Modinomics And The Indian Economy
The whole world is looking at India with great hope during this turbulent time of global uncertainties because the country’s economic fundamentals are robust, its political leadership is strong, its will for reforms is unrelenting and its implementation of welfare schemes is unparalleled in terms of scope, scale and effectiveness.
The Union finance ministry rightly said in its latest report for September 2022, “Halfway into FY 2022-23, growth and stability concerns for India are less than that of the world at large.” As measured by PMI composite index, the economic activity level was higher for India at 56.7 compared to 51 for the world during April-Sept 2022. Retail inflation for India during these six months stood at 7.2%, lower than the world inflation of 8%, as represented by the median inflation of major economies, it said.
During the same period, the rupee depreciated by 5.4% against the US dollar, less than the depreciation of 8.9% of six major currencies in the DXY Index, it said. The six currencies in the DXY basket are Euro, UK Pound, Canadian Dollar, Japanese Yen, Swedish Kroner and Swiss Franc. So, nervousness around depreciation of the rupee by a section of so-called experts, including a former finance minister, is more optics and politics than economics.
There is absolutely no doubt that the major countries, including advanced economies are facing major headwinds – initially due to God’s will (the Covid-19 pandemic) and later, largely because of them (massive supply chain disruptions because of sanctions against Russia that made food and fuel unaffordable for the poor countries, including some of the developed world). Was a war inevitable or matters could have been diffused is a larger debate – it needs to be examined separately. But, so far the impact of the Ukraine war is concerned, it is devastating for all, particularly the low- and middle-income countries, but it could affect the Indian economy the least because of its robustness and strong fundamentals.
When the Covid-19 pandemic hit the country in the second half of March 2020, like others, it was also a bolt from the blue for India. But, the Narendra Modi government was well prepared with matured transformational reforms like Noah had vision to prepare an ark. In about eight years of rule, PM Modi made several small and big changes, but five of them were key to shielding Indians during this devastating time and helped the economy to bounce back quicker than anybody else. They were – the digital revolution through JAM Trinity (PM Jan-Dhan accounts, Aadhaar identification and mobile connectivity), stable uniform Goods and Services Tax (GST), emphasis on the ease of living, taxation reforms and focus on growth through capital investments.
After assuming the office of Prime Minister in May 2014, the first major step taken by him was towards financial inclusion – which needed a three-pronged approach – taking banks to unbanked under the PM Jan-Dhan Yojana (PMJDY), linking their bank accounts to Aadhaar and providing them infrastructure for mobile connectivity. He announced the scheme on August 15, 2014, to provide universal access to banking services for the poor. The scheme was launched on August 28 of the same year. And now PMJDY is the world’s biggest financial inclusion programme with over 472 million accounts with deposits in excess of ₹1.75 lakh crore.
Its full potential was realised during the Covid period, when India faced a 68-day hard lockdown from March 24, 2022. The Modi government sent financial assistance to millions of underprivileged, including widows instantly, by the push of a button money reached their accounts. They availed government assistance at the time of extreme crisis without giving any cut to middlemen. Modi’s foresight saved millions. This was over and above 5 kg per person per month free additional food grains to 800 million poor under Prime Minister Garib Kalyan Ann Yojana (PMGKAY). The programme still continues even at an expense of over ₹3.90 lakh crore since April 2020. This is the world’s largest food security programme that not only saved the Indian poor from starvation, but also catalysed the rural economy by creating demand.
The road to such reforms was not always easy for the Modi government. It has been criticised for launching the Goods and Services Tax (GST) regime on July 1, 2017. Critics, mainly the opposition, said it was implemented in a hurry. But, thank God that it was implemented, else the country would have debated it for another one or two decades. Knowing well that the GST regime would take time to stabilize, the Modi government bit the bullet. Unfazed by criticisms it continued fine-tuning the new tax regime. As a result, India has a robust revenue stream, which crossed ₹1.50 lakh crore for the second time since the inception of GST and ₹1.40 crore is the new normal. There was a time when crossing ₹1 lakh crore was a matter of celebration. While GST unified the country for business purposes, the government reduced corporate tax significantly to attract foreign investment. As a result, when all major economies, including China, are on the verge of recession, India received a record foreign investment of $84 billion last year.
So, Modi’s carefully crafted strategy not only saved the poor but also encouraged economic activities. Besides, tax administration was made more impersonal and people-friendly, reducing compliance cost and encouraging people to contribute more in nation building. The ease of doing business was extended to ease of living by doing away with over 1,500 archaic laws. Self-attestation has been encouraged to save people from finding a gazetted officer to endorse his activities. Modi cut bureaucracy to size by restoring faith in the people, he trusted citizens.
The most remarkable strategy that saved the Indian economy was the calibrated stimulus by the Modi government that quickly revived the economy without stoking inflation. Initially, critics castigated the government for not doing anything to revive demand. They wanted Union finance minister Nirmala Sitharaman to dole out billions of dollars to people to create demand (like many advanced economies). But, FM was careful. She did not give freebies indiscriminately, instead, she offered easy finance to bring back production and spent public money on capital investment. As a result, India has comparatively low inflation, while many European countries have record inflation of four decades.
While freebies created problems for advanced economies, the conservative and balanced approach of Sitharaman is now appreciated worldwide. Public expenditure, particularly capital investments have been aggressively pursued by her for its multiplier effect on the economy. While the return on Re 1 spent for revenue expenditure is only 45 paise, the same amount spent on infrastructure gets a return of ₹2.45 in the first year and ₹3.14, and ₹3.25 in subsequent years.
Prime Minister Modi summed it up on Wednesday. Inaugurating the Global Investors Meet of Karnataka on Wednesday, PM expressed his confidence in the steady growth of the Indian economy. In the 21st century, from its current position, India has only to move forward. Referring to the sense of global optimism towards India, he said, “These are uncertain times, still most of the nations are convinced about the fundamentals of the Indian Economy.” He is so right.