Is India’s Economy Under Modi Stable, Or Are The ‘Bure Din’ Here?

Posted by Sumit kumar in Business and Economy, Politics
May 31, 2017

The Modi government has now officially completed three years at the helm.With the massive mandate which it won in 2014, it was imperative that it fared well in order to secure its place in the minds of the voters. It came riding on the promise of acche din (good days), promising to create an accountable, honest government that would give priority to good governance.

Of all the sectors and departments that the government has sought to reform, its performance in reforming the Indian economy should be given importance mainly because of its flexible, elastic nature and also due to its impact on people, especially the poor.

From the Jan Dhan Yojana (that sought to improve financial inclusion) to the latest Goods And Services Tax (GST) reforms, which is supposed to roll out from July 1, 2017 – a slew of measures have been taken to bolster the pillars of India’s economy. As a result, fiscal deficit and inflation levels are in control and foreign direct investment (FDI) levels are soaring. The Sensex is also faring well (having crossed the 31000 mark for the first time, recently) and the menace of the ‘parallel economy’ is being targeted in an assiduous manner. This year’s budget has also been advanced, which proposes to provide the funds to the relevant ministries in time, thereby bypassing the need for a Vote On Account.

Financial Inclusion

Around 26 crore accounts have been opened under the Jan Dhan Yojana in the past three years, which reflects the massive success of the programme. Moreover, insurance schemes like the Atal Pension Yojana (and others) have helped the poor and unorganised to safeguard themselves against any kind of unforeseen circumstances.

For people to avail the benefits of insurance schemes and subsidies, it was imperative that the people had financial accounts. The Jan Dhan accounts helped the people in this regard. To some, merely opening up bank accounts may seem to be futile. However, the fact is that the opening of such accounts has something to do with the rationale of economic equality stated by the Directive Principles of State Policy.

Jan Dhan Yojana launch in Ghaziabad
Jan Dhan Yojana – a necessary step for economic equality in India (Photo by Sakib Ali/Hindustan Times via Getty Images)

Banks which were previously inaccessible to the poor are now accessible to them. This is a indeed a giant leap towards furthering social and economic equality. The money that some of these people used to hoard with themselves, due to callous bank authorities, can now be safely stored in their Jan Dhan accounts. Furthermore, women who previously couldn’t access their own savings due to their husbands (the alcoholic ones, for instance), can now keep their savings in these accounts for necessities and for their children’s future. A higher level of savings in the system also truncates the ‘informality’ in the economy, allows banks to lend more funds and therefore benefits the entire economy as a whole.

Essentially, focus on financial inclusion is a win-win for everyone. Given the importance of micro, small and medium enterprises (MSMEs) in the Indian economy (accounting for around 45% of the manufacturing output and 40% of exports), credit opportunities for them have been bolstered by the launch of the MUDRA bank on April 8, 2015. Other than the burgeoning share in exports, MSMEs have also been extolled in the present scenario, where jobs are alleged to be in danger because of growing automation. Since this is a labour-intensive sector, it has the ability to absorb the growing labour force in India.

Black Money – The Enemy Within

In the past three years, the government has taken various steps in confronting the parallel economy. Demonetisation, the Benami Property Act, the Real Estate Act, the roll-out of the Goods And Services Tax and the emphasis on a digital economy are the bricks upon which the edifice of an honest economy is being built.

Given the massive amount of corruption that exists in India,  implicitly aided by many political people and babus, it is obvious that fighting this will require more consistence, determination, co-ordination and support from the state governments. The Central Bureau of Investigation (CBI) and other agencies looking into cases of corruption must be given effective autonomy so as to free them from political interference.

Corruption is one of the very fundamental problems which impacts the poor the most. So,reigning in corruption and black money will not only benefit the whole economy, but will also help in moving towards economic equality.

Real Estate

Real estate investors and buyers are expectant because of the real estate regulations that recently came into force. These regulations will spur investments in the sector, provide accountability for the developers and bring in transparency. Most importantly, they will help in reducing the time and cost of completing the projects.

A good investment opportunity in the real estate could also mean a reduction of investments in physical resources like gold which puts a heavy burden on the current account deficit of India. On the other hand, the Benami Transactions (Prohibition) Act, 2016, will help in freeing large tracts of land that have been held by corrupt people through fictitious names. Therefore, prices of real estate are expected to go down, resulting in an increase in ‘consumption levels’. Furthermore, GST  reforms are also expected to benefit the real estate sector, too.

The NPA Conundrum – The Economic Ebola

The problem of non-performing assets (NPAs) continue to haunt the economy, particularly the banking sector. The NPAs decline the credit growth in the economy, reduces the faith of investors, declines productivity and output levels, erodes the bank’s funds and makes bank more cautious while lending to the corporate sector.

Time and again, steps have been taken by both the Reserve Bank of India (RBI) and central government. Of these, the most recent one was the ordinance to amend the Banking Regulation Act, 1949, which empowers the RBI to deal with stressed assets, more effectively. But, since the problem still continues to persist, some out-of-the-box solution is clearly needed, especially given the fact that the date for compliance to Basel III regulations is not very far.

Demonetisation – Cure Or Curse

No one in India can forget the address by the Prime Minister on November 8, 2016 in which he announced the demonetisation of ₹500 and ₹1000 notes. Some say that it was an insensate step, some say it was unplanned, while others say it was a political statement.

Whatever be the case, the fact is that it did shock the Indian economy – something which was admitted by the 2016-17 Economic Survey in the chapter on demonetisation. Seasonal workers, daily-wage labourers, rickshaw wallahs, street vendors and workers from the unorganised sector had to bear the brunt of this, because these sectors were heavily, if not completely, cash-dependent.

People stand in a queue outside a bank, post demonetisation
Is this a premonition of things to come, or is the storm over? (Photo by Sameer Sehgal/Hindustan Times via Getty Images)

The government had outlined four motives behind this sudden measure – fighting black money, corruption, stopping terror-financing and counterfeiting. Perhaps terror-financing and counterfeiting did take a hit – but, frankly speaking, the main motive of fighting black money could not be addressed. This was partly because of the ineptness of the government, and partly because of the tactics employed by shrewd people who deposited money through Jan Dhan accounts, co-operative banks and so on. Reportedly, 97% of the outlawed money in the form of ₹500 and ₹1000 denominations was reabsorbed in the system through deposits.

Foreign Direct Investments

Besides bringing economic and technological benefits, FDIs also reflect the ‘macroeconomic condition’ of a country as a whole.

In this regard, it is indisputable that the government has done pretty well. Relaxing FDI norms for many sectors has helped to attract lots of investments. Moreover, the Foreign Investment Proposal Board has been scrapped and its functions have been transferred to the relevant ministries.

The Prime Minister has personally met with business delegations from many countries asking them to invest in India. After all, in a ‘resource-limited’ country, it is indeed essential to attract a burgeoning share of investments to spur the gross domestic product (GDP) level and improve the job scenario.


Image Source: Sonu Mehta/Hindustan Times via Getty Images