Modinomics
Economics is the least understood subject. To understand the economics of Narendra Modi is even more difficult. What Modi has undertaken, is something which has baffled the most astute economists. If successful, the Modinomics shall be a new chapter, which shall be added in the text books of economics. But that will come later in this chapter. If theories and history bore you, skip to the last headings of this chapter.
Inherited economy
In 2014 when Modi won, western media was sceptical of any progress. The Washington Post wrote an opinion piece that carried this headline – "Will Narendra Modi'sera be marked by an economic boom or derailed by nationalism?" It asked "whether Mr. Modi will be the Deng Xiaopeng of India or its Vladimir Putin—a leader whose economic ambitions are derailed by nationalism and authoritarian temptations."
In 2014 the economy of India, and it was no secret, was moribund if not bust. A New York Times editorial titled 'With Narendra Modi, a Change in India', said Modi and his BJP's "landslide victory" reflects a changing India which is "more willing to extend governance to those outside the established elite". Modi ran on his expansive promises to revive India's "moribund economy, end corruption, create millions of jobs and lift millions of people out of poverty…..People posed unwavering confidence in his leadership. He had to meet their expectations by taking radical measures to ensure political stability, economic growth and transparency in governance i.e. the three promises he made to the people during his hectic whirlwind campaign throughout the length and breadth of the country."
So how did Modi fare on economics? Let me first dwell on the subject of economics itself.
What is economics?
Economics is the only social science which is not clear about itself. For example Sociology is about society and anthropology is about past human civilisations. What is economics? Is it about economy? Yes it was. Adam Smith (in 1776) called it a study of "Wealth of Nations" but then Alfred Marshall (in 1890) replaced it with "Study of Consumer Behaviour" by introducing the concept of the ideas of supply and demand, marginal utility, and costs of production.
In last century before second world war, the world was suffering from great depression, there arose a new theory by John Maynard Keynes. According to which economics was a science of "Growth of Economy". In past few decades, doubts have emerged about the growth theory as all countries in the West are either stuck with stagnant economies or very slow growth. Hence the world is awaiting for a theory of "Well Being" in which human being may not suffer due to non-growth of economy.
The upshot of above discussion is that there is no perfect method or science to handle or to boost the economy. But there is one simple logic. If every person or most of the persons in an economy is/are doing well, the economy is also doing well. If some persons are doing very well and most people are not able to make their ends meet then economy is not well. How was the economy of India before 2014?
Mohanomics
10 years of Manmohan Government, economy was growing over 6 percent but actually a very small number of people benefitted therefrom. Currency of a country is like share of a company. Fall in face value of currency is like fall in reputation of economy of country. Under Manmohan Rupee fell to 70 from 37 per dollar. Why it would happen if economy is growing and all is well?
Let's assume that a country hasten persons. Some hunt and gather and one barber, one tanner, one cook and so on. Hunter hunts an animal and give it to cook and gets food. Cook engage tanner and for food gets animals skin tanned. Cobbler takes skin and makes shoes and in exchange get extra skin and food. Imagine the rest. This is an economy at work in a bartering society, in inter dependence. Now replace it with money.
Hunter exchanges animal with money. He goes to cook and spends money. Cook goes to barber and spends money. One rupee earned by hunter rotates in society for ten times makes it a GDP of 10 rupee. If rotation is twice, it is 20 rupee. But if just two persons are dealing among them, rotation is 20 times the GDP is 20 but 8 persons out of 10 are not affected by it and they earn nothing.
India under Manmohan worked just like it. Most of the growth was on paper. Price of assets like properties and bullion were rising but income of common people was not rising. New jobs were not created. Companies like Ola and Uber were litigating to do business in India. Others waiting out side. Complete status quo on business policy.
Another problem was import without revenue. The industry in India has to pay tax on sales (VAT) or on production (Excise) or both. Now it is replaced with GST.
Manmohan permitted tax free import of telecommunication equipments from China causing loss to Government from earning import duty from 10 years. Similar low tax import of steel caused Indian steel industry to become unviable to the brink of bankruptcy. Remember Bhushan Steel was first company to be sold under new law of Bankruptcy.
On top of these revenue losses, farmer loan waiver in 2009 and introduction of rural job guarantee (MNREGA) etc. schemes also drained the economy. Both schemes failed as the targeted people, the poor did not benefit. Aadhar was no implemented and mony did not reach the poor. In MNRGA middle men offered half money to people without doing any work. Negligible number of public assets were created under MNRGA.
Prior to this crises, when ever media advisercccviiSanjay Baru in Accidental Prime Minister ibid. of Manmohan went to meet the Prime Minister he found the PM and his wife are busy reading books? So the modern Nero uses book instead of flute? Did Manmohan do something to rectify it?
India is second largest importer of crude oil. In a vast country like India, need of fuel can not be curtailed as it will hamper peoples movement and would shrink the economy. So how Manmohan dealt with it. Two tricks did the job. Oil bonds and Iran.
Iran was under sanctions hence it could not be paid in dollars. So Manmohan imported oil without paying. Payment of imports made from Iran became due in 2014 to Iran when Obama entered in a deal with Iran called Joint Comprehensive Plan of Action JCPA. Second was to issue oil bonds. The oil distribution companies were told to sell at lower pice in lieu of special bonds to be repayable in future. In other words another debt to be paid by future Government.
How Modi repaid these liabilities that too without raising any additional revenue by new tax? It was sheer luck. Oil prices hit the lowest and Modi simply chose not to reduce retail prices. We the people, who enjoyed subsidy under Manmohan were now paying it back.
As regards the problems of loans (NPA) which public sector banks had released it was explained by Finance Minister in his speechcccviiiFinance Minister Piyush Goyal in his budget speech delivered in Parliament on Feb. 1, 2019. as under:
" ….The period of 2008-14 will be remembered as a period of aggressive credit growth and, as per RBI, the primary reason for spurt in non-performing loans and stressed assets. Outstanding loans of public sector banks ballooned from 18 lakh crore to 52 lakh crore during this period. Many projects were started that could either not be completed or had low capacity utilisation resulting in their inability to pay back their loans. There were high stressed and non-performing assets (NPAs) amounting to 5.4 lakh crore in 2014. Many more were hidden through restructuring or otherwise which were discovered during Asset Quality Reviews and inspections carried out since 2015.
12. We put a stop to such questionable practices and stopped the culture of "phone banking". The 4Rs approach of recognition, resolution, re-capitalisation and reforms has been followed. A number of measures have been implemented to ensure Clean Banking. Through a transparent and accountable process, we recognised these NPAs. The Insolvency and Bankruptcy Code has institutionalised a resolution-friendly mechanism, which is helping in recovery of non-performing loans while preserving the underlying businesses and jobs. Earlier, only small businessmen used to be under pressure of repayment of loans while in the case of big businessmen, it was the headache of banks. But now, defaulting managements are either paying or exiting their businesses. An amount of close to 3 lakh crore has already been recovered in favour of banks and creditors. To restore the health of public sector banks, recapitalisation has been done with an investment of 2.6 lakh crore. Amalgamation of banks has also been done to reap the benefits of economies of scale, improved access to capital and to cover a larger geographical spread."
Since the Government has yet not issued white paper on economy, it appears that the state of economy in 2014 was worse than what is projected and India has not yet crossed the bridge.
Fiscal deficit
If there is a single thing, the economist do well, it is to give obscure names. The have renamed loss as 'fiscal deficit'. Interesting part is that all economies are now run on losses. You and me work and earn money every day or every month. At the end of year after meeting all the expenses what ever is left is our saving. It is also the net profit. In case of a Government it will be called 'fiscal surplus'
Governments do the opposite. They 'budget' to spend and almost always overspend. Now the shortfall in the revenue is called 'fiscal deficit'. The term loss is not used. Government print extra currency to cover this loss. This is the position of fiscal deficit of India this year:
"….From the high of almost 6% seven years ago, the fiscal deficit has been brought down to 3.4% in 2018-19 RE. The current account deficit (CAD), against a high of 5.6% six years ago, is likely to be only 2.5% of GDP this year. We contained the fiscal deficit notwithstanding the Finance Commission's recommendations increasing the share of the States from 32% to 42% in central taxes, which we accepted in the true spirit of cooperative federalism, thereby transferring significantly higher amounts to the States…."cccixFinance Minister's Budget Speech 2019 ibid.
Thus the Government has reigned the fiscal deficit with in 3.4% of GDP in the year ending March 2019. It may be added that the practice of running Governments with fiscal deficits, though followed by most countries is no more recommended and many economists oppose it.
Inflation
Price rise is euphemiously called as inflation in economics. Inflation is an indirect taxation. Inflation is also caused by printing of money to cover fiscal deficit. Minister of Finance in his speech delivered in Parliament on Feb. 1, 2019 explained the achievement of his Government:
"….Inflation is a hidden and unfair tax on the poor and the middle class. The average rate of inflation during 2009-2014 was a backbreaking 10.1%. The then Prime Minister admitted as much when he said, "We have also not been as successful in controlling persistent inflation as we would have wished. This is primarily because food inflation has increased." In contrast, our Govt. broke the back of back-breaking inflation. We brought down average inflation to 4.6% which is lower than the inflation during the tenure of any other Government. In fact inflation in December 2018 was down to 2.19% only. If we had not controlled inflation, our families would have been spending around 35-40% more today on basic necessities such as food, travel, consumer durables, housing etc..."
Actually, the performance of the government on price front is felt by every one. For the first time prices actually come down. It has never happened before. Neither under Vajpayee Government or in 1977 Janata Government, which also contained rampant inflation. Those Governments were able to stabilise the prices. Modi Government actually rolled back the price of many food items e.g. Dal or Lentils selling at Rs. 200 per Kg are now down toRs. 60-70 per Kg.
Black money
Black Money Law, the Fugitive Criminal Offenders Act, and Demonetisation, have brought undisclosed income of about ` 1,30,000 crore to tax, led to seizure and attachment of assets worth approximately 50,000 crore, and compelled holders of large cash currency to disclose their source of earnings. During this period, Benami assets worth 6,900 crore and foreign assets worth 1,600 crore were attached. 3,38,000 shell companies de-registered, and their directors disqualified.cccxFinance Minister's Budget Speech 2019 ibid.
Direct Tax
There was a growth of 18% in direct tax collection in 2017-18 and increase in tax base by 1.06 crore more people filing income tax returns for the first time in FY 2017-18. The number of returns filed have thus increased from 3.79 crore in 2014 to 6.85 crore in 2018 showing 80% growth in tax base. The tax collections increased significantly from 6.38 Lakh crore in 2013-14 to almost 12 lakh crore this year.
Direct tax growth is a healthy sign that economy is being formalised. In a tax compliant society, there has to be larger number of tax payers. Growth in the number of tax payers has direct relation with growth of economy.
The effect of these measures on the ground is that now people are hesitant to flaunt wad of notes or 'gaddi' as we call it, in public places. Payment by card is now respectable and cash is looked down upon in many places. At many Government vending counters, cash has been completely prohibited, even though it is illegal to do so. But again, no question raised by any one. Why?
GST
The Goods and Services Tax (GST) is undoubtedly the biggest taxation reform undertaken in India since Independence. Earlier Seventeen different taxes were levied by the Central and State/UT Governments with cascading effect of tax on the tax, were consolidated into one GST.
India has now become a common market. GST has resulted in increased tax base, higher collections and ease of trade.
One major advantage of GST is improvement of logistics. Earlier, there was a local levy called Octroi which was levied at every city. Introduced at least as far back as 300 BC, it was tax on movement of goods into city limits. A goods carrier had to halt out side every city to pay this tax. Now it has been abolished.
The speed of movement of goods have increased by almost doubled. It means if it used to take 10 days in any journey, now it shall travel same distance in 5 days. The difference can be felt at ground level too. Buy anything online and notice the difference. Recently an order placed online, on Saturday night, was delivered from Gujarat to New Delhi on Tuesday morning i.e. just two working days.
The overall statistics of upward trajectory of economy of India under Modi can be read here.
Last budget of 2019
As expected, the Government delivered a populist budget. The main features are in bold.
1. Within 2 years, Tax assessment will be done electronically
2. IT returns processing in just 24 hours
3. Minimum 14% revenue of GST to states by Central Govt.
4. Custom duty abolished from 36 Capital Goods
5. Recommendations to GST council for reducing GST rates for home buyers
6. Full Tax rebate upto 5 lakh annual income after all deductions.
7. Standard deduction has increase from 40000 to 50000
8. Exempt on tax on second self-occupied house
9. Ceiling Limit of TDS u/s 194A has increased from 10000 to 40000
10. Ceiling Limit of TDS u/s 194I has increased from 180000 to 240000
11. Capital tax Benefit u/s 54 has increased from investment in one residential house to two residential houses.
12. Benefit u/s 80IB has increased to one more year i.e. 2020
13. Benefit has given to unsold inventory has increased to one year to two years.
Other Areas
14. State share has increased to 42%
15. PCA restriction has abolished from 3 major banks
16. 2 lakhs seats will be increased for the EWS reservation of 10%
17. 60000 crores for manrega
18. Rs. 1.7 Lakh crore fund to ensure food for all
19. 22nd All India Institute of Medical Sciences (AIIMS) to be opened in Haryana
20. Approval has to be given to PM Kisan Yojana
21. Rs. 6000 per annum has to be given to every farmer having upto 2 hectare (5 Acre) land. Applicable from Sept 2018. Amount will be transferred in 3 installments every year.
22. National Kamdhenu Ayog for cows and cattle protection. Rs. 750 crores for National Gokul Mission
23. 2% interest subvention for farmers pursuing animal husbandry and also create separate department for fisheries.
24. 2% interest subvention for farmers affected by natural calamities and additional 3% interest subvention for timely payment.
25. Tax free Gratuity limit increase to 20 Lakhs from 10 Lakhs
26. Bonus will be applicable for workers earning 21000 monthly
27. The scheme, called Pradhan Mantri Shram Yogi Mandhan, will provide assured monthly pension of Rs. 3,000 after 60 years of age. The contribution of Rs. 100 per month for workers in unorganized sector, will be matched equally by Central Govt.
28. Distribution of 6 crores free LPG connections under Ujjawala scheme
29. 2% interest relief for MSME GST registered person
30. 26 weeks of Maternity Leaves to empower the women
31. More than 3 Lakhs crores for defence
32. One lakh digital villages in next 5 years
33. Single window for approval of India film makers.
Social Security for all
After the budget of 2019, India has joined the club of those advanced nations in which every citizen has some social security. There is life insurance for Rs. 340 per year, Accident insurance for Rs. 12 per year, retirement pension subscription starts at about 250 per month to get pension of Rs. 5000/- at the age of 60 onwards. For those earning less than 21000 per month, KarmYogi pension subscription of Rs. 50 per month will give pension of Rs. 3000 per month at the age of 60 years.
Ayushman Bharat ensures free medical treatment expenses upto 5 lac a year for the population of 50 crore i.e. equal to entire Europe. Can India afford all this? If it can, how it is a poor country?
Modinomics
The economic policy of Modi was called 'Modinomics' during the presentation made about Narendra Modi at Seoul, South Korea. He was awarded Seoul Peace Prize 2018 for his "contribution to international cooperation and fostering global economic growth." So what is this Modinomics?
Every "Advanced Economy" in the world had gone through a similar economic cycle. Recently China also underwent a similar cycle. This cycle entails moving away from agrarian economy and shifting farm labour to industries. This required massive investment in manufacturing industries. After the economy attained momentum, the salaries rose and technical know how increased and the economy switched to higher trajectory.
This is where the India is already on a different trajectory, even before 2014. India is a net exporter of highly skilled, skilled as well as unskilled labour. Half of foreign exchange earned by India is through remittence.
While India has a large number of highly skilled work force, it also has a large number of unskilled labour which for whom a skilled development program has been undertaken.
Here is the modinomics which comes into play. The Prime Minister Awas Yojna is a program to provide housing to all the population of India by 2022. While construction of the housing will provide jobs, the program whill turn the homeless people into a lower middle class economy. That is a transformation. This means, India will skip one step of industrialisation and move straight into welfare mode. The social security which is discussed earlier, will ensure India as a welfare state.
What is the major source of world economy? Out natural response to this question is 'food' but that is not true. Agriculture is just 6% of world's GDP, Industrial products form about 30% of GDP. A whopping 63% of world GDP is from services sector.
China and India accounts for 19.49 and 7.39 percent of total global agricultural output, yet China has to import agricultural products from Africa and USA. World's largest economy United States is at third place in agriculture. Next in line is Brazil and Indonesia.cccxiSee https://www.cia.gov/library/publications/resources/the-world-factbook/fields/209.html However to produce 7.39% of food, India employs about half of it's work force and that has been and is the serious problem of underemployment, which should have been addressed several decades ago.
Weapons including fighter planes, missiles etc. is the foremost source of Industrial production. The next item is medicine, something in which India is already a champian if not the pharmacy of the world. Electronics would form the third. As in 2019, India is already manufacturing about 90% of it's mobile phone requirement, in India. Interesting?
Modi Government is therefore concentrating on weapons. Kalashnikov AK-203 gun factory in Amethi is a step in that direction. Two industrial area have been marked as Defence Corridors. One is in backward area of Bundelkhand in Uttar Pradesh. The other is in Tamil Nadu, near Chennai.cccxiiSee https://economictimes.indiatimes.com/news/defence/niramala-sitharaman-inaugurates-tamil-nadu-defence-industrial-corridor/articleshow/67609598.cms
It means that India will skip the China model of industrialisation as a producer of consumer goods but will focus on core industries along with services. The Startup and Standup programs are aimed at innovating more of such core industries.
The other part of Modinomics is promoting entrepreneurship. Oliver Balch is a British author and freelance writer who specializes in business and international affairs. He quotescccxiiiIndia Rising: Tales from a Changing Nation (2012) Faber and Faber Ltd. an Indian Novel to explain entrepreneurship in India:
"Apparently, sir, you Chinese are far ahead of us [Indians] in every respect, except that you don't have entrepreneurs. And our nation, though it has no drinking water, electricity, sewage system, public transportation, sense of hygiene, discipline, courtesy, or punctuality, does have entrepreneurs.'"cccxivAravind Adiga in The White Tiger
Out of entire GDP of India just 5% is by companies listed in stock exchanges. 10% of GDP is by companies not listed in exchanges. This 15% of GDP gives a mere 9% of employment. So what do the rest of population of India does? They are entrepreneurs.
In diamond processing, India's share is about 16 billion USD out of total market of 24 billion USD. That is whopping 2/3rd of the world GDP. Most of this business is located in Surat (Gujarat). Who does this business? They are all entrepreneurs. The artisans who actually started all this, hardly ever got formal training. They existed inspite of the previous Governments.
The entire diamond industry is carved out, after India gained independence in 1947 without any hlp from Government. Today Bharat Diamond Bourse (BDB) is the world's largest diamond bourse (exchange) and is located in Mumbai, India. Spread over a 20-acre plot, the Complex is home to some 2,500 small and large diamond traders in addition to the Custom House, banks and other service providers who cater to the gems and jewelry trade.
The Gems and Jewellery sector plays a significant role in the Indian economy, contributing around 7 per cent of the country's GDP and 15 per cent to India's total merchandise exports. It also employs over 4.64 million workers and is expected to employ 8.23 million by 2022.
The exponential increase in gem and Jewellery sector in last two decades coincide with the rise in political prospects of Narendra Modi as Chief Minister of Gujarat. May be this knowledge will make it clear why first Bullet Train will start between Ahmedabad to Mumbai in 2022.
The above diamond trade is just a representative of entrepreneurship skill of India which is inherent. The guarantee free loans under "MUDRA" scheme is a step in that direction.
These policies are an acknowledgement that Gandhian economic model of village economy need not be abandoned and that Nehruvian model of big industries had limitations.
But all these policies have just begum. The effect of these shall take at least a decade. The even bigger question is: Will Modinomics work and transform India into an advanced economy? What is the ideological impact of these policies? Does it make BJP, a right wing Hindu nationalist party or what?
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