Mainstream, VOL LIII No 23, May 30, 2015
One Year of NDA Rule: Issue is not Activity but its Direction
Saturday 30 May 2015, by
The NDA Government, that is completing one year, started with tall promises during election rallies as well as in its manifesto. It is time to assess whether the government has been able to deliver on its promises in the past one year. Of course, one should not expect all the promises to be fulfilled within one year but the media blitzkrieg by the government is forcing analysts to assess the performance. In its manifesto, the BJP promised ‘Sabka Sath, Sabka Vikas’. The immediate tasks promised in the BJP manifesto were: ‘rein in inflation’, ‘job creation’, ‘eliminate the scope for corruption’ and ‘bringing back black money stashed abroad’.
During the year the government seems to have been mostly in an election mode, making promises and giving new slogans. It has floated programmes and schemes like Jan Dhan Yojana, Make in India, Good Governance, 100 smart cities, bullet trains and Swatch Bharat Abhiyan. The image of a paralysed government during the UPA-II rule has changed with all the activities and announcements. Parliament seems to be losing fewer days to disturbances and adjournments, partly because of the BJP’s majority and a decimated and divided Opposition. Narendra Modi has personally taken charge of foreign policy and there is the impression of action with high-visibility visits abroad by the PM and visits by foreign dignitaries to India.
However, one can legitimately ask: is the direction of action/activity the correct one? At the social plane, the minorities feel they are under attack. At the economic plane, the gover-nment started the innings with the FM arguing that pro-business need not be anti-poor. How-ever, the impression at the end of the year is that the government is pro-business and anti-poor.
Even though the rate of inflation (both in terms of WPI and CPI) has come down, the fiscal and current account deficits are lower and the rate of growth is higher, the public appears to be dissatisfied. Certainly the government’s high approval ratings a year back have come down. The rate of growth of exports is currently negative. The rates of growth of industry and agriculture remain low and corporate profits are stagnant in spite of the pro-business policies of the government. This is because the govern-ment is largely following the policy framework of the UPA-II. (See Kumar, 2015) It is not able to give a new direction to the economy.
It appears that the BJP had not worked out its economic agenda which could be different from what the UPA-II had. Even its manifesto (for the 2014 elections) was not well formulated. While it spelled out a whole range of action on all the problems facing the country, a coherent whole was missing. For instance, in its hurry to close the Planning Commission, it did not work out an alternative way of functioning. It did not have an alternative to the Plan; so the 12th Plan continues with the thrust given to it by the UPA-II.
The crisis of the UPA-II was not just due to policy paralysis even though that played a large role. It was the faulty vision based on ‘growth at any cost’ and rising disparities that created the problems. (See Kumar, 2013) The NDA needed to change that to tackle the crisis in the Indian economy. However, no long-term vision has emerged from the NITI Ayog (Ayog is redundant given that NITI stands for the National Institute for Transformation of India) that has replaced the Planning Commission. In the absence of the missing whole, there are contradictions in the policies being followed and some of them are discussed below.
I. Analysing the Pro-poor Schemes
Schemes, like Jan Dhan Yojana and pension for the poor, have been announced with much fanfare as examples of inclusive policies. But there is a danger of these turning out to be mere show. The government claims that about 15 crore accounts have been opened under the Jan Dhan Yojana, but the moot point is: how many of them have any savings in them or are active or genuinely belong to the poor? The genuinely poor, who do not have money to even fill their bellies, are unlikely to put away money in the banks as savings while their children go hungry. Usually, they are indebted to the local money- lenders at a high interest rate. Under the circum-stances are they likely to put away money in their savings accounts to earn a fraction of what they have to pay the money-lender? The money in the operative accounts is likely to be that of the lower middle class households or those who are impersonating as the poor.
Further, there are few bank branches where the genuinely poor live. In fact after 1991, the number of bank branches in the genuinely poor areas have declined. With little access to banks, could the poor have opened so many accounts? The poor are also largely illiterate and can hardly fill a form or operate a bank account. In Delhi itself at the ATM one finds the poor people asking for help to withdraw money. In India, bank branch managers are known to be clever people who can manipulate numbers to show that they have fulfilled the targets.
The Jan Dhan Yojana has largely been operative through the PSU banks. They are already saddled with large NPAs (Non-Performing Assets). A large number of accounts have opened with small deposits and if these accounts become active they can only dent the profitability of these banks further. The new insurance schemes for similar reasons can dent the profitability of the public sector insurance companies already under attack from the government and the private sector insurance companies. In the Budget just presented, no provision has been made to compensate either the PSU banks or the insurance companies for the losses they may suffer. Does a business-friendly government, that expects businesses to run in profits, think that these schemes are only for show and will not cause losses? The impression one is left with is that while such schemes are welcome, they are not properly designed and their implications have not been worked out.
II. Dissatisfaction Continues despite the Pro-business Policy Framework
The government has repeatedly shown an inclination to listen to the voices of the business community while ignoring the protests of a majority of the people. For instance, when the business community protested against the retro-active tax changes, the provisions were diluted by arguing that there should be no ‘tax terrorism’. This was true in the case of the Vodafone case as well as the FIIs on whom the MAT was levied. When the farmers protest on the ground that the Land Bill should not be against their interest, it is not argued that the government should not indulge in ‘land terrorism’ and, therefore, not modify the Bill already passed unanimously during the UPA-II regime. The planned mega projects are likely to result in large scale displacement and ensure that they are cheap for businesses, but compensation is sought to be kept at low levels. For instance, on both sides of the proposed freight corridors, large parcels of land are likely to be allotted to big business in the name of employment generation. This has already happened earlier in the case of the Taj Corridor.
The real estate Bill is being opposed by the home-buyers since it will strengthen the position of the builder and real-estate lobbies. The latter along with financiers manipulate the prices of land and buildings. The home-buyers need pro-tection from these people who cheat them by delivering much less than what is promised or hoodwink them about the delivery schedules and divert the money to other projects and so on.
There are moves to dilute the provisions of the Whistleblowers’ Bill so that corruption can continue without a threat of exposure. The black money Bill supposedly to help uncover black money held abroad is not likely to do that but will certainly help some rich people to escape penalties by offering an amnesty. The introduction of the GST will help large businesses to consolidate their hold over the markets at the expense of small businesses who produce and trade locally.
The business community also appears to be dissatisfied. Deepak Parekh has voiced the wider concern of the business community that nothing much has changed even though a lot was expected. In closed-door meetings at their national chambers, businesses have expressed worry about the diversion of national attention to the socially divisive issues. The narrow social agenda and growing social strife in the country are preventing the creation of a proper business environment. The government’s silence over attacks on the minorities—Muslims and Christians—has led to the impression that the govern-ment is soft on the so-called ‘fringe elements’. The impression is that these may not be ‘fringe elements’ but part of a strategy to use them to polarise the voters when the elections are near. The top leadership’s silence on these statements has lent weight to such arguments and undermines the idea of working towards the creation of a ‘vibrant and participatory demo-cracy’.
Obama and other foreign dignitaries have raised the issue of treatment of minorities in India and caused embarrassment to all right- thinking Indians. India, which has till now been a global symbol of tolerance and secular ethos, has had to listen to lectures from others. The problem is not confined to social aspects alone since foreign investors are also worried about the adverse impact of all this on the business environment. In the present context of the rise of the Islamic State (IS) and the arc of instability in the Middle East and North Africa, all this is not a good portent for foreign investment in India.
The government’s energies are getting diverted from governance and development. Even the middle classes, which are now keenly observing the economy, have reacted negatively to it. The Opposition has raised the issue of attack on minorities in Parliament several times and this affects debate and the legislative agenda. Consensus-building has been set back and affected legislation.
III. Unfulfilled Promises on Black Economy
Amit Shah, the BJP President, has admitted that the promise of bringing back the black money hoarded abroad and distributing Rs 15 lakhs to each family in the country was an election stunt. The Opposition has used this to pillory the BJP since till date nothing has been brought back, much less distributed to anyone. The reason simply is that the government does not know where the money is, who has illegal money abroad and how much of it. There are 90 tax havens and the money could be in any one of them or in all of them.
While lakhs of Indians hold illegal wealth abroad, till now only about 1200 names have come and that too from stolen data from the banks. The government has not been able to get names while journalists have done so. Julian Assange has claimed that he has names but it is not clear that the government has done anything to get names from him. The intelligence agencies that track hawala operators have not acted against them to close hawala in India.
To hide their inaction on the black economy front, the governments have talked about use of the DTAA and TIE to bring black savings held abroad. But as this author has repeatedly pointed out, these agreements are about the declared incomes and not black incomes. As such, how can these agreements help bring back black money held abroad? The past record of these agreements is that they have not yielded anything till now.
The SIT was set up under the NDA as the SC had ordered it in July 2011. It consists of the same official agencies that have not bothered to take concrete action for so long. Will they suddenly become pro-active if their political masters do not show interest in unearthing the black incomes generated? It has been estimated that of the black incomes generated annually in India only 10 per cent go abroad while 90 per cent of those remain in India. Thus, if the internal generation of black incomes is checked, the amount flowing out will also get reduced. Further, if people are caught in India, they can be forced to reveal how much money they have taken out and so on. Also, the proposed dilution of the Whistleblowers‘ Act is not a good signal. It protects the corrupt who will be more secure that their wrong-dong will not get easily exposed.
The government has brought in the ‘Black Money Bill’ to force people holding black wealth abroad bring it back. Stringent punishment is provided for. But the moot point is: how will the government catch those who hold black wealth abroad? The Bill has no provision for that. So, the punishment cannot be meted to the black wealth holders. Is the Bill then a paper tiger?
Finally, it is argued that no big corruption case has been unearthed till now. It is argued by the government that crony capitalism has been ended since no favours are being shown to any businessman. Ambani is given as an example of how he did not get his way on gas pricing. The scams taking place during the UPA-I were exposed only in the UPA-II with a big time-lag. No one admits of corruption till she/he is caught since it is done in secrecy. Rajiv Gandhi talked of a clean government but people around him were all trapped in corruption and even he was finally trapped. One has to wait for any judgment on this issue.
IV. The Mixed Macroeconomic Scenario
The macroeconomic imbalances that had built up since 2012 have certainly abated. The Current Account Deficit (CAD) has declined, the rate of inflation has come down, the fiscal deficit is less and the rate of growth of the economy seems to have picked up.
This is partly a continuation of the trend in the last quarter of the UPA rule and some credit for the improvement may go to the previous government which was taking steps to correct the imbalances in the economy. Another part is the good luck of the nation that globally commodity prices dropped. The two big problems facing the economy earlier were the gold and petroleum prices. These moderated and led to improvement in the CAD. The decline in petroleum goods prices had a salutary impact on the rate of inflation in India. But the impact should have been larger. In many countries of the world the consumer price inflation has been near zero with some fearing deflation.
The bigger issue is that our inflation index does not give adequate representation to services which are now the dominant component of our production and consumption. Their prices have been going up, like those of education, health, travel and telecommunication, but they are not a part of the basket used to calculate inflation. Thus, when the government claims moderation in inflation, the public feels that inflation is high. Further, the poor continue to suffer from the high prices of basic items of consumption of goods and services. A moderation in the rate of inflation does not mean that the prices start falling; it only means that they are rising slower.
The weak international economic climate has meant that exports have actually declined in the last many months. They have barely risen in the twelve months ending February 2015. That is why the CAD has not benefited as much as it should have. The big trade deficit with China remains a major cause of concern and a problem for our industry, especially the small-scale one. While the foreign exchange reserves have risen, so has the foreign debt which now stands at $ 462 billion (December 2014). Thus, the rise in reserves is a reflection of the nation’s rising indebtedness—not a good situation to be in.
The Budget has also benefited from a roughly 40 per cent decline in petro-goods prices. Subsidies on petro-goods have declined and helped keep the deficit down. Yet, the fiscal deficit has been a major source of concern since tax collections have fallen short of their target. So, the fiscal deficit has tended to rise above the target. To keep this in check, the Plan has been cut by over a lakh crore of rupees. (Kumar, 2015) This has meant a cut in capital expenditures, social sectors and essential pro-poor schemes. With such cuts in expenditures, can the BJP fulfil its manifold pro-poor promises? Given the farm distress due to drought in the last one year and the unseasonal rains recently, cuts in such expenditures can only increase the distress.
The investment rate has tended to stagnate at around 30 per cent of the GDP and that is why the rate of growth of the economy has not gone up. The government’s economists have themselves expressed doubt about the sudden rise in the rate of growth based on the new series announced in January 2015. The new data on the higher growth rate is not supported by the growth rate in industry or agriculture or exports. It is crucial that the investment rate should rise to its earlier peak of about 38 per cent (achieved in 2007-08) for growth to go to double digits, as the FM wants. The government is unfortunately making the same mistake that the UPA made by overly depending on stimulating foreign investment. But, it needs to be remembered that foreign investment constitutes only about 10 per cent of the total investment in the economy. It is the 90 per cent internal investment that is crucial but the government’s focus is not on that. No wonder, Arun Shourie has criticised the economic policies as being directionless.
The reason for the slowdown in investment is the international climate as well as the internal slowdown in demand due to a rapid rise in disparities that indicates the purchasing power at the lower rungs has not been buoyant. Further, the cut-back in Plan expenditures by about 25 per cent has meant that a large number of projects remains incomplete and cannot add to the productivity in the economy. It has also meant a slowdown in initiating new infra-structure projects. The private sector, facing demand slowdown, has also been investing less in spite of the large reserves held by many businesses.
The government ought to have played a large role in reviving demand by investing more. But due to the slow rise in tax collections, the government has cut the Plan size to keep the fiscal deficit from rising. Thus what the government thinks is that the solution is the problem. (Kumar, 2013) The mistake made by the UPA-II is being repeated.
Nowadays the success or failure of policies is measured by the reaction of the stock markets. They have shown a rising trend but with a lot of fluctuation. This represents the economic and social instability being witnessed in the country. Instability is also being fed from the outside. Slowdown in the world economy has meant a greater instability there and this, in a more open economy, affects the Indian stock markets via hot money flows. This has impacted both the CAD and foreign exchange reserves. Changes in the policies of the Federal Reserve of the US and the Central Bank of Europe are adding to the instability. One is moving toward ending the easy-money policy while the other has initiated it.
The PM has been measuring the success of his foreign trips by the amount of investment he is able to get from the countries he is visiting like, China, Japan, France and the USA. This is presented as a sign of India having arrived on the world stage. This would indeed be true if we were contributing to others in terms of technology or capital. There is complete silence on this. Why this one-sidedness?
Are we offering the foreign powers, whose economies have slowed down, access to our markets? If so, what impact will this have on our own industry and also what will happen to the much touted ‘Make in India’ programme? Industry will slow down and manufacturing in India will not get the needed boost as is the case with the Rafale deal. China already has a large trade surplus and that is impacting our industry.
V. Conclusion: Policy Confusion Persists
The undue haste with which the Planning Commission was closed down has led to confusion. No Ministry can perform the task of coordi-nation of policies across Ministries. The Finance Ministry cannot play such a role since its task is to manage resources and its inclination is to cut expenditures to prevent the deficit from burgeoning.
With competing demands optimisation is needed. The Modi Government wishes to create 100 smart cities, start bullet trains and so on. What would happen to the remaining 7900 cities that are also in a state of collapse? Would the non-bullet trains further slow down, if funds are sucked up by bullet trains? Thus, new prioritisation and sequencing are needed and these are a form of planning. In the absence of this, currently there is policy confusion.
Policies are piecemeal, like the one proposing 100 smart cities. The road-map for achieving this goal is not clear. Similarly, where is the road- map of the laudable idea of cleanliness in our life? The Swachch Bharat Mission or the good governance goal have remained mere slogans with much money spent on their launch. The very place that the PM cleaned up at the inaugural of the Swachch Bharat Mission is lying dirty, according to reports. Clearly, the adminis-tration has not taken the idea seriously. There is delay in implementation of policies. As one BJP MP said in frustration, not an inch of road has been constructed in his constituency. Expansion of the rail or road network has not gathered momentum. ‘Make in India’ or skill creation programmes remain stuck.
There is a crucial distinction between the short-term and long-term policies. However, the short-term policies have to be situated in the long-term. What may work in the short term may not be correct for the long run. For instance, if employment is to be generated for the youth, choice of technology has to be appropriate. Industry cannot be based on imported high technology alone. In such a situation, a contradiction arises between the long- and short-run goals. If this happens, society confronts new problems, like alienation of the youth and their energies turning to destructive rather than constructive activities. This has the potential of denting the nation’s internal security.
In brief, the government faces a serious gap between promise and performance in its first year and the direction it has taken does not promise that this gap may close soon.
1. Kumar, A., 2013, ‘Indian Economy and the Crisis of a Borrowed Development Strategy’, Mainstream, Vol. LI, No. 35, August 17, 2013, Independence Day Special.
2. Kumar, A., 2015, ’Union Budget 2015-16: Continuity with the Past Framework’, Mainstream, VoL LIII, No. 11, March 7, 2015.
The author is the Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. He has also written the book Indian Economy since Independence: Persisting Colonial Disruption.