Alam Srinivas is a business journalist with nearly three decades behind him working for The Times of India, India Today, Outlook Financial Express and Business Today. He is the author of Cricket Czars: Two Men Who Changed the Gentleman’s Game
Two crucial things are likely to happen over the next few weeks. At least, in terms of economic decisions, and future projections. Arun Jaitley, finance minister, would have had his last hurrah, presented his last Budget before the next general elections. It will give us indications of whether this government is completely in the election mode, or whether it is still interested in now-monotonous-sounding issues such as growth, development and employment. One will also know the real combined impact of demonetisation and GST on growth.
In economic terms, growth, development and employment were the three planks of Narendra Modi’s election spiel. The fourth one was anti-corruption. In terms of achievements, growth faltered, development stuttered, and employment took a back seat. Only the driver, the war against corruption, was better off. In many ways, the issue on the wheels impacted the others. The Prime Minister’s transparency’ Ferrari was in full acceleration. But he forgot to warn the riders about the potholes, curves, and speed breakers along the way.
When he came to power with an unexpected majority, Modi seemed clear about one thing. If he put the right (non-corrupt) person to drive his ‘economic’ car, the rest of things, like growth and development, would follow naturally. A transparent system would get the honest excited, especially the foreign investors, and automatically drive up investments, growth, development, and employment. It was a s simple as that. The core problem with India was corruption. Clean it up, and the rest of the events would follow the script, or the track course.
They didn’t. They couldn’t. For like all the other policies, economic decisions have unintended consequences. Events gather their own momentum, and stray out of control. Nothing seems as it should be. Nothing moves as it was meant to do. The spiral seems more like a tornado that’s been deliberately designed to defeat your purposes. So, the blame game begins. Who’s at fault? Possibly, everyone, no one, or the usual suspects. The old dishonest guards who resist status quo and change. They are the deliberate destroyers of a yet-to-be built ‘New India’.
May be, the individuals, the decision-makers, were not wrong. May be, it’s time for Modi to study economic thermodynamics and economic equilibrium to understand what really happened over the past 44 months. Economics, as economists wouldn’t say, isn’t a simple open-and-shut science. There’s no linear or simplistic progress, cause-and-effect, that results in a movement from Point A to Point Z, through a series of interventions at the interim stops. Most economies move in a typical zig-zag, random ‘Brownian’ manner.
Unfortunately, in this case, even the final ‘economic’ objective was unclear, or a bit fuzzy. During the long, aggressive and tiring election campaign, Modi used words like growth and development as jargons or, as Amit Shah, BJP president, would put it, “chunavi jumle” (electoral-speak). Winning the elections was the only motive, or economics was a means to score several political goals. Somehow, as Modi realised after he came to power, being in majority in the Lok Sabha wasn’t enough. He had to achieve a majority in the Rajya Sabha too.
Hence, politics continued to be the main objective; winning state elections was now a priority. Congress-mukt Bharat, the RSS dream, replaced all realism. Economics continued to be the means, the tools, to achieve political ends. Therefore, economic issues never got the overall focus that they should have had, they never became the ends in themselves. They were to be used, abused, even misused, as long as they helped in winning the assemblies.
Modi’s overriding focus shifted to corruption; his loyalists convinced him that this was an alchemist’s stone to kill both the political and economic birds.
So came a slew of carrot-and-stick policies to tackle the country’s black economy. A law to tackle and expose benami properties of the rich-and-famous. A sweetener to disclose hidden foreign cash and assets without criminal action. An ongoing effort to go after willful corporate defaulters of loans. There were others. But each one of them had huge gaping holes, which either weren’t thought through in the hurry to show results, or could be deliberate. Sadly, they didn’t work as envisaged. It was back to Square One.
To be fair to Modi, there were simultaneous moves to kick-start growth, speed-up development, and focus on employment. Grand schemes like ‘Make in India’, ‘Start-up India’, Swachh Baharat, etc were launched. At the end of the day, politics lurked around, and then took over. Some of them were basically aimed to garner votes. Others were meant to sustain Modi’s larger-than-life governance image. Alas, no one figured out, or didn’t wish to, that such measures take time to fructify, mature, and fulfill the desired objectives.
What didn’t help matters were a few reverses in two states – actually, one state and the other half-a-state. The BJP lost badly in Delhi; the Bihar Mahagatbandhan spelt electoral doom in Bihar. Politics gained more credence, whether Modi acknowledged it or not. In his subconscious, and fueled by Man Friday, Shah, the politics of economics, and politics of politics reigned supreme. It was all about winning elections – first the states, then a majority in Rajya Sabha and, finally, the 2019 general election to enjoy a second term.
The war against corruption scared the business community. Even the honest weren’t convinced as they faced questions from the various authorities, especially the tax collectors. A first-time entrepreneur complained, “The first letter I got after registering my firm was a notice from the service tax department. This was less than a week, and it asked me why I hadn’t paid my service taxes. I had just registered the company; I hadn’t earned a single penny. And here was this first tax notice that went into the corporate file.”
There were several media reports that instead of enthusiastically investing in new and existing projects, the country’s businesspersons, especially the small and mid-level ones, sought tax residencies elsewhere. They sought safe havens to escape such tax atrocities. Of course, some of them were dishonest. But even the honest ones seem scared and scarred. It was an environment that was against investments. You either left, or waited and watched.
Growth could still have come back on track, even cross the 8 per cent mark. Politics killed it. Although Modi and BJP politicians may scream from the rooftops that demonetisation was aimed to clean up the system, and go after the corrupt, its main objective was to win Uttar Pradesh. The prime minister knew that his two main competitors in the state, the ruling Samajwadi Party, and the frontrunner, and expected-to-win Bahujan Samaj Party, were dependent on cash. If somehow their access to cash was severed, the BJP had a huge opportunity.
The demonetisation demon was unleashed; the devilish genie was allowed to escape the bottle. It was because of the political ends that both the old Rs 500 and Rs 1,000 were banned. If corruption was the focus, a bar on Rs 1,000 would have been enough. But in his mind, Modi wanted to take no chances. So, he went ahead with removing the Rs 500 notes from the circulation. Despite the brouhaha, and media criticism, the move worked like a charm. It was a huge risk; the voters lapped it up despite the sufferings.
Demonetisation effectively decimated the informal unorganised sectors and agriculture. India has a huge cash economy; even the organised private and public sector plays a part. Hence, removing it from the cash equation implied a huge negative impact on growth. Strapped for cash, businesses shut shop, or reduced their operations; salaries in the formal and informal sectors were delayed, or not paid, and; consumers postponed their buying decisions. Economic gloom and doom was written on most sectors’ walls.
What contributed to the growth slide was the GST (Goods and Services Tax) haste. No one can dispute the benefits of a single nationwide tax. Except it requires two critical ingredients – simplicity and singular. It turned out to be neither. It was as complex, if not more, as the old value-added tax regime. And it had several layers of taxes, apart from exemptions, and including luxury tax. Well, you got the drift. In addition, it initially made life more difficult, rather than easy, for the small and medium business community.
Within months, the government had to retract and change several of its provisions. To give an example, the original law stated that a company will be responsible for the GST, if its vendor or consultant didn’t pay it. This was scary, stupefying, and a mockery of any tax regime. You can ask me to cut taxes at my end; you can’t make me responsible for the non-payment of taxes of my employees, vendors and consultants. It was tax terror at its worst. So, by the time, the changes came, GST became a lost cause.
This time, ironically, pure economics became a political tool in the hands of the opposition parties. It was used to thunder the Gujarat state elections. The Congress almost succeeded; in the end, Modi’s charisma, and his party’s non-growth, non-development, non-employment rhetoric worked. Gujarat was saved, but only by a whisker. It could have gone either ways. GST turned out to be a double-edged sword. It cut both ways – economically and politically.
To make matters worse, the politics of ideology played a consistent and continuous role in the battles between economics and politics, growth and electoral victories, development and vote banks. The RSS demanded its pound of flesh. After all, it was majorly responsible for Modi’s 2014 win; it had backed him to the hilt. Although Modi took several decisions that angered the RSS, and its offshoots, he also initiated efforts to appease them. The end result: a mish-mash of politics, economics and ideology with several means and ends.
Caught between these interactive, opposing and clashing forces was employment, or rather unemployment. ‘Make in India’, which focused on huge and mega projects, could not provide adequate jobs. Most economists have realised that big manufacturing cannot create jobs because of technology, automation and AI (artificial intelligence). A huge steel plant or power unit leads to 50-200 direct jobs. Most of the work in the factories today happens in the large computer rooms to adjust and operate the various machines.
Even the official think tanks have suggested that the surest and fastest way to create jobs is to focus on the traditional labour-intensive sectors such as leather and textiles. The other huge employment creator is construction and infrastructure.
The first didn’t happen. The second required major investments. As we mentioned earlier, private money was squeezed, and public one wasn’t enough. Recently, the World Bank too maintained that what India needed was to encourage private investments, on the back of public investments.
So, the other modes of job creation were schemes like ‘Start-up India’ and ‘Skill India’. The first turned out to be a non-starter because the policy makers didn’t understand the ecosystem. First, the failure rate in it is 90 per cent or even more. For every 10 projects, only one, if you are lucky, succeeds. Hence, the lenders had to be ready for it. Two, most start-ups make a fortune in 3-5 years; giving them tax breaks for a limited period isn’t enough. In some ways, start-ups need to be treated like mega manufacturing projects with tax breaks of 10 years.
Skill India is akin to putting the cart before the horse. Rather, putting one alongside the other. Enhancing and imparting skills to the youth works only if jobs are available. They make sense only if the youth realise the benefits of acquiring new skills, or improving the existing ones. In addition, skills cannot be treated as a target by the giver; it has to be enmeshed with what’s happening in the immediate economic universe. Neither was true.
In the name of targets, the giving-stakeholders cooked up skills that were either irrelevant or partially-relevant. The youth figured out that skills alone will not get them jobs because the jobs just weren’t there. This was similar to what happened in the 1970s and 1980s. Most people felt that education was the route to success. India created a sizeable number of unemployed graduates, post-graduates and doctorates. It was only in the 1990s that education benefitted a small section because of the IT and outsourcing boom.
As Modi and his cabinet colleagues greet 2018, as Jaitley prepares to present his last Budget (the next may be interim because of national elections in May 2019), as the BJP rides the several electoral waves, the issues of growth and development are likely to continue to take the back seats. The prime minister’s desires are still the same, the way they were after he won I 2014. For him, it’s mostly about politics, and economics that needs to be used to woo the electorate, create vote banks, and hope for the economic best.
Fortunately, economics, growth, development and employment isn’t a zero-sum game or exercise. In retrospect, one can explain the links. While it is happening, there are huge uncertainties. During its 10 years of rule, the two UPA regimes had little idea about why the Indian economy grew. External factors such as the Global Financial Crisis (2008-09) and European Debt Crisis (2010-12) didn’t impact the Indian economy. Growth chugged along between 2004 and 2012. When the decline came, in the last two years of UPA-2, there wasn’t an immediate, pressing, or past reason. Internally, the various scams, 2G and coal block allocation, didn’t hamper investments. Neither did the looming and increasing bad loans in the banking sector seem to discourage the business community. Everything seemed hunky-dory until 2012. But then economic factors have strange ways of their own. Their impact can be quick and immediate, or they can come with a lag effect.
In the case of UPA, the lag effect kicked in 2013. The cumulative complex events of the past finally caught up with the government and economy. May be the same will happen this time. As everything seems to unwind itself, Modi and Jaitley may find themselves in a sweet spot. The decisions they have taken, the efforts they have initiated, may show results in the second half of 2018 and the first half of 2019. In effect, the economy will be ready to positively impact politics during the national elections, as it did negatively against the Congress in 2014.
Modi was a lucky campaigner; he was an even luckier prime minister, at least for the first two years. May be his fortunes will change again – for the best. May be Dame Fortune is just waiting for the right time to turn her gaze on Modi and BJP. The economic wheels rotate, but in bizarre ways. Their speed, direction, and destination remain hidden. They are revealed only in the end. And, in the end, Modi wants electoral victories and a second term.
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