2019 Forecast: Politics

The Modi Momentum

PR Ramesh is Managing Editor of Open
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The Prime Minister’s transformation agenda will be put to the test

JUST DAYS BEFORE election year 2019 was rung in, Prime Minister Narendra Modi, speaking at a rally in Ghazipur, Uttar Pradesh, described farm loan waivers as “lollipops”, short-termist measures for farmers that are resorted to by governments only with immediate political gains in mind. This candour came just weeks after the BJP lost three key Hindi-belt states to the Congress in assembly elections. Modi’s disdain for such ‘manna’ to agriculturalists in distress was rare for a politician in post-Independence India. Considering his party’s need to enlist the support of the country’s 260 million-plus farmers and their dependents in the upcoming General Election to win a second term in power, it was a significant statement. In an open season for populist announcements, Modi was loud and clear.

Predictably, the comment triggered off debates on whether the Prime Minister’s criticism of farm debt relief was directed at non- BJP ruled states or should be viewed as his party’s own policy orientation. Or, if re-elected, his government would initiate long-pending reforms to help sustain livelihoods in the ailing sector, which needs to be competitive and profitable, while ensuring that the truly poor would not lose the benefit of food subsidies.

It was not the first time the BJP-led Government has rubbished loan waivers as the primary solution to farm distress. But BJP-ruled Maharashtra and UP had both declared agricultural loan write-offs—to the tune of Rs 34,000 crore and Rs 36,000 crore respectively—and it was left to Finance Minister Arun Jaitley to spell out the Centre’s position that the onus of a debt -waiver decision was on the states and those with fiscal space could opt for it so long as other longer-term measures were also adopted.

The debilitating effects of such populist handouts on the overall economy are well known not just to economists and bankers, but also policymakers with experience of past episodes. They break the credit cycle since banks are tightfisted after such waivers and farmers are left at the mercy of moneylenders who charge usurious rates of interest. They aggravate the problem of ‘moral hazard’ among farmers because it lowers their incentive to repay future loans, while the earnest who have already paid back feel penalised, which has negative effects on the banking sector. It takes a pragmatic leader to recognise this and eschew populism just before polls. Most politicians cannot resist dipping into the public exchequer to don the mantle of ‘kisaan messiahs’, Congress President Rahul Gandhi being an example (with his chorus on loan waivers).

Modi’s statement comes amid reports that the Government is evaluating options such as direct payments to farmland owners of upto Rs 2,000 per acre at an estimated total cost of Rs 1 lakh crore; or transfers to farmers of the difference between the declared Minimum Support Prices for crops and the actual money received by them, a scheme that would cost only half as much.

Politically, this approach of Modi has the potential to unsettle opposition parties. It also speaks of his conviction that farmers are aware of the hollowness of short-term relief and can see through these ‘lollipops’ as self-serving ploys. Although it is still a risky stance in electoral terms, the Prime Minister has chosen to defy politics-as-usual on the strength of his appeal as a leader.

Even otherwise, Modi refuses to be boxed in on predictable policy lines. Here, for instance, is a leader who was apparently business-friendly, a Prime Minister expected to deregulate the economy and usher in laissez faire capitalism. However, he has not done that. He was expected by millions of supporters in 2014 to turn public sector units efficient and push ahead with a large- scale privatisation programme. He has not done that either. He was seen as a leader who would protect business interests after he emphasised that he had no problem meeting industrialists openly and rolling out the red carpet for them. But contrary to these expectations, his focus has remained on disciplining business overall, including PSUs, without outright selloffs.

Nor is Modi a leader who believes in the slow processes of trickle-down economics to help the poor. Instead, he has shown an intent to address poverty and improve people’s lives through public schemes aimed at the needy.

From Swachh Bharat and electricity-for- all to accessible housing, cooking gas and healthcare coverage, Modi has gone about laying the framework for his vision of a social-security state on the 2014 promise of ‘Sabka Saath, Sabka Vikas’. At Ghazipur, he said that his government believed in working transparently in the public interest to accomplish big tasks. “Today, even the poorest of the poor are heard. The Government has laid the foundations of a strong monument.”

It is clear that Modi is attempting a fundamental course correction of India’s development. By no means a Nehruvian socialist, he begins speeches with ‘Bharat Mata ki Jai’ and distances himself from Iftaar party politics. However, he has surprised both his supporters and detractors on Hindutva as an ideology, which he appears in no tearing hurry to replace Nehruvian secularism with, and other divisive issues. In the Financial Times of London, Gideon Rachman writes that the fears expressed by Modi’s opponents of large- scale inter-communal violence have not been borne out since he took office in mid-2014. The pre-Modi period had seen much worse, such as the 1984 anti-Sikh riots in Delhi. A country of a billion-plus would have its horror stories, but these have been exceptions rather than the rule.

Modi is not a leader who believes in the slow processes of trickle-down economics to help the poor. Instead, he prefers to address poverty through various public schemes

As Chief Minister of Gujarat (2001-2014), Modi was hailed as an economic reformer. As his first term as prime minister concludes, though, the question often bandied about by critics whether he is a Hindu zealot in the guise of an economic reformer or vice versa would appear to have been settled.

If Modi had proved to be a status quoist, had he done what his supporters—or denouncers—expected him to, it would perhaps have been simpler to analyse his worldview and policies emanating from it. Analysts say that those who voted for him in 2014 aspired to—but perhaps never truly expected—three main things: decisive policy-making, the end of corruption and renewed market reforms. On all three, the Congress-led UPA had performed dismally. The BJP, with its parliamentary mandate, had to perform well on all three fronts.

Modi has not only projected an image of personal probity in governance, he has worked to ensure that India is the fastest growing large economy in the world. He has reached out to caste, gender and other constituencies that had been indifferent to the BJP in the past, and taken effective steps to impress the youth and aspirational classes countrywide. He has also acted in various ways to counter the opposition charge of his being a polarising leader— especially after the anointing of Yogi Adityanath as UP’s Chief Minister—with an exclusivist agenda.

The Prime Minister has made inclusive development a priority, with the interests of the underprivileged at the forefront of his action plan. It has been an exercise in policy planning to target welfare outlays at the deserving and shift attention to outcomes. Consider the jobs scheme brought in by the erstwhile UPA Government under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA), often hailed as a landmark income generation programme for rural India but restricted to a limited number of days every year with payments made to the needy for labour work on repairing roads, building open water tanks, walls, embankments and so on. A criticism voiced by studies earlier was that in view of the type of work involved, MNREGA tended to only attract those castes and classes at the bottom of the socio-economic pyramid. Under Modi, a slew of new initiatives has begun to break through the old class and caste dynamics. The current Government’s drive is to dispense small loans for micro businesses and self-employment and create easy access to educational scholarships for the youth. This goes along with an assurance of dignity for women and ease of domestic work in villages by introducing them to pucca toilets and gratis cooking gas connections.

With big-budget initiatives to give India’s millions a minimum standard of living, Modi has taken sections of the electorally minuscule but vocal middle-class—a major support base of the BJP—that expected to be the focus of his attention by surprise. Their disenchantment on this, however, has not translated into disengagement with the BJP, thanks mainly due to the personal image of the Prime Minister himself.

If Modi has fallen short of expectations, it is of vested interests. Specifically, those who backed him expecting him to act according to an image they had sculpted of him: a free-market enthusiast who would reduce the role of the state in the economy. This could explain the resistance he is now facing from a coalition of forces, including his political rivals.

Of the Modi Government’s economic management, the jury is still out on the controversial November 2016 move to demonetise high-value currency notes, the overnight cancellation of 86 per cent of all cash in the economy’s circulation to check black money. There is no denying that on the narrow yardstick of money returning to the Reserve Bank of India, notebandi may not have met with the success expected. By August this year, the RBI’s annual report said that 99.3 per cent of the banned currency, totalling Rs 15.3 lakh crore, was back in the custody of banks. Economist Surjit Bhalla, however, argues that is it wrong to evaluate demonetisation merely on this criterion. Undoubtedly, people suffered, their woes ranging from the inconvenience of long queues at ATMs to withdraw money to job losses at Medium and Small Enterprises. Other cash-dependent sectors were hit hard too during that phase. But few questioned the earnestness of the intention behind the move. It was a bold measure that bore the risk of going sour electorally. But, as Modi has insisted since, it was supposed to clear the way for a modern state that rewards fair play, honesty and transparency, and punishes those who flout the law.

Despite the Doklam crisis, relations with China have rarely been this comfortable in the recent past, thanks to Modi's efforts to engage Xi Jinping

MODI’S OPPONENTS ACCUSED the Government of shifting the goalposts for demonetisation as the weeks passed by, unmindful of the fact that a major decision of the sort invariably has complex and unforeseeable results. Aside from a noticeable fall in real-estate prices—thanks to the end of suspect cash components of transactions—that made housing more accessible to buyers, demonetisation had the medium-term result of hastening the formalisation of a significant part of the informal sector. This had positive effects for employees who had to be taken onto employer rolls and given the same government-mandated benefits that their formal sector counterparts always had (provident fund savings, for example).

Formalisation helps the economy too. As Bhalla has pointed out, the improvement in tax compliance since late 2016 has been an important benefit of notebandi to the country. By his numbers, personal income tax buoyancy, which had slumped between 2010 and 2015, registered a revival in 2016 and 2017. ‘No matter how one slices the personal income tax data— whether by record increases in the number of tax payers or by tax buoyancy— the fact remains that an improvement in tax compliance has been a major success story of demonetisation,’ Bhalla writes.

In 2001, he says, less than 15 per cent of the tax revenue that should have been collected by the Government was done. ‘A small increase in tax compliance could have gone to schooling, medical care, nutrition and avoidance of the deaths of the poor,’ in his words.

Another objective of the exercise was the transformation of the economy to make it less cash-intensive. This also supports tax revenues since non-cash transactions leave an electronic trail that can be traced, so manoeuvres to avoid paying the Government its due are that much easier to catch. The figure for cash withdrawals from ATMs as a proportion of all transactions in the country declined from the January to June period of 2016 to the same six months last year by 17 per cent in value terms, according to Bhalla. Aside from that, as other economists have argued, ‘draining the swamp’ has meant that terrorist and Naxal operations find it difficult to get funds, even if they have not entirely disappeared.

The Modi Government’s biggest reform has been its implementation of the Goods and Services Tax (GST). This has involved a fundamental rework of the country’s indirect tax system to bind multiple and complicated taxes into a single tax, aimed at improving economic efficiency in the long term. Despite its apparent complexities, technical processes and multiplicity of rates, barriers to inter-state trade have been lowered and overall collections have been encouraging. With a better system of taxation, the Government will have more resources available for social sector spending.

Opposition leaders have often raised the issue of ‘jobless growth’ driven by what they call the ‘bad policies’ of the Modi Government. An estimate they cite is that 8-12 million jobs need to be created every year to keep a lid on the crisis and contain social strife. At the peak growth period of the economy under the UPA, however, annual job growth was also sluggish. Broader solutions are required.

On the broad indicators of an economy’s health, the official macro-economic numbers of the annual fiscal deficit, inflation and external balances, India has had a commendable performance over the past four years. Apart from demonetisation and GST, India’s troubled banking system also got relief in the shape of the Insolvency and Bankruptcy Code, which is expected to help solve the problem of bad loans.

MODI’S RECORD ON the diplomatic front, too, has been remarkable. The Prime Minister worked out a special arrangement with the UAE to deal with fugitives. Getting back Christian Michel, an alleged middleman in the AgustaWestland bribery case, to India was a big deal for the Modi regime. To ensure the extradition of Michel, a third-country national, to India, Modi had to use his relationship with the Abu Dhabi Crown Prince Mohammed bin Zayed al-Nahyan, who was chief guest at India’s Republic Day parade in 2017 (a break with the tradition of only inviting heads of state or government). The Government denied suggestions that it was part of a quid pro quo deal involving the Indian Coast Guard and the daughter of Abu Dhabi’s Prime Minister who had run away from home. Either way, the extradition was a feather in the Government’s cap.

Modi’s pragmatism was also to be seen in the episode of the Saudi dissident Jamal Khashoggi’s murder in Istanbul.

Even as the West fulminated over Riyadh’s alleged involvement, Modi put national interest first. This allowed him to persuade the US and its bete noire Iran simultaneously as well as Saudi Arabia to take measures to control the global prices of crude oil, which India imports in large quantities. On Pakistan, Modi was mocked by his political rivals for a wavering policy. Today, the Prime Minister’s diplomatic skills have resulted in aid to Islamabad being substantially reined in by the US for its failure to act against terror operatives that enjoy unofficial state sponsorship. Modi also lobbied within the neighbourhood to have Pakistan shunned for its export of terror to other parts of the region.

Relations with China, India’s other ‘difficult’ neighbour, have rarely been this comfortable in the recent past. Despite the Doklam crisis, progress has been made thanks to Modi’s efforts to engage Chinese President Xi Jinping and start on a clean slate.

With a track record of the kind that Modi has on politics, the economy and diplomacy, the question that arises in the ultimate analysis is whether— despite having read the pulse of the nation better than most—he has bitten off more than he could chew and erred in gauging the appetite of voters for the sort of fundamental policy changes he is so keen to execute, involving entire systems, institutions and mindsets. Whether, also, he has misjudged the capacity of people to resist change. Or is it that the mastermind reader of the masses, hailed as a leader with a rare connect with the electorate, is confident that the protests of the disgruntled is mainly white noise that will be drowned out by the support of a majority?

In France, the reformist zeal of President Emmanuel Macron has had to be tempered, as his agenda started confusing both the Left and the Right. The speed at which he was trying to effect changes caused a blowback. However, unlike in France, where Macron annoyed voters, Modi’s supporters can take satisfaction from the fact that the opposition to his policies is primarily from predictable quarters, political rivals and ideologues. What will count at the hustings is the voice of the people and whether they are lured by ‘lollipop’ vendors or embrace Narendra Modi’s India Project.