Does economics dictate politics? It is a subject that will continue to spark off debate and drama, but if the actions of the Narendra Modi government are anything to go by, then the answer is in the affirmative.
After weeks of dithering and living in self-denial about the state of the Indian economy, the cat is suddenly out of the bag. This week it was made officially known that the Central government was considering a Rs 50,000 crore economic stimulus to pump prime an economy, which had slumped to 5.7 per cent growth in Q1 2017-18, and what’s worse, threatens to go down even further in the next quarter.
It also makes it the fifth consecutive quarter in which growth rates have slumped. The country’s industrial activity, as measured by the Index of Industrial Activity (IIP), has merely expanded by 1.7 per cent between April and July as compared to 6.5 per cent over the same period last, when demonetisation was not even on the radar.
While some people have argued that a few quarters of bad growth is no indication of any large scale economic damage, the fact is that a politician who has to fight crucial elections, including some assembly elections this year before the big one in 2019, can hardly afford to take such a languid view of the situation. A relentless opposition – divided as it may seem - is going to exploit any and every chink in Modi’s armour and at the moment, this government is looking vulnerable on the economic front. While it is true that they may not like each other very much, but there is no reason why they will not gang up on Modi, who has inflicted heavy political wounds on virtually all of them with the exception of Mamata Banerjee.
The decision to demonetise high value currency notes, coupled with the newly-introduced goods and services tax (GST) and its enormous teething problems, has made the Modi government aware of the huge political pitfalls that lie ahead.
While it has been easy for the BJP to blame the previous Congress-led dispensation for jobless growth and policy paralysis, the shoe is in the other foot now. Unemployment is a great political card to put any ruling party on the defensive, but it is a game that can be played by all sides and the BJP government now knows it better than most, from the benefit of hindsight, having been in power since 2014.
Little wonder that the stimulus is aimed at those sectors that offer not just the highest avenues of growth, but also remain the most prolific employers. Included in this list are exports, infrastructure, manufacturing and small and medium sector industries, the last mentioned constituting the main driver of India’s economy and the country’s single largest job creator.
Exports, which were instrumental in putting India in the driving seat, growing at rates of 20 per cent in 2009-10 and 16 per cent in 2010-2011, have since then fallen to single-digit growth rates. However, most experts agree that no country in the world’s economic history has grown at 7 per cent or more unless its exports have moved up at 15 per cent plus annually.
There is also thinking in the government about pushing more money into the social sector, which critics have panned as being under-invested since the BJP government came to power and in contrast to the preceding UPA government that had put social security high on its priority list. For instance, additional investment into affordable housing, again one of the largest employing sectors, both formally and informally, is one way to tackle political frustration that appears to be mounting and one that the Modi dispensation can ill afford two years before the general elections.
There is also little point in blaming India’s big businesses who have been unable to exploit international and global opportunities, because the situation remains largely unchanged from the days of the UPA government. Indian companies have been loath to making investments or plough some of their profits into new ventures. As a matter of fact, they have their own little sad story to narrate. Private investment has taken the worst hit over the last few years, particularly since the problems of bad loans started spiralling out of control. Since banks are wary of lending out fresh loans on account of their rising non-performing assets (NPAs), the situation of private investment is unlikely to see any great upturn.
The political upshot of economics can scarcely be underestimated, particularly with the Modi government. To this prime minister goes the credit of putting economics on the political agenda of the country, more than any previous prime minister. The concept of ‘ache din’ was sparked off by the concealed promise of a better if not utopian economic future. More than any one before him, Modi can be credited with turning India into a nation of accountants. With demonetisation, the vast multitude of the population, a significant portion of them unlettered, became aware of the nuances of banks, of money exchange rates and of things financial. Well, letting the genie out of the bottle is one thing; to control it could be quite something else.