A short report card

Three successes and two failures of policy in the last five years

As the National Democratic Alliance’s (NDA’s) second successive term in office comes to an end — with every expectation that re-election is on the horizon — it is worth considering how it has dealt with five relatively tumultuous years, at least in terms of economic management.
 

This column’s opinion of the first five years of the NDA government was not entirely positive. It had two major reform successes: The introduction of the Insolvency and Bankruptcy Code, and the formal institution of an inflation-targeting regime at the Reserve Bank of India. What should have been the third, the rollout of the goods and services tax, or GST, was marred by an excessively compromised final version and sequential cuts in the rate that meant it was likely not revenue neutral.

Enormous advantages — such as a sharp fall in global energy prices — were largely squandered; programmes like “Make in India” turned out sadly to be more about hype to woo investors than substantial, on-the-ground reform. And there was, of course, the enormous self-inflicted wound that was demonetisation.
 

The global climate in the next five years was not so positive. While the economy — particularly the informal sector — was still struggling with the after-effects of the GST introduction and demonetisation, the pandemic hit. The broad trend towards fiscal consolidation in New Delhi since 2013 could naturally not survive this once-in-a-century event. Yet the first major achievement of the second NDA administration was unquestionably the macro-economic management of this event. The Union finance ministry chose to use a system of guarantees and targeted welfare rather than opening the floodgates of fiscal spending for a more generalised boost to demand. This turned out to be a wise choice. The deficit did not expand as much as it could have. While the pace of consolidation since could and should have been faster, the deficit’s downward direction is clear and credible.
 

The absence of a generalised boost to demand — along with the effects of central bank inflation-targeting — meant that India has largely been spared the bouts of high inflation that have affected some other large economies, both developing and developed. The political priority given to inflation management even through fiscal policy is visible. It has, on occasion, led to problematic choices — such as export restrictions of one sort or another on various agricultural goods such as rice and onions — but overall, the careful management of inflation has to be presented as a positive.
 

To these two achievements — expenditure management and inflation management — we can add a third. The government’s direct focus on many frontier sectors — from semiconductors to renewable energy to space — has energised investor interest in these areas. Some of this is borrowed wisdom from the West and China, of course. The return of industrial policy and “picking winners” among sectors is not unique to India. This approach has many problems in general. The production-linked incentive, or PLI, is certainly a worrying expansion of government into the risk-taking and choices of the private sector. But the broader political decision to give special attention to these sectors, in the context of climate change and economic security, is eminently defensible.
 

A more arguable achievement is the continuing effort to build infrastructure. Public expenditure on physical infrastructure was doubled in successive Union Budgets, even as overall resources were strained. The degree to which this money was well spent cannot yet be judged. It seems certain that highways, for example, have improved. But there is also good reason to wonder if improving the actual performance of assets like the Indian Railways took a back seat to video-friendly developments like the Vande Bharat trains. If it turns out eventually that multi-modal connections have not been built, or “soft” infrastructure like supervisory capacity at ports continues to operate as a bottleneck, then it may turn out that the returns to this spending have not been adequate. Efforts to bring in global capital to assist in this build-out have been made, with some success. But these efforts could have been far more effective if more intelligent financial structures were created to enable the entry of long-term finance.
 

So with these achievements — three unquestionable, one more doubtful — under its belt, can we give this government a passing grade? I am not so sure. Two giant questions remain unanswered. The first is where momentum for broad-based growth will come from. And the second is about job and employment growth.
 

The last quarter’s growth, of over eight per cent, is attributable to some one-time statistical phenomena. As Shankar Acharya pointed out recently on these pages, India needs to grow at least eight per cent quarter after quarter, year after year, for 25 years to become a high-income economy. This has been achieved by several countries in the past. But in each case, there were identifiable sources for this growth — expansion of the workforce by including women, increases in labour-intensive export, and rapid foreign investment-led industrialisation. India has none of these. It seems to be depending mainly at this point on domestic demand-led growth. Yet consumer demand is simply not reliable. Nor is it broad-based. And, finally, no country has grown to wealth simply by using domestic demand.
 

The second, linked, question is about employment. Demand is not broad-based because the number of decent jobs and thus secure wages and wealth growth do not seem to be increasing as much as they should. We can argue at length about what the data about employment says. The government has been happy to use various estimates from private-sector agencies when they suggest employment growth in the millions; and has been as happy to criticise such agencies when their surveys show jobs or wages are relatively stagnant. But the broader failure to create formal employment across the nation is undeniable. The government has not paid a political price for this. But that does not mean that this is a sustainable system over time. India has a few decades to utilise its demographic bulge effectively. In parts of the country, demographic trends have already turned adverse. Countries have to grow rich before they grow old. And they will grow rich only if their definitive generation of young people — the one we in India have now — are given opportunities to be productive and stable members of the workforce. This should have been the major task of the NDA government across its two terms. But it is hard to say it has accomplished this effectively, if at all.

The writer is director, Centre for the Economy and Growth, Observer Research Foundation, New Delhi