Everything Wrong With Modi Government’s White Paper on India's Economy (Part 1)

The UPA-I years and the decade of 2002-12 saw the best economic performance in post-independent India's history.

The Modi government’s White Paper recently released in Parliament, which is partly an assessment of the Indian economy under the UPA (United Progressive Alliance) years, comes across as propagandist intellectual extraction designed for political purposes.

The end result is a product of shabby research that isn’t worthy of parliamentary discussion (note how the data source cited on the figure showing the rupee’s performance under the UPA is the FRED [Federal Reserve Economic Data] and not the RBI [Reserve Bank of India] data).

A Word on the UPA

The White Paper says that the UPA Government inherited a healthy economy ready for more reforms, but made it non-performing in its ten years.

As argued earlier, the UPA-I years (2004-09) and the decade of 2002-12 saw the best economic performance in post-independent India's history. These may have been anchored by a Manmohan Singh-led UPA government, but the consequential reasons for the economic success remained path-dependency on the continuum nature of pro-market reforms undertaken in the 1999-2004 period (during the Vajpayee years).

Still, added to this momentum was the nature of social policy interventions undertaken during UPA I, through interventions like MGNREGA (for job security), and Right to Food campaigns (for nutritional access distribution) which allowed for greater upward income mobility for India's low-income rural and middle-income urban economy. Both these groups have woefully suffered in the Modi government's decadal term (please see the income growth chart for the 2016-21 period for evidence).

Yes, the UPA-II years may have been fraught with macroeconomic instabilities witnessing a higher inflation rate, episodes of policy paralysis and economic uncertainty, but those happenings didn't cause a structural rupture in the social and economic mobility and growth process of India's focal point: the aspirational (middle) class.

Also, what caused a massive economic shock in India was the 2016 demonetisation (a term entirely missing from the White Paper) which was a direct shot into the tyres of a racing Indian economic vehicle. Somehow, the vehicle didn't gain the same pre-2016 momentum if one looks at the annual growth rate data ever since.  

On the other hand, the White Paper also claims that the incumbent government has strengthened the health of the economy and the business sector.

Four key issues still stand where, under the Modi Government’s decadal term, we see India entering a cycle of ‘jobless’ growth, declining private investment for capital formation, real wages stagnation, poor employment creation (accompanied by worsening youth unemployment and female labour force participation rate), and a social welfare fiscal de-prioritisation.  

Tryst with Low-Productivity Trap and Growing Employment-Output Gap  

If we look at output-employment growth over the last 6 years (particularly from the post-2016 demonetisation period), there has been a sharp fall in overall output (if we only look at industrial production levels) and in the aggregate employment rate of the eligible job-seeking population. 

The gendered effects of these trends are even more striking, where the female employment rate has dropped from 11.88 per cent (2016-17) to 7.96 per cent (2021-22). In urban areas, for women, the employment rate has dropped from 10.77 per cent to 5.57 per cent in the same period. 

As argued in much detail before, India’s manufacturing sector, in percentage to GDP, hasn’t seen any exceptional growth across the last few decades.

The Low-Productivity Trap for India

India has been facing a crisis of low productivity in its manufacturing landscape for a significant time now. Its manufacturing to GDP levels have remained almost the same since the 1960s, even though most workers are engaged in it (after agriculture), in sectors linked to the small-medium-scale manufacturing landscape, particularly the MSME sector (see here).  

Was this the case across sectors? Not really. 

As argued before, in the case of electronic hardware manufacturing, India’s comparative advantage was first realised and then lost in the early 1990s through a series of half-baked liberalisation measures (see here for a more detailed explanation of the policy errs that contributed to this).  

An economic diagnosis of the problem shows that India, at a macro-manufacturing level, experienced ‘premature deindustrialisation’.

For a state-level historical picture of India, one can see how states like Gujarat (22.8 per cent), Maharashtra (18.9 per cent), Tamil Nadu (18.1 per cent), Haryana (17.3 per cent), Himachal Pradesh (16.4 per cent) were the top five manufacturing-growth based states before the 2007-08 financial crisis, even when overall India’s manufacturing to GDP per cent was dismally low, at 10.7 per cent.

The recently introduced Performance Linked Incentive (PLI) Scheme of the Modi government aims at enhancing domestic private investment into manufacturing activities. However, the response to the scheme has remained far from satisfactory. Note how PLI didn’t even find a mention in this year’s interim Budget Speech. 

The Employment-Output Gap in Services: As Dipak Prakash (2023) argues, in the context of India, our economy is termed as a service economy only with respect to its share in output.

The table below (extracted from Prakash’s EPW paper) shows that the agriculture sector’s share in GDP has been significantly declining since 1980. However, it continued to be the sector accounting for the largest share of employment.  

The industry’s share in output has remained flat since 1980. The sector’s share in employment increased only on account of construction.

While the share of services in employment has risen, it is quite low compared to its share in value added. These corresponding disproportionalities in the share of agriculture and services in output and employment are significant because they are associated with the slow growth of employment in the Indian economy.

Jobless Growth is Accompanied by a Vanishing Middle Class (2016-21) 

If we look at the income growth by income group from 2016-2021, the top 20 per cent rich have seen almost a 40 per cent rise in income growth while the middle 20 per cent, the lower middle 20 per cent, and poorest 20 per cent, have all seen a negative income growth. This has been largely due to the structural inconsistencies highlighted above in the composition of output/growth across sectors (which didn’t contribute to adequate labour-intensive jobs and higher incomes).

Only the elite with higher-value skill sets grew in performance and saw a rise in incomes consistently, while the bottom 60 per cent consumer class (scattered across low-middle-income, poor, and precariously poor groups) suffered with respect to upward mobility. This is what contributed to India entering a middle-income trap under the Modi years. 

And, if we look at concerns of rising inflation of the essential consumer basket that adversely impact (real) wages, consumption, and aggregative demand-supply issues making the poor worse off, the problem appears even more severe. 

(Deepanshu Mohan is a Professor of Economics and Director, the Centre for New Economics Studies (CNES), Jindal School of Liberal Arts and Humanities, O P Jindal Global University. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)