Crisis After Crisis – How Modi Managed Them

Economics became subservient to electoral politics. A mix of luck and information management helped the Prime Minister to wriggle out of regular crises in the past nine years

By Alam Srinivas
  • If one looks at the nine-year report card, at least on economic and business matters, it seems that Modi faced challenges on a regular basis
  • After GST the regime’s support base among the business community shot up, which meant more funds to fight elections
  • During COVID, India’s economic recovery was better than the rest of the world. Businesses that survived earned higher annual profits than they had ever done
  • In essence, Modi is the right person for the right time in an era where economics has receded in favour of politics across the globe

A half-empty glass can be seen as half-full too. Hence, each negative that critics espouse about the Indian economy can be effectively countered by the positives. The GDP growth slowed down, even witnessed negative rates. But India is still the fastest-growing among the large economies, and may see the highest growth among all nations this year. High prices crippled homes. But Europe, America and Asian nations suffered more from inflationary pressures. One can go on and on this way on issues related to governance, reforms, corruption, poverty, subsidies, and welfare schemes.

What is, however, important is not that India muddled from one economic crisis to another one in the past nine years. It is about how and why Prime Minister Narendra Modi emerged almost unscathed after each one. Was it a case of master strategies, luck, pluck and confidence, or a mix of these issues? No one, not even his diehard loyalists, cabinet colleagues, senior members of the BJP, and the ideologue RSS were convinced that the PM will escape unhurt. But he did. Not once, not twice, but a dozen times. Each time critics wrote his electoral obituary, he emerged stronger than ever.

TWO-TONE NARRATIVE

Before we discuss the crises, and flesh out reasons for their unexpected and surprising impacts, let’s set the tone with two crucial narratives. In the beginning, at least for the first couple of years, Modi did believe in a revised Gujarat Model of growth that could be replicated nationwide. This comprised four important ingredients – reforms to attract large investments to spur growth and create jobs, a slew of targeted welfare schemes with populist and catchy slogans, the use of technology for effective and transparent governance, and make India a nation of billion entrepreneurs.

Narendra Modi

When these failed, or did not deliver the desired results, Modi changed tracks. He pushed economics on to the back seat, focused on winning elections via social-political tactics, and took disruptive decisions. These are related to social engineering, political maneuvering, electoral exercises, and social media moves. In the process, the citizens stumbled from one crisis to another, and did not get the time to understand the implications or catch their breaths. Before the masses could react to a disruption, they were neck deep in the next one. The government changed the national narrative regularly.

UNSETTLING EXPERIMENTS

Demonetization was perhaps the first unsettling experiment. Everyone, from rich to poor from urban and rural areas, especially the middle class, was hurt by it. Migrants were wrecked. Lower classes were demon-struck. The middle class was shattered. The rich lost a lot of their wealth. Yet, within months, the BJP won a huge victory in the Uttar Pradesh assembly elections. Despite the troubles and travails, the people quickly forgot about it. The monetary system rolled back to normal, as the cash economy increased, and Rs 2000 notes were introduced instead of the banned Rs 1000 ones.

Perhaps, this lack of memory, and its inexplicable effects on voting patterns, can be explained by socio-psychological factors. Each section in the socio-economic pyramid hierarchy – poor, lower classes, middle class, and the rich – thought that the move hurt those above them the most. The poor justified it because they believed that the richer classes lost their ill-gotten money. The middle class was pleased that the corrupt business community, civil servants, and politicians were suitably punished. The super-rich easily found legal and illegal ways to protect their money, and make extra profits too.

Each section, in a sadistic manner, took a beating because it felt, rightly or wrongly, that the impact on those, who comfortably sat above them in the wealth ladder, was greater. Those who stood in the queues to exchange their high-denomination notes, smirked that while they would still get their money back from the banks, the rich had to throw away their cash, give it for free to others, or pay a premium to convert their money. Anecdotal evidence, either through the media, social media, and word of mouth, enhanced these beliefs. If the bad people suffered more, went the popular feeling, we would not complain.

Note-bandi was followed by the single GST (Goods and Services Tax). In a single stroke, thousands of traders, vendors, and small businesses in the informal sector were devastated by it. Some of them were forced to become official taxpayers, but most had to simply shut shops. In this case, Modi got away because of the huge support from the organised sector, which comprised large and medium-size companies. In fact, the regime’s support base among the business community shot up, which meant more funds to fight elections. The captains of industry, including foreign investors, hailed GST from the rooftops.

In a bid to understand this phenomenon, one needs to untangle two basic tenets of GST. The first is that the revenues lost by those in the informal sector shifted to the organised one. The companies that were officially registered gained, and their profits zoomed due to higher volumes. The second is that it created a supply gap that the larger companies were able to bridge by adding more capacity, or utilising more of the existing production abilities. In the end, the big companies became bigger, and there was a forced consolidation that aided the process. The new corporate wave favoured Modi.

More importantly, GST paved the way for new forms of corruption and tax avoidance. Many firms forged invoices to show production in low-tax states. Others realised that GST offered a unique opportunity to game the entire distribution chain to avoid and evade taxes. State governments, who got higher shares from the Centre, found innovative ways to impose state taxes that bolstered their revenues. This enabled them to fund their ever-growing welfare schemes, which allowed them to woo electoral bases with higher and expansive subsidies and doles. Most states have welfare schemes for almost every section.

PANDEMIC OVERSHADOWED SLOWDOWN

By 2018-19, there were signals that GDP growth had faltered, India was in midst of a dangerous slowdown, and jobs had become scarce. In the pre-Covid era, the unemployment rate was estimated to be the highest in the previous four decades. More alarming was the fact that huge percentages of women and men in the 15-59 age group had deliberately opted out of the job market. This implied that more people were without work since these sections were not officially designated as jobless. Both industry and agriculture were in a state of negative churn. The services sector was the only silver lining.

The Modi regime’s focus on welfare schemes, which was largely cash-led due to the spread of DBT schemes (Direct Benefit Transfer to put money in the bank accounts of beneficiaries) helped. The poor got decent sums in their banks, they got a few basic amenities like housing, and healthcare, and did not starve. As mentioned earlier, the states’ expenditure rose astoundingly, and they were able to further bolster the bank accounts of the needy through specific DBT schemes, which were in addition to the centrally-sponsored ones. Thus, there was enough cash in the pockets of the people.

Luckily, the monsoons did not disappoint, and agriculture witnessed growth in most years. Hence, there was no shortage of food, especially in the rural areas. This was one of the major reasons that there were no mass protests. This factor played out in Modi’s favour, even during Covid, one of the worst global pandemics, as millions of people returned to their villages, and realised that they had a roof over their heads, and enough food was available. The Center and states doled out free rations from the warehouses to feed the nation. These disruptions damaged Modi’s popularity for a limited period.

Once Covid decimated the global economies in early-2020, the earlier Indian scenario of GDP slowdown, rising prices, and lack of jobs became a non-factor. Indians found that they were in a better state compared to their counterparts in the developed world

Once Covid decimated the global economies in early-2020, the earlier Indian scenario of GDP slowdown, rising prices, and lack of jobs became a non-factor. Indians found that they were in a better state compared to their counterparts in the developed world. Indeed, by stroke of luck, as the world recovered from the massive healthcare destruction, India was the fastest-growing economy among the large economies. The economic recovery in India, it seemed, was better than the rest of the world. Businesses that survived earned the highest annual profits than they had ever done before.

Corruption, especially crony capitalism in the form of 2G and coal allocation scams, was one of the main planks that Modi used to win the national elections in 2014. But scandals skyrocketed as the Prime Minister failed to bring back cash and assets that Indians had illegally stashed in tax havens, extradite dishonest businesspersons who fled the country, and backed certain corporate groups. Even in the demonetization era, the regime spoke of strictest actions against those who had exchanged huge sums of cash. Subsequent events proved that the record was mixed. Most escaped the net of the taxmen.

CONTENTIOUS ISSUE OF CRONYNOMICS

When it came to crony capitalism, Modi’s colleagues defended him to the hilt. Fortunately, in some cases, like Anil Ambani’s links with the French Rafael (fighter aircraft imports) deal, the judiciary sided with the ruling regime. The government was able to publicly declare itself taintless and spotless. In a fortuitous manner, most businesses owned by Anil Ambani went down the tube under the new insolvency code. Many sections within the masses were ready to believe that Modi never helped the Ambani scion, or else, why would the Prime Minister allow his crony’s operations to be declared bankrupt.

However, in a curious twist of fate, the insolvency code, which aimed to protect state-owned banks against corrupt businesspersons, who syphoned off money, became a contentious issue. There were high-profile cases with allegations of massive haircuts, or creditors agreeing to receive 10-15% of their claims, dishonest practices, and behind-the-scenes shenanigans to hand over bankrupt companies to favoured entities. But since the insolvency code helped the banks, especially state-owned ones, and targeted businesspersons, who were seen to be eternally corrupt by the masses, the mud did not stick.

In another crony-capitalism case, two factors helped Modi’s image. The first was that the Adani Group, now embroiled in the Hindenburg controversy, was involved in strategic operations in sensitive sectors such as power, ports, coal, and renewable energy. It handled high-profile projects in South Asia, Australia, and the Middle East that were of national interests. Hence, the Adani Group exposure helped the nation, and not the individual or corporate. Like the US, China, Japan, Russia, and other European and Asian nations, India too used business groups like Adani to enhance its global economic clout.

For various factors, including government favours and the percentage of shares available in the public, the companies within the Adani ambit saw shocking surges in valuations in the past few years. Suddenly, Gautam Adani, the group’s patriarch, emerged as a shining Indian beacon in the universe of global billionaires. He shot up from nowhere to reach the No 3 position on the Forbes List. Indians rejoiced, and felt that he could become the No 1. So, instead of focusing on the not-so-savoury events related to the group, the people wanted him to grow faster, and become the wealthiest person on Earth.

Only after the recent Hindenburg report that targeted the Adani Group that stock valuations nosedived. They recovered a bit in the recent past. However, the record is forever blemished. Gautam Adani is now ranked No 25 on the Forbes List, and his personal net worth skidded from $120 billion to less than $50 billion. One needs to see what happens in the near future, especially once the stock market regulator SEBI and Supreme Court-appointed expert committee submit their reports on the Adani-Hindenburg issue. Do not write off Gautam Adani yet. Given the Anil Ambani precedent, do not imagine that this regime will support Adani in any and every circumstance.

Each section in the socio-economic pyramid hierarchy – poor, lower classes, middle class, and the rich – thought that demonetization hurt those above them the most. The poor justified it because they believed that the richer classes lost their ill-gotten money. The middle class was pleased that the corrupt business community, civil servants, and politicians were suitably punished

Farm laws, which were later withdrawn after long-drawn-out protests by millions of farmers, proved to be a blemish on Modi’s image. The government blamed the rich farmers, and their families in the UK and Canada who ostensibly funded the long protests. It proved to be in vain, as the landowners dug in, and disrupted the life in the Capital for months. These laws had an electoral impact too – the BJP lost the Punjab assembly elections, where the Aam Aadmi Party triumphed, because of the farmers’ protests. It was a rare occasion when the regime capitulated, and Modi took a few steps backwards.

If one looks at the nine-year report card, at least on economic and business matters, it seems that Modi faced challenges on a regular basis. Some of them were deliberate, and others were not in his control. There were a few mistakes. But the Prime Minister recovered within a short period. He changed the narratives to suit him, he had luck on his side, there was no real opposition to take on the causes, and there were welfare strategies in place to blunt the attacks. In essence, Modi is the right person for the right time in an era where economics has receded in favour of politics across the globe.

Alam Srinivas

Alam Srinivas is a business journalist with almost four decades of experience and has written for the Times of India, bbc.com, India Today, Outlook, and San Jose Mercury News. He is working on a new book on the benefits and pitfalls of the Indian Bankruptcy Code.

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