Who is smarter & braver on political economy than whom?

The 5 things Modi has got proper on the political economy shows good economics isn’t necessarily bad politics….

Relying completely on where your voting preference lies, the Narendra Modi government has both performed brilliantly or disastrously on the economy in its 5 years. Critics counter, certainly, look at the data, but how do we find when you merrily fudge? We shall let the experts on both sides wrestle over it, and only take a broader view of 5 years of the political economy.

It is true that only twelve defaulters have been put below bankruptcy proceedings yet. But these are the twelve biggest and the most powerful. What happens is that these are the types with the most number of powerful politicians and civil servants on speed-dial, with many accumulated IOUs. The point that none of them has been able to secure a “phone-banking” release, not even the mighty Ruias of Essar, shows a new political intent.

See it this way. Once you know there is no chance of getting a reprieve or evergreening through a “friendly” phone call, you learn to deal with a new era in Indian capitalism. Where bankruptcy is an inevitability if your business flops. For its capitalism to come of age, a society has to learn to receive the bitter fact of failure. In India, bankruptcy has been seen as a family embarrassment to be concealed.

An avowedly Left-socialist, but “phone-banking” state was complicit in this. The Modi government ended that. The big boys are running bust. It is out of this bonfire of corporate vanities that new Indian capitalism can develop. I see this as truly a welcome political and cultural change, never mind the amounts of bad loans it actually brings back to the banks. If no one is too big to fail, the secondary players will fall in line.

The Modi government has faced many reviews for keeping prices of petroleum high, despite falling crude. But if it hasn’t made the kind of outcry as it did under the UPA, it is as the consumer also watches the total shopping bill at the end of the month. The Modi years have seen high oil prices, but low inflation overall, especially food. No one is still calling the inflation data fudged, nor has it been re-set retrospectively, unlike GDP. So we can make a fair judgment.

When the Modi government took over in the summer of 2014, UPA-2 had handed it an economy with Consumer Price Inflation at 8.33%. As of December 2018, it is just 2.19 %. This, mind you, despite the government containing its nerve and keeping oil prices high.

Inflation-targeting, hence, is the 2nd big success of the Modi government’s somewhat instinctive and non-academic doctrine of political economy. Maximum Indian governments have been tempted to let fuel prices fall and buy peace with the noisy urban elites.

The politics of prices, however, has a mystique of its own. UPA-1 increased farm Minimum Support Prices (MSPs) relentlessly, made the farmer and farm labor feel much safer, and easily won the 2nd term. In its 2nd term, consumer food prices rocketed and widespread stress built up, killing it. The Modi government, now, made customer food prices crash, some by refusing to increase MSPs, and some by over-enthusiastic encouragement, externally bothering about market forces.

As a consequence, the farmer got pauperized and farm labor wages fell. It was only in the last 3 crop cycles that the NDA started increasing MSPs. But it is too early to make an impression. Rahul Gandhi, hence, is not wrong to say that the farmer has lost out in the 5 Modi years.

It is just to say that just like UPA-2, the Modi-led NDA has also been grabbed at the wrong end of that cobweb. Therefore the distress. It is a cruel political truism that as long as interests of the consumer and the farmer are contradictory, a government could lose power as much for high prices as for record lows.

What did the Modi government do with all this extra money it collected from fuel taxes? The results lie in the next thing we think it got right — cutting fiscal deficit. Piyush Goyal is right when he says the NDA received from UPA-2 a fiscal deficit of about 4.5% of GDP and rising. If it is at 3.4 today, notwithstanding all the tens of thousands of crores the Modi government has paid out in voter giveaways, it is in a large part because of this oil bonanza. Oil subsidies had removed the fisc under UPA-2.

There has been much cheering for Nitin Gadkari’s effectiveness in building highways and it is well-deserved. It also avoids the larger picture. While huge investments have been pumped into the highways, we take short notice of the ports, Sagarmala projects, the Northeast and the railways. Broader data tells us that India’s support spending has increased about 3 times in the past 10 years as a %age of the GDP, and much of this has come in the last 4.

Helping this along is the 4th of the 5 successes in our list: Improvement in tax agreements and tax-to-GDP ratio, from about 9 to 12% of a much larger GDP. At higher levels, the taxman has been grinding, drawing charges of tax-terrorism. But at lower- and middle-class levels, the reforms in tax administration have been efficient, greatly reducing human interface. If you aren’t a sizeable business or specifically targeted by the “agencies” or politically victimized, your experience with the taxman is accurate. The 5th and last, indeed, is GST.

Of course, there are many areas of failure, from agriculture to exports, and from jobs to unreformed PSUs and, finally, the globally embarrassing data fudge. There was also demonetization, which rivaled in its nuttiness Mao’s war on the sparrows. We’ve been complaining about these things and more and will continue to do so. This week, we acknowledge the rarer instances of a government showing that sound economics isn’t necessarily bad politics or vice versa.


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