What Modi needs to do to make the elephant dance before 2019
The Indian economy is often depicted as a tiger. In reality, it is an elephant. It’s huge, the third largest in the world (in PPP terms), and ponderous in its pace. It can defy even the most skilled mahout.
In May 2014, when Narendra Modi took over as prime minister, the 'India story' had gone into a tailspin. The government was paralysed, corruption was deemed to be at an all-time high, and GDP growth had slumped drastically. The huge mandate for Modi brought with it fresh hope and new confidence, buoyed by the promise of maximum governance and minimum government.
For the first 24 months, all was well. India saw steady GDP growth and increasing global interest. Then, its economy, after running at a fast clip of 9.2 per cent growth for the last quarter of 2016, started to run out of breath for the next five quarters, declining to 5.7 per cent in the April-June quarter this year, the lowest in three years. Manufacturing sector growth fell to a five-year low of 1.2 per cent, down from 10.7 per cent a year ago; worse still, as many as 1.5 million jobs were lost in the first four months of the year.
With China recording a growth of 6.9 per cent for the first two quarters of this year, not only did India lose its grand claim of being the world’s fastest growing economy but also had the greatest dip in consumer confidence in the first half of 2017 according to a survey of 18 Asian countries.
This should worry a government elected on the mandate of development. Now the debate is about how long the downturn will continue, and whether the economy has bottomed out. The prognosis of most experts seems to be "weak in the short-term and strong in the long-term".
No doubt the Modi government has been on steroids in reforming the economy - the drive against black money culminating in demonetisation, the Bankruptcy Code, the Benami Act, RERA or the Real Estate (Regulation and Development) Act, and finally GST.
The scale and scope of these reforms is unprecedented. The withdrawal of 86 per cent of the nation’s currency at a moment’s notice and the introduction of a unified tax across 30 states/ UTs, with four slabs (additional 3 per cent for gold), would send shockwaves through any economy.
Not surprisingly, India is still experiencing the tremors. Demonetisation and GST have dealt a seeming body blow to manufacturing and the Make in India plan. The once booming services sector, with high potential to absorb labour, has taken a hit too. GST, while it may be improving indirect and direct tax compliance, has disrupted supply. RERA, along with demonetisation, has severely depressed the real estate sector and slowed job creation. These fundamental reforms are beneficial for the long-term health of the economy, but need to be followed up by other measures to curb black money.
India is well described by analyst Neelkanth Mishra as a house under renovation and we have to suffer the discomfort of consequent disruption.
The cover story, by deputy editor MG Arun and senior editor Shweta Punj, says the government hopes for a turnaround in the September quarter on the back of a good monsoon and festive demand.
We also asked seven prominent economists for their assessments, projections and what needs to be done. Most seemed cautiously optimistic provided certain actions are taken.
The challenge India faces is monumental. We may laud ourselves for growing at 6 per cent, which is more than many countries, but we should not forget we are still a very poor country. Twenty-two per cent of our population (270 million) is still below the poverty line (BPL). Even with an average annual GDP growth of 8 per cent, it will take two decades to take them and the growing population out of BPL. We need to grow even faster to empower those who have just graduated from BPL but are stuck in a low-income trap.
If Modi wants the elephant to dance before 2019, he needs to act swiftly and decisively. A supine elephant will be almost impossible to move.
(India Today Editor-in-Chief's note for cover story, How to Put the Economy Back on Its Feet; September 18, 2017.)