The rights and the wrongs about Narendra Modi's economic policies

Inflation is below 3 per cent, forex reserves have been built up and fiscal deficit has been brought under control in five years of his leadership

The government is set to announce a scheme which will give Rs 2,000 to 10 million farmers. This is reminiscent of the Congress style of economic governance of free lunches for all.

But given that farmers think he has ‘done’ nothing for them and given the proximity of the general election, this is not surprising. The BJP has its back to the wall and Mr Modi is waging a lone battle for it. Populism is the sole remaining cartridge in his gun.

Most people will, however, concede that Narendra Modi has changed the rules of the game as far as economic policy is concerned. After Indira Gandhi, between 1971 and 1991, the attention of all governments was mostly focused on equity rather than efficiency because the poor had the largest number of votes.

This style of running the economy made all three factors of production -- land, labour and capital -- the costliest in the world. The result has been that fresh investment on the scale needed has not happened.

When he took over as prime minister, Mr Modi understood this in an intuitive sort of way. But because labour reform and land reform can lose you millions of votes, the ought to fix the capital problem first.

True, he did try to reform both land acquisition laws and labour laws. But severe political opposition made him abandon the attempt. Rahul Gandhi’s ‘suit-boot ki sarkar’ jibe touched a raw nerve because Mr Modi firmly believes that the BJP lost in 2004 because of the ‘India Shining’ campaign. He took fright.

Quixotic style

But where capital is concerned, in sector after sector, his government has introduced changes that seek to squeeze more out of scarce capital. If these reforms are not tampered with by successor governments – for example the bankruptcy laws – the Indian economy will start using capital far more efficiently than it has since 1972. Then the cost of capital will begin to come down. This will be Mr Modi’s greatest contribution.

But he has also been quite quixotic as  when he demonetised 86 per cent of India’s currency on November 8, 2016. It seems to have served no purpose at all. If anything, it has boomeranged with output and jobs both falling below the potential level. Till date no one known why he did, that too against expert advice. 

His insistence on the introduction of GST before the technological and administrative systems were ready for it made implementation a joke.  His demand that the tax on 62 per cent of the products be kept at zero led to the remaining things being taxed at higher rates also slowed the economy down.

In his approach to farmers he made the very error which Atal Behari Vajpayee had made in not increasing agricultural support prices for four long years. In 2004 the farmers turned against Mr Vajpayee. Now they have turned against Mr Modi. Hence his recent attempts to mollify them.

The ban on cattle slaughter has also annoyed farmers. The Modi government did not work out the economic angle which is simply that old cows are costly to maintain and become a nuisance to everyone when they are abandoned by farmers who cannot sell them.

The political consequences of this came home to roost in the assembly elections last December in MP, Chattisgarh and Rajasthan where the BJP was voted out.

What Modi got right

But Mr Modi has got one thing absolutely right: the macroeconomic management of the Indian economy. He had inherited a near-crisis in 2014 similar to the 1991 crisis.

But inflation which was near double digits is now below 3 per cent. Forex reserves, which were melting rapidly, have been built up. And the fiscal deficit has been brought under control. You really can’t ask for more.

But this success has entailed a cost -- lower aggregate demand in the with all its negative consequences for industry, agriculture and employment. Those birds are coming home to roost now as the Opposition harps on them. 

In the end, however, whether he gets a second term or not, Mr Modi can take comfort from the fact that the economy is far stronger than it was in 2014.