Three Years Into Modi’s Regime, the Cracks Are Beginning to Show
has risen and the corporate sector has taken a hit, but the Modi
government is relying on statistics to create an illusion of economic
Prime Minister Narendra Modi. Credit: Reuters/Yuya Shino
The completion of three years of Prime Minister Narendra Modi’s
government has released a flood of assessments. Most of these are paeans
of praise. In a recent article in Indian Express, Ram
Madhav, the national general secretary of the BJP and its former
spokesman, has labelled Modi India’s most trusted leader, whom he
perceive as “working towards a new vision of India”.
Madhav is Modi’s subordinate, so his assessment of his boss should
carry about as much weight as an assessment of Donald Trump’s first
hundred days by Rex Tillerson, his secretary of state. But on one of his
claims there can be no dispute: Modi has put his stamp so firmly upon
this government that he has been able to extend the honeymoon period of
his government, and delay the onset of anti-incumbency, by at least 18
months longer than any previous government.
Madhav ascribes this to Modi having the courage to make unpopular
decisions and his ability to make the people support them. “Modi is
undisputedly the most trusted leader in the country today…after many
years the people of the country feel the presence of a strong and
decisive leader…” What Madhav has overlooked is that while a decisive
leader makes people feel secure, he also raises their expectations. Modi
may have done the first, but despite being in power for three years, he
has completely failed to meet the second. The failure stretches across
every realm of policy, but let us start with the economy, and his
promise to bring acchhe din back again.
Madhav claims that in the last three years, growth and development
have been “more than satisfactory”. The truth is the exact opposite:
When Modi came to power, the economy was in deep trouble. Today, three
years later, it is in even deeper trouble. Far from ushering in acchhe
din, Modi and his ministers have floundered around making microscopic
changes to the micro economy, while the macro economy has edged steadily
The Modi government did not cause the downslide of the economy. But
the past three years have shown that it does not have the faintest idea
of how to stop it. What is more reprehensible is that instead of
acknowledging that every macro economic indicator is heading south, the
government has resorted to statistical legerdemain to create an illusion
of growth where there has been only decline.
Let us take the most frequently quoted yardstick first – the GDP.
The government has claimed a rise from 5.1% in 2012-13 to 7.9% in
2015-16. But Rajeshwari Sengupta, professor of economics at the Indira
Gandhi Institute for Development Research in Mumbai, pointed out
a year ago that India’s GDP growth in calendar year 2015 was actually
only 5% and not 7.1% as the official statistics claimed. The growth rate
was inflated because the official statistics grossly underestimated the
correction needed to discount inflation in the services sector, which
contributes more than half of the GDP, to obtain their estimate of
growth at constant prices.
Failure to correct fully for inflation has been a problem with all
recent GDP data, so the BJP cannot be blamed for taking advantage of it
to claim a growth that does not exist. But what is inexcusable is its
claim that the sharp jump in GDP growth from 5.1% in 2011-12 and
2012-13, in the penultimate years of UPA rule, to 7.2% in 2014-15 and
7.9% in 2015-16 is a measure of its success, when it too is a
statistical illusion caused in part by a change in the way GDP has been
calculated since 2013-14, and in part by the result of a crash in world
commodity prices that has followed China’s abrupt slowdown. This has
brought down input costs for industry, and thereby raised value added in
manufacture without any physical increase in output (GDP is measured by
value added and not physical output).
Not content with massaging the GDP figures, the government has also changed the base year
for the calculation of the industrial production index from 2004-5 to
2011-12, and claimed that the average industrial growth in the past
three years was not the paltry 1.96% shown by the old series, but the
4.1% shown by the new series. What it has not mentioned is that this
bump happens every time the base year is moved forward because it
increases the weightage within the index of sunrise industries and
decreases that of sunset ones. The same updating has also bumped up the
industrial growth rate in the last two years of the UPA from 0.5% to
Neither of these figures is impressive. Even in the three decades of
the closed economy till 1981, the average growth of industry was 4.8%.
It was over 9% from 2004 till 2009, and 13.5% between July 2009 and June
2011. But even the small blip in growth from 3.35% to 4.1% shown by the
new index is an anomaly.
For during these years, employment in industry has fallen sharply.
This is the one infallible indicator that no amount of wrangling over
numbers can hide. For reasons that defy understanding, the Indian
government has not created a single index for change in employment. But
since 2008 it has been collecting quarterly data on job growth in eight
labour intensive industries, and these show that there has been a
seven-fold decline of job growth in them, from an average of 900,000 a
year in 2010 and 2011, to 135,000 in 2015 and 2016. Even the vastly
reduced job growth in each of the UPA’s two final years, of 420,000, was
more than three times this number.
It is possible to make a rough extrapolation of the change in
employment growth in the entire economy by comparing these figures with
the estimates of total employment growth given by the decennial Census
and the quinquennial National Sample Survey. Both put the figure for
2009-10 and 2010 at over seven million a year. This means that at least
during Modi’s tenure around eight million young people who join the
labour force every year are being forced to join what our statisticians
call the “involuntarily self-employed”. They have no security, no future
and, therefore, no stake in stability. So it is no surprise that tens
of thousands of them have found ‘self-employment’ as cow vigilantes, and
prey upon others who are even poorer than they, to survive.
The other victim of our policymakers’ failures has been India’s much
vaunted corporate sector. A moribund share market in which initial
public offerings of equity shares have dried up because people are not
willing to invest in them has forced promoters to rely heavily on
domestic and external bank borrowing at sky high borrowing rates of
11-14%. This have combined with a crash in the exchange rate after 2012
to more than double the cost of servicing debt in the last six to seven
years, while simultaneously choking domestic demand and drying up their
current revenues. Once the envy of China’s policymakers, much of the new
corporate sector is now on its last legs, gasping for breath as it dies
a slow death.
Nearly all the entrepreneurs who had embarked on the modernisation of
India’s stone age infrastructure are facing bankruptcy today. Fifty of
these owe the banks more than Rs 10 lakh crore, or one seventh of the
The most recent victims are the mobile telecom companies that
transformed the face of India a decade ago and created millions of jobs.
Burdened under the debt created by the 4G auction and crippled by the no holds barred competition
launched by Mukesh Ambani’s Reliance Jio, the telecom sector’s debt,
(Rs 8 lakh crore), is almost 16 times its gross earnings before tax,
interest, depreciation and payback of the principal. No one holds any
serious hope that they will be able to survive on their own. The
government has set up a committee to examine its problems, but the
measures that will be required to save the sector are not within its
terms of reference.
The credit for the destruction of India’s growth has to go to the
RBI, which first snatched control of money supply from the government in
January 2007, and began squeezing credit relentlessly by raising
interest rates to control the continuing price rise, and persisted with
this suicidal course unmindful of its failure. The resulting high
interest rate regime – perhaps the highest real rate regime in the
world, has been in place for eight of the last ten years – has destroyed
Wise investors, who saw what was coming, simply abandoned their
projects to cut their losses. As a result, two years ago there were Rs
880,000 crores worth of abandoned projects, nearly all in infrastructure
and heavy industry.
Older, cannier corporates, who had not taken up infrastructure
projects, simply stopped investing in India and took their money
elsewhere: between 2008 and 2015, $70 billion of Indian corporate
capital found its way into fixed investments abroad. Not surprisingly, the gap between existing and required investment in infrastructure has widened to Rs 500,000 crore a year .
The RBI justified, and still continues to defend, its actions on the
ground that lowering inflation and then pegging it at a low level is
essential for achieving sustainable economic growth. But there is no
empirical evidence in developing countries to back this up. On the
contrary, South Korea achieved its three decade long explosive growth
with an average inflation rate of 21% a year.
What has been unforgiveable is the RBI’s failure to grasp what any
second year student of economics knows: that curbing credit lowers
prices only when there is too much money chasing too few goods. But as
former chief economic adviser Kaushik Basu pointed out in his most
recent book, this was never the case in the 2000s.
All the inflation India experienced between 2006 and 2014 was caused
by occasional droughts and freak weather occurrences; steadily increased
administered prices of food and cash crops; rampaging global commodity
prices caused by China’s runaway growth till 2013; and a mounting
shortage of public goods like health, land for housing and education.
Crushing domestic demand in a single country to remedy this was akin
to the medieval remedy for a fever, which was to attach leaches to the
patient’s body to suck out his blood. As often as not, the fever came
down, but the patient died. Despite their impressive degrees, the RBI’s
governors and their advisers have known little more about the economy
than the medieval European doctors knew about the human body.
Modi came to power with no baggage of past policies to defend. So he
had the chance to make policy on a clean slate. What is more, in July
2014, China went into a severe recession and global commodity prices
crashed. So in India, wholesale price inflation became negative and even
the cost of living index, which mostly reflects shortages of public
services created by government failure, fell sharply.
Modi and finance minister Arun Jaitley, therefore, had a golden
opportunity to instruct the RBI to bring down policy interest rates very
sharply. Had the RBI halved borrowing rates as Yashwant Sinha had done
between 2000 and 2002, all but a few of the 50 companies now facing
bankruptcy proceedings today would have survived and many of the
abandoned projects would have been revived.
But Modi kept every seasoned economic minister of the Vajpayee
government out and asked a lawyer to become an instant economist. These
are sins, born of incompetence and hubris, for which his government will
be called to a reckoning before very long.