Over the last few days many pieces have been written analysing the performance of Prime Minister Narendra Modi on the economic front.
He completes four years in office on 26 May 2018. While the analysis has been detailed, one point that almost everyone writing on the issue has missed out on, is luck. In May 2014, the month Modi took over as prime minister, the price of Indian basket of crude oil was at $106.85 per barrel.
From July 2014 the price of oil started to fall, and fell to as low as $28.08 per barrel in January 2016. Tis happened primarily because the Saudi Arabia-led oil cartel OPEC, started to drive down the price of oil, in order to make the business unviable for the shale oil producers of the United States and Canada.
The average price of oil for the four-year period between 2010-2011 and 2013-2014, stood at $102.62 per barrel. This put pressure on the current account deficit and the fiscal deficit. It also led to the rupee losing value against the dollar and adding to the overall problems.
The average price of oil for the four-year period between 2014-2015 and 2017-2018, stood at $58.6 per barrel. To that extent Modi has been lucky on the oil front, even though his luck now seems to be running out. A lower oil price has helped bring down the current account deficit.
In turn, this has helped control the value of the rupee against the dollar. Also, in a scenario of falling oil prices, the Modi government raised the taxes on petrol and diesel. The central government taxes on petrol and diesel, over the last four years, have gone up substantially.
Increase in Taxes on Petrol and Diesel
The central government taxes on petrol have gone up by nearly 88 percent between May 2014 and May 2018 (1 May 2018, Delhi price). Central government taxes on diesel have gone up by around 241percent during the same period. (Of course, state governments also used this opportunity to increase their share of taxes, but that is another story for another day).
The higher taxes have helped the Modi government bring down the fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends, and is expressed as a percentage of the gross domestic product or the GDP. In 2013-2014, when Manmohan Singh was prime minister, the fiscal deficit had stood at 4.5 percent of the GDP.
By 2017-2018, this had come down to 3.5 percent, a fall of 90 basis points. One basis point is one hundredth of a percent. Falling oil prices had a key role to play in it. This also benefitted inflation.
A lower inflation meant lower interest rates and so on. And luck had a huge role to play on this front, which needs to be acknowledged. With the point on luck out of the way, let’s look at how the Modi government has performed on various economic parameters in the last four years.
Here’s How Modinomics Performed
1) One of the bigger successes of the government has been the Goods and Services Tax (GST) law, though the implementation has been a thorough mess. While people keep pointing towards the fact that the earlier system was an even bigger mess than the current GST, what they forget is that in the earlier system of indirect taxes, service tax, largely paid and collected by individuals, was simpler.
2) The introduction of Real Estate (Regulation & Development) Act, or RERA, has been another great move, at the central government level. But state governments have been lackadaisical in implementing it. And implementation as usual remains the key.
3) One of the big problems that the Modi government inherited was the bad loans mess of public sector banks. For nearly three years, it did not take the problem seriously, sitting on it and hoping the problem will be resolved by itself. But in the last one year, the government seems to have realised the gravity of the problem.
The Insolvency and Bankruptcy Code, has started to work its way through and banks, in the years to come are likely to get back a reasonable portion of the loans that were defaulted on. Given the fact, that the process has just started, it will take more than a few years to clear out the mess.
4) The Modi government built on the work done by the Manmohan Singh government (during its first term) and now every village in the country has an electricity connection. It will take a while before every household in the country has an electricity connection.
5) A lot has been written regarding the success of the Ujjwala scheme, which was launched in 2016, with the idea of distributing free cooking gas cylinders to poor women. An ambitious target of distributing 5 crore cylinders by May 2019 was set.
By early April 2018, nearly 3.5 crore connections had been provided under the scheme, in which the Union government bears the connection cost of Rs 1,600 and the household has to pay Rs 1,500 for a gas stove and the cooking gas cylinder. This has been a success story.
Having said that, data and anecdotal evidence now suggest that the number of connections are rising at a faster pace than the consumption of domestic cooking gas cylinders, which leads to the question, whether the beneficiary households are actually using their cooking gas cylinders or not.
6) The Modi government has also worked a lot to revive the underinvested Indian Railways, though results remain to be seen. But given the huge underinvestment in the Railways over the years, this is bound to take time.
7) Nitin Gadkari has been the star performer among the Modi ministers. The construction of national highways increased from 4,410 kilometres in 2014-2015 to 8,231 kilometres in 2016-2017. Other than improving infrastructure this also provides employment to India’s low-skilled labour force, which the country barely needs.
8) Inflation has been under control, after the days of 10 percent inflation during the days of the Manmohan Singh government. This has primarily happened because the Modi government has slowed down the increase in minimum support price of agricultural crops.
On the flip side, the farmers continue to remain dependent on the country’s archaic agriculture marketing system, in order to sell their produce. This is something that the government has talked a lot about changing, but nothing much seems to have happened on this front.
9) A lot has been written about how the direct tax collection has gone up, during the Modi government. The problem is people are looking at the direct taxes number in the absolute sense of the term.
As the economy expands, the tax collections are bound to go up. Hence, it makes sense to look at the direct taxes to GDP ratio, to arrive at the right picture. In 2013-2014, before Modi took over, the direct taxes to GDP ratio stood at 5.62 percent of the GDP.
For the next three years, direct taxes to GDP ratio was lower than 5.62 percent. In 2017-2018, this has jumped to 5.94 percent of the GDP, which is better than earlier years, but not a huge jump, as is being made out to be. Also, one needs to look at the direct tax to GDP ratio for the years 2007-2008 and 2008-2009, when it was at 6.3 percent and 5.93 percent of the GDP, respectively.
The stock market was doing well at that point of time. Along similar lines, the direct taxes to GDP ratio might simply be up because of the government managing to collect a higher amount of taxes from the stock market (securities transactions tax and the short-term capital gains tax). There is no publicly available data to ascertain the same. Further, there have also been media reports about refunds being delayed. Delayed refunds obviously push up the direct tax collections number.
10) In his pre-election speeches, PM Modi had talked about minimum government and maximum governance. Not much seems to have happened on that front. The government continues to run companies like Hindustan Photo Films, Scooters India Ltd, MTNL, Air India etc. In the last few months, some effort has been made to sell Air India. But given the terms on offer that is unlikely to happen.
Of course, the oil bonanza helped here. A decision to shut down any public sector company has a huge nuisance value, and any politician would like to avoid it, unless really pushed to do it, because of an economic crisis which leads to financial pressures.
11) In its initial days, the government had talked about simplifying the multitude of labour laws that India has, and replacing them with four codes. Nothing seems to have happened on that front. To its credit, the government has made the employment of contract labourers easier.
12) Demonetisation was the biggest mistake of the Modi government and pulled back the economy by at least 18 months. Of course, the government won’t admit to the same and is still trying to sell it as radical economic reform. It destroyed large sections of the informal economy, which is still in the process of recovering from the government’s brain fade.
13) The mess on the jobs front continues, with the Make in India programme more or less having been abandoned by the government. A whole host of data points, from falling investments, flat industrial credit, almost flat labour intensive exports etc, points towards that.
The Modi government has been more interested in managing the optics of the job situation than doing things and making decisions, which will help create jobs. We have been told everything from people are selling pakodas to the number of subscribers of the Employees Provident Fund, is going up, and hence, jobs are being created.(This is not the place to get into a detailed answer, but most of the arguments offered by the government are basically based on cherry picking data). It hasn’t helped nearly the 10 million Indians entering the workforce every year.
To conclude, the performance of the Modi government has been a little better than the average on the economic front. Nevertheless, that is hardly surprising given that the Indian governments have rarely been bothered about the economy, until there is a crisis.
(Vivek Kaul is the author of ‘India’s Big Government – The Intrusive State and How It is Hurting Us’. He can be reached @kaul_vivek . This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)