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Modi Report Card: Between Good and Satisfactory, But Best Is Yet To Be

To seal a durable path to political longevity, Modi has to use his authority to roll back political divisiveness and focus on jobs and growth. He has to live up to the ‘sabka saath, sabka vikas’ slogan by speaking up when the fringe erupts.

There is a rough-and-ready way to judge the three-year-old Narendra Modi government by: take the assessments of his critics, and the assessments of his supporters, get the midpoint, and you will get somewhere near the truth.

Critics, including those who believe Modi can do no good, say the following: he has unleashed or emboldened violent Hindutva in many BJP-ruled states, and they are targeting minorities and Dalits; his ministers are trying to rewrite history to make it more Hindu-biased; he has done little to improve India’s security abroad despite zillions of foreign trips; internally, Kashmir is close to being “lost” and the Maoist threat in Chhattisgarh remains unresolved due to mishandling; despite promises of achche din, economic growth is nowhere near where the UPA took it (8-9 percent), and jobs growth is absent.

Mixed record on Hindu agenda, economy

Those who are inclined to back Modi, both the uncritical supporters and those who do not mind calling out his follies despite being favourably inclined to his rule, have the following things to say in his favour. In fact, we also tend to forget that Modi’s strongest critics are the Hindutva forces, who believe he is doing little to take forward even the positive aspects of the Hindu agenda, including the rollback of laws that discriminate against Hindus and appease minorities (Example: state control of thousands of temples, lack of freedom to manage Hindu-run educational institutions, imposition of RTE only on majority-run institutions, special treatment to madrassas and Haj subsidies). The only thing they can laud Modi for is the government’s strong support for banning triple talaq, which the so-called “liberals” have copped out of.

Modi supporters also point to the high legislative and economic reforms record of the NDA government, and its excellent performance in maintaining price and fiscal stability. They note that despite temptations to blame every problem on the previous government, the NDA has not taken the easy route to popularity by abandoning fiscal rectitude, raising foodgrain support prices excessively and/or announcing loan waivers (UP being an exception, but the populism is state-led) to gain instant popularity. Nor has a major dole been given to any segment beyond the ultra-poor. If anything, the government, by demonetising high value notes in November last year, has angered its core voter base – the trading community and middle classes which have been the backbone of the BJP for decades. Nor has it pandered to any business lobby, and cronyism and corruption – a key feature of the UPA – are conspicuously absent at the centre.

For a more neutral and non-expert analysis, a look at the latest approval ratings of the government show that popular support is not only holding up, but seems unlikely to flag in the foreseeable future. It might well hold up all the way to 2019, assuming the government does not shoot itself in the foot by letting violent groups get away with murder, and scuttling growth through economic mismanagement.

Only a broad right-ward shift in terms of political preferences can explain why, despite the headline-grabbing murders and lynching of Muslims or Dalits by gau rakshaks, the sluggish recovery of the economy, the paucity of job creation, and the wringer of notebandi, the average voter still has faith in Modi.

The latest LocalCircles Governance Survey says 61% of the 40,000 people polled online said Modi had met their expectations of him. Online surveys may remain suspect in terms of validity, since the respondents are self-selecting, but other surveys last year and the year before recorded the same high ratings despite the government’s many mis-steps. This trend has been confirmed by emphatic recent electoral victories of the BJP in Uttar Pradesh and Uttarakhand.

Even though Atal Bihari Vajpayee and Narendra Modi are poles apart in terms of personality and operating styles, one thing is common to them: they are both head-and-shoulders above their party in terms of popularity. Vajpayee’s avuncular charisma is more than matched by Modi’s image as someone who is at least trying to do the right things for the country. This is significant, for the media in Vajpayee’s time thought of the prime minister as different from his party (“the right man in the wrong party”), but Modi is not seen as different ideologically from his party. In fact, he is seen as the very embodiment of the party’s Hindutva moorings, a conflation that began with Gujarat’s communal conflagration of 2002, where Modi’s role has been questioned even though no court has found any evidence that he did wrong.

Since Modi’s image has been built despite the hostility of the mainstream Lutyens’ media and establishment, what his continuing popularity really means is that there has been a broad right-ward shift of the Indian citizen in terms of political preferences. This is the only thing than can explain why, despite the headline-grabbing murders and lynching of Muslims or Dalits by random gau rakshaks, despite the sluggish recovery of the Indian economy, despite the paucity of job creation, and despite putting the entire population through a wringer during notebandi, the average voter still has faith in Modi.

Tabulating Modi’s scorecard

Prime Minister Narendra Modi deserves an A+ for image management and political messaging. Credit: Reuters

However, the job of the political or economic analyst is not to validate what the average voter thinks or does not think about Modi but to arrive at a scorecard on his government’s performance independent of popular perceptions.

That the prime minister is an excellent manager of his own image is well-recognised. While some people look on this self-promotion with disdain, the reality is different. In a political economy, if a politician is not capable of managing his image and making himself electable, he cannot deliver on his promises or get things done. Modi is one of the first politicians in India to realise that image and perceptions are important to achievement – a truth that most western democracies have known for decades.

Since 2001, when he was pitchforked into the chief ministership of Gujarat, Modi has repeatedly reinvented himself every five years. In 2002, in order to win in Gujarat, he was willing to play ‘Hindu hriday samrat’. In 2007, he saw that political longevity needed him to deliver economic results to his people and overcome his “communal” image. He duly focused on making Gujarat a global investment destination.

In 2012, as Gujarat became his private pocket borough, Modi realised that his ambitions for Delhi needed him to win over his western enemies, who were wary about his Hindutva credentials, with the US even refusing to issue him a visa. This time he positioned his state as the most business-friendly in India. Thus, he was constantly schmoozing with business leaders and foreign delegations, impressing them with his earnest efforts to ease life for businesses in his state. He succeeded in making western businessmen, and then western politicians, buy his story. Reason: where business is willing, politicians will follow.

R. Jagannathan’s Scorecard for Modi @ 3
An ‘A+’ for image management and broad political messaging
An ‘A’ for legislative and reforms achievement
A ‘B’ for economic outcomes and results (but with the possibility of a better score in next two years)
A ‘C’ in bringing down inter-community tensions within India and peace with neighbours.

But post-2012, when the target was the whole of India, he changed tack again. As the party’s prime ministerial candidate, Modi no longer flaunted his pro-business credentials, but his concern for the poor. He realised that an overtly pro-business party can easily be junked by his political opponents, with both Rahul Gandhi and Arvind Kejriwal alleging that he was beholden to Ambani and Adani. Modi shifted his rhetoric to the poor – moving his party decidedly to the Left of its earlier stance. Leaving aside some elements of detail, the BJP under Modi is no more Right-wing in economic policy than the UPA. The Sangh parivar that is in awe of him, is all for this too.

It is this Left-ward shift in the party’s positioning that allowed his party to gain more state assemblies post-2014. Business leaders who hailed him as another Thatcher or Reagan soon realised that at best he was not anti-business, and was willing to help in a neutral sort of way by easing regulations. But his priorities had shifted from being business-friendly to being anti-crony. This image shift, which has been followed up by two black money disclosure schemes (only one of which could be termed successful), a draconian law to check benami property transactions, and demonetisation of high-value notes last November, has been central to his reinvention as messiah of the poor. Politicians tried hard to paint Modi as anti-poor since they were made to stand in long queues for days to get their high-value notes exchanged, but the poor saw in demonetisation a prime minister who was not afraid to take on the moneybags. They knew this instinctively, since the rich used the poor to launder their black money.

This messaging has been amplified by other programmes that sealed his image as someone with good intentions. The Swachch Bharat mission, the ‘Beti Bachao, Beti Padhao’ initiative, the Jan Dhan financial inclusion scheme, the plans to double farm incomes and enabling everyone to live in a pucca house by 2022 are part of this makeover. None of these schemes is likely to deliver in spades, but as a statement of intent and direction, they have served a major purpose.

Conclusion #1: Modi is now the tallest and most credible politician in India for he has shifted his party to the Left and replaced the other centrist parties from this position. If he can win 2019, he will have enormous power to deliver on his promises. Hence the A+ score.

Reforms count …

Finance Minister Arun Jaitley and Prime Minister Narendra Modi (right). Credit: Reuters

Barring the Narasimha Rao government of 1991-96, and to a lesser extent the Vajpayee government of 1998-2004, no government has passed as many enabling and reformist legislations as has Modi’s. Between mid-2014 and now, the Modi government has passed bills to enhance foreign investment in insurance, pensions, defence, rail infrastructure, brownfield aviation, construction, and e-commerce marketplaces, to name just a few. India became the world’s No 1 foreign direct investment destination in 2015, replacing China.

Subsidy reforms have gone further and deeper than ever before, with Aadhaar being used extensively to eliminate fake and duplicate beneficiaries, direct cash transfers replacing physical subsidies in LPG, petrol and diesel prices being deregulated and kerosene being gradually phased out. Over Rs 1,50,000 crore has been disbursed through direct cash transfers in government schemes. In its eagerness to use Aadhaar for expanding the tax base and eliminate subsidy-related corruption, the Modi government is taking a huge risk: it has given less attention to privacy and data protection, at a time when the Aadhaar database is being shared with companies for business reasons.

Laws to sell coal mines only by auctions have been passed, and the first auctions held, and coal mining is no longer a state monopoly. The moribund power sector has been revived by the Uday scheme which transferred state electricity board debts directly onto state balance-sheets, thus removing constraints on power generation and distribution. Some 25 out of 27 states or Union Territories have revised power tariffs, and solar power has been given a huge liftoff, with the latest bids for solar tariffs falling below Rs 2.50 per unit. India’s solar capacity is set to cross 20 Gw by 2018 end.

And, for the first time ever, India now has a bankruptcy law that is comparable in terms of provisions with the best in the world.

Where the opposition was in a position to thwart legislative action, the government used the money bill route to pass laws, as in the case of the Aadhaar Bill last year.

Modi’s biggest legislative success has, of course, been the enactment of the constitutional amendment bills to enable the imposition of a combined goods and services tax (GST), which got passed last year by the centre and more than half the states. This could not have been done without Modi investing a huge amount of personal political capital, given the strong animosity between the BJP government at the centre and various opposition-ruled states.

Conclusion #2: Despite huge political blocks and an opposition veto in the Rajya Sabha, this government’s legislative record is second to none. It deserves an ‘A’, even though the benefits flowing from these reforms will take years to accrue.

… But growth, job creation, lag behind

As a Crisil report on three years of Modi says it, his signal achievement has been to implement disruptive change without loss of political capital. It is not business as usual. Notes the report: “GST, the most significant indirect tax reform in decades, will be a game changer. It may not be the optimal GST structure, but let the best not be the enemy of the good. Even with its imperfections, it is expected to usher in significant efficiencies and benefits in the logistics chain across sectors and lift India’s growth trajectory over the medium run. Although somewhat disruptive in the short run, demonetisation is being leveraged to move India towards a ‘less-cash’ economy.”

While the jury is out on whether demonetisation’s gains have outweighed its economic costs, Crisil’s takeaway is this: “One of the most important lessons from the demonetisation drive of last year is that it is possible for a government to take hard decisions without eroding political capital.” That is a big gain in a country where elections are always won with freebies.

Next, we need to consider how good has the Modi government’s economic management been? The short answer is “good in parts”, but not good enough overall.

The plus points are clear. The price situation is benign after the UPA’s wildly inflationary era, and fiscal management has been sensible, with Arun Jaitley staying the course on fiscal consolidation despite there being good reason to dump P Chidambaram’s fiscal roadmap in the first two years of the NDA regime, when growth was sluggish. Despite two consecutive drought years, food prices are moderate, and the latest print on retail inflation is less than 3 percent.

The export engine sputtered and died between 2014 and late 2016 before registering a revival; corporate investment has dwindled to low levels; and the consumption story was stopped dead in its tracks by demonetisation last November, though it will surely revive from this quarter.

As the Crisil report notes, “the recent data from the Central Statistics Office shows a small and transitory hit to India growth from demonetisation. We, too, expect India’s GDP growth to lift to 7.4 percent in fiscal 2017-18 from 7.1 percent in the preceding fiscal. GST together with the move towards a ‘less cash’ economy will also give speed to the formalisation of the economy.”

The biggest black mark for the Modi government is its failure to fix public sector banks and their mounting bad loans: many banks are teetering on the edge of bankruptcy, with bad debts crossing over Rs 7 lakh crore by now.

Three years is simply too long a time for a government to have failed to come to grips with a serious economic problem that was evident as far back as in May 2014, if not earlier. Even though efforts have been made to give the Reserve Bank of India enhanced powers to force a resolution of bad loans with banks, this process is not going to happen overnight.

Not enough work to go around. Credit: Stephen Geyer/ Flickr, CC BY-NC-ND 2.0

As a regulator, there are limits to how far the RBI can push banks to settle bad loans with promoters, when most of these banks belong to the government. This is also an abdication of duty: if the owner of public sector banks does not have the courage to clean up its act, how can the RBI do it any better?

The single biggest constraint on a sustained economic recovery is weak banks, and for this problem the only real solution is larger infusion of capital into public sector banks. But in the 2017-18 budget, the government has provided all of Rs 10,000 crore for recapitalisation, when just one investor, Softbank, is putting in as much money ($1.4 billion, or Rs 9,000 crore) in a small private sector payments bank called Paytm.

The second big economic failure is in jobs. This government has been making all the right noises on jobs – using the Mudra bank to funnel money into self-employment schemes, focusing on skill development, and even offering tax sops and law changes for increasing apprenticeships and full-time employment – but jobs are simply refusing to grow.

To be sure, the faltering jobs machine is both the result of under-investment (as companies are still trying to reduce their loan burdens), and a secular dip in new jobs creation due to the spread of automation and labour-saving technologies. An HDFC Bank jobs report in 2016 noted that India’s employment elasticity – which measures the growth in jobs relative to every 1 percent increase in GDP – has been dropping sharply. Fifteen years ago, the employment elasticity was 0.39 – that is, when GDP grew 1%, jobs grew by 0.39%. But this elasticity is down to 0.15 – more than halving the rate of job creation. We are close to make the frightening term “jobless growth” a reality.

While chief economic advisor Arvind Subramanian is right to say “you can’t have employment growing if the economy is growing at 3-4 percent,” the problem is that job creation is being challenged by the rise of technology and automation not only in India, but the whole world.  A political volcano is building up under the surface in many economies. In the US, it threw up a Donald Trump. In Britain, it has led to Brexit. In France, a sharp nationalist upsurge was nipped in the recent presidential election, but the far-Right National Front of Marine Le Pen is now that country’s main opposition. In India, we are seeing tiny manifestations in terms of demands for job reservations from castes that were hitherto not in need of it: the Patidars in Gujarat, the Jats in Haryana, the Marathas in Maharashtra, among others.

Conclusion #3: India elected a pro-growth Modi three years back; this is where his delivery is weak, hence a ‘B’ for actual economic performance. His chances of re-election depend not only on his image and other legislative triumphs, but on his ability to get growth and jobs growing faster in the remaining two years of his tenure. Sure, our GDP is growing at a rate above 7%, but this is largely the result of a change in how growth is measured.

Divisiveness hurts growth

Just as a person’s height does not increase because you use centimetres to measure it instead of inches, the higher GDP growth using the new methodology is not supported by the revival of animal spirits in the economy. Animal spirits seem more evident among fringe groups than businessmen. Growth cannot return to its old levels if fringe groups loosely associated with Modi’s party create mayhem on the streets, exacerbating the country’s many fault lines of caste, religion, language and region.

Conclusion #4: Modi has rarely used divisive rhetoric post-2012, except occasionally on the campaign trail. But this rhetoric was never over-the-top. His real challenge is to avoid giving the appearance that he supports the violent fringe by keeping quiet on issues like the Dadri lynching or the Una violence for a bit too long. He has to speak up. Only he has the authority to check the fringe. In the absence of that, he get’s a ‘C’ for social harmony.

Modi’s three years have been a great political success; the economic success could follow in the remaining two years. To seal a durable path to political longevity, he has to use his unchallenged authority to roll back political divisiveness and focus on jobs and growth. He has to live up to the ‘sabka saath, sabka vikas’ slogan by speaking up when the fringe erupts.

My final word on the Modi report card: Good in parts, satisfactory in others, but not good enough given the scale of the mandate. He should try harder in the remaining two years.

R. Jagannathan is Editorial Director, Swarajya Magazine.