-ons on the core strategy of team Modi-Shah. The real game-changer for the BJP was that it understood the Indian economy better than Harvard-trained economists.
The Poor Seek Points of Access To The Govt – Modi Understands This
These elections have proved what some political theorists have argued for years – the poor in our towns and cities, and the farmers in rural India, do not get affected by things like GDP growth, industrial output and the current account deficit. Even at the best of times, India has had a low labour-force participation rate, especially amongst women. Liberal economists tried to explain that by saying increased prosperity means women don’t have to work any more. But, the high-unemployment rate amongst women who did look for work, belied those claims.
So, almost half of those who can work, do not look for work in India. That’s because they know they cannot get any work. They live off intermittent and irregular labour, vagrancy and support from their immediate community. Such people do not care about unemployment rates and the drop in India’s exports. Instead, they seek points of access to the government, through which they can get a share of public resources.
Narendra Modi understands this. That is why he has provided the poor with many such touch-points – Jan Dhan Yojana, Pradhan Mantri Awas Yojana, Swacch Bharat, Ujjwala, Ayushman Bharat, and, most importantly, Kisan Samman Nidhi.
Even if these schemes haven’t worked fully on the ground, they have built connections with an estimated 22 crore people. Compare that to the one-crore-odd people who are estimated to have lost their jobs in the Modi era, and you will see that access to government schemes more than made up for job-losses.
Modi-Shah Don’t Leave Anything To Chance
Does Modi 2.0 have any reason to change his approach? On the face of it, he doesn’t need to. Because, why fix it, if it ain’t broken? But, Modi-Shah do not leave anything to chance. In 2017 and 2018, the government had implemented GST and gone slow on budgetary spending. Even though procurement prices were raised, farmers didn’t get the official rates when they went to sell their crop in the mandi. In other words, the Modi government had shorted the connections it had built with the rural poor.
This was corrected in the Budget this year, as the government opened its coffers. GST rates were moderated, exemption limits raised, budgetary allocations to central schemes increased, and PM Kisan money was deposited into 2.6 crore accounts.
On top of that, crop procurement increased. In Uttar Pradesh, the usual cane-crushing season, which normally ends in March, was extended to mid-May. The result can be seen in food-price inflation picking up in April. This means, farmers have got better prices for their crops than they were getting earlier.
What To Do With The Part Of The Economy That Is Slowing Down?
The problem is what to do with that part of the economy that is slowing down. The Modi government held back a fuel price hike because of the elections. That could come soon. Despite its best efforts, the government couldn’t stem the bad-loan rot. In fact, the opposite happened. Public sector banks got scared of giving loans, and small businesses have had to depend on NBFCs for credit. The net result is that the bad-loan contagion has now infected the NBFCs too.
However, most corporates didn’t really need loans to invest in capital. Many of them have decent cash reserves.
If they really wanted to invest in plant and machinery, they could have used their own retained earnings. Instead, they chose to give it back to equity investors in the form of dividends and bonuses. CMIE reported that, between 2014 and 2018, nearly 65 percent of the net profit of non-finance companies was distributed as dividends. The dividend payout ratio was just 45 percent between 2010-11 to 2013-14. In other words, corporates do not believe that investing more will increase their income.
Modi 2.0 Should Be Wary Of ‘Policy Paralysis’
While, as we have argued above, this does not affect a large chunk of India’s poor, it does affect the powerful and vocal middle-class. If the organised economy does not recover soon, India Inc will start losing patience with the Modi government. Suddenly, you will find prime time TV news channels debating economic mismanagement. Corporate funds will start flowing to the Opposition and street-protests will be covered by live broadcast vans.
This did happen to UPA-II. It came back with a bigger mandate in 2009, but within two years, Anna Hazare was grabbing all the headlines. By 2012, the UPA was afflicted with, what the media called, ‘Policy Paralysis’.
Scams, real and imagined, hobbled the government’s every move and it lost control of state institutions. Modi 2.0 will have to watch out for this. Public memory is very fickle and consensus can be manufactured very quickly, even after a massive mandate.
(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels. He now anchors Simple Samachar on NDTV India. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)