Economy

NDA Second Innings – Flames of Hope and Ocean of Challenges

The BJP led NDA government has started the second innings with a thumbing majority in the recently concluded Lok Sabha elections in the country. The 2019 election has given a hegemonic victory for BJP with a huge mandate where the party alone has won about 303 seats thereby closing the total of the NDA at 353 seats. At the outside the election victory can be regarded as an extended story of the success of previous NDA government, but inside, especially at the eco-political realm this number throws the light on the grounding ideological firmness coupled with the prospective upsurge of the economy. One should remember that while the former NDA government has risen out of anti-incumbency wave against the then UPA government marred by alleged scams and corruption charges, the credit of NDA’s win of second term must be attributed to the slogans related to national security, nationalistic ideology and prioritised agenda of economic growth.

In fact, this land slide victory comes at a time when the economy passes through a very turbulent phase recording high unemployment percentage and moderately rising economic growth rate. This implies that the expectations of the general public are much higher in comparison with the previous term, irrespective of the magnitude of key issues faced by the economy. Therefore, how far the government would be successful in addressing these fundamental concerns is very crucial amidst the global economic slowdown and internal as well as external national security crisis knocking down the steady growth pattern of India. Before getting into a deeper search on the prospects and expectations from the new government, it is very much imperative to have a strong understanding of the performance of the first innings of NDA government during 2014-19.

Performance of NDA During Innings One – A General Overview

The victory of the BJP led NDA government in 2014 was as impressive as that of 2019 with full of political knockdowns and upsets. Politically, the 2014 election witnessed the rising of popular leaders like Arvind Kejriwal along with his Aam Aadmi Party (AAP) enforcing a new drive of popular democracy and mass participation as well as the downfall of popular figures and stalwarts of Indian politics like Sheila Dikshit and many others. On the other hand, economically, the 2014-2019 term of NDA-1 government was a gambling between the dual goals of economic reforms and maintenance of consistent economic figures and indicators. The first term of the UPA-1 from 2004 to 2009 was highly commendable in terms of its governance especially regarding economic achievements.

It was this success that got reflected in the 2009 elections providing the Congress led UPA a jackpot for a second term. But the UPA-2 lost its confidence among the Indian population mostly because of the alleged cases of corruption and scams. This very own hatred towards corruption and expectation for a change in government stimulated the success of NDA in the next election leading to a shameful defeat of the Congress. Thus, the major challenge the NDA-1 government faced in 2014 was the revival of the Indian economy from falling figures and the widespread pessimism.

Under the NDA-1 regime, the economy had performed much better as compared to the UPA-2 government although it is important to note that 2009-14 was also the period of global economic crisis. Also, in many perspectives, the NDA government couldn’t actually outperform the first UPA government of 2004-2009. Yet, certain figures and statistics are worth considering and to be pondered upon. To begin with, the average GDP growth rate of India during 2014-2019 was an aggregate of 7.5 percent in comparison with the UPA governments’ rates of 6.9 percent (2004-09) and 6.7 percent (2009-14) respectively. It is under the NDA government in the FY 2016-17 that India has emerged as the fastest growing economy in the world with a growth percentage of 8.2 percent, thereby outperforming China, Japan, UK and many other nations (Mishra, 2019). The NDA government have upper hand in terms of capital formation and balancing the current account deficit. The capital formation was pushed up to 7.78 percent in 2015-19 from the 6.3 percent of the 2010-14. The current account deficit was efficiently reduced to -1.4 percent from the high -3.2 percent. But, the export growth was sharply declined from a very high rate of 12.3 percent to 1.9 percent where the negative impact could actually be traced in the export sector (Sabnavis, 2019). One of the prime areas where the Modi government has actually outperformed the two terms of UPA government is in the inflation front. When Narendra Modi sworn in as the Indian Prime Minister, the inflation measured by the CPI (Consumer Price Index) stood at 7.72 percent with food inflation recording a rate of 9.21 percent. The NDA government along with the targeted monetary policy of RBI could successfully bring inflation under control by reducing it to 2.57 percent in the initial phase of FY2019 with the food prices falling by 0.66 percent. Also, under the NDA-1 government, India had evolved to become a business friendly country by pushing itself up to a rank of 77th out of 190 nations in the World Bank’s ‘Ease of Doing Business Index. In a closer analysis, one could see that most of the major economic indicators showcased glorious pictures under the Modi government (Times, 2019).

Challenges Ahead of the Innings Two

Just like the two sides of the coin the past five years of NDA rule was also coloured with pulls and pain. The country witnessed two major economic reforms in terms of demonetisation and introduction of Goods and Services Tax (GST) during these years. As the monetary and fiscal measures gambled with Indian economy, it ended up in much tear and wear especially for the rural and small scale undertakings.

With the demonetisation move announced on 8th November 2016, whereby the legal tender of 1000 and 500 rupee notes were cancelled, the country had witnessed a pseudo form of sluggishness and constrained liquidity in all aspects of economic activities. Though the act came up with the idea of curbing black money, it actually brought lot of disturbances in the normal life of people. Different sectors including the manufacturing, agriculture, real estate, food processing, construction and small-scale industries including the cottage, co-operative were massively challenged and to a great extent collapsed. This in fact created a crisis like situation among various sections of the society including the rural and the marginalised. Demonetisation, although ideated with good intentions, ended up in adding more fuel into the fire of misery and hardships of people. It fell like a meteor on the economy, pulling down the higher growth forecasts already set.

Following this, the implementation of GST was the second blow in a row. Improper planning and wrong contextual analysis crushed the growing economy with poor compliance levels. GST did also cost in terms of huge revenue loss and increase in administrative burden. It shattered many successful production units. In fact, this copied tax system was literally failed or misunderstood in the Indian context at least in the initial years of its introduction by worsening the issues of unemployment, slow demand and constrained production.

It is interesting to see that the first term of Modi government came up when the economy was just recovering from the global recession spill-overs along with falling economic figures. However, one should discount the impact of global sluggishness while categorising the second term of UPA government as not effective, except the allegations of scams and corruptions. Even then the negative impact created in the minds of common people can’t be justified completely. Thus, if the first NDA government had to evolve measures to lift the economy up, the second government’s task is to regain the right pace in a floor of uncertainty. A major area of concern is the indebtedness of the Public Sector Banks (PSBs) and Non-Banking Financial Companies (NBFCs), which is more like a curse on the economy. Despite the reforms and bankruptcy code, the amount spent by the government for recapitalization of these banks is quite a big sum- approximately 2.06 trillion (VITA, 2019). The Interim budget of 2019 didn’t mention anything about funding the PSBs and NBFCs which doesn’t mean that the issue is insignificant. With the crisis unresolved and burden rising, the government must evolve a strong mechanism to efficiently resolve the same.

Another serious challenge is, of course the problem of mounting unemployment. The data released by NSSO reveals the unemployment rate to be the highest in 45 years, there by stressing upon the need for better employment plans and schemes. In a recent study, Dr. Aravind Subramanian, the former Chief Economic Advisor (CEA) argues that the growth rate of India has been overstated since 2011-12 to 2016-17 by raising concern over the methodological aspect of GDP estimation. This is again a pointer towards the crisis awaiting Indian economy from the unemployment front. Given the reality that relying on short term solutions won’t help the economy in ensuring long term stability in terms of macroeconomic fundamentals, it is very tricky to think about a once for all policy shortcut for the government to create adequate amount of jobs.

Followed by these tough situations, the challenges emerged due to the recent removal of Generalised System of Preferences (GSP) by the US invite immediate attention. Since India had been one of the major beneficiaries of trade ties with US this decision of Trump government may have far-reaching impacts. Although India had reacted with retaliatory tariffs on 28 items of imports from US the depth consequences from the measures of both the parties is yet to be fully known. Adding to this, the global trade war between US and China has stimulated a weak positioning of Indian rupee putting additional pressure on India’s foreign trade. The trade policy of the Indian government is more of traditional in nature than reformative. In fact, the economy must be propelled to a system of reciprocity in trade rather than mere liberalisation and extreme protectionism. The very idea itself is not practically viable in Indian context as the changing decisions in Washington and Beijing easily ruin the Indian stocks and shares. No doubt, it is indispensable to maintain good terms with US because of India’s vulnerable position with its neighbours and border issues on the one side and the rising dominance of China in terms of economic growth and occupancy in the East on the other. The end of first innings of NDA government was eventful with rising tensions in the border with Pakistan after the Pulwama terrorists’ attack and the Balakot air-strike in retaliation.

Expectations from the Government

The NDA government, in its second term, has to prove its metal with some of the prominent figures have been stepped out of the cabinet. There are a whole lot of things to be done with regard to meeting the expectations of different sections of the society.

To begin with let us look into the need of faster economic growth. Although the average growth percentage of the previous government during 2014 to 2019 was 7.2 percent, many economists and experts have expressed their concerns on these figures. With the GDP growth touching the new low of 6.2 percent last month followed by the immediate correction in figures from the government and the attempt to collaborate independent Central Statistical Office with NSSO, the stimulus that the government produces is not so agreeable among the economists. Hence, one of the prime areas of concern for the NDA-2 is to maintain a sustainable and high growth rate in terms of real indicators without any fallacies popping out. Though the government had good achievements in the initial years, the statistics of economic performance in 2019 often questions the success of the NDA government where the indicators have fallen to the initial stage of instability. The strong positioning of India as a global player under the Modi-1 regime through diplomatic and strategic meetings and discussions with global leaders and investors should translate into boosting India’s domestic investors’ confidence. The weak private investment and increasing fiscal deficit may threaten the health of the economy thus stressing on the need of short and long term planning. Fiscal consolidation, financial and structural reforms with effective implementation, is very crucial as far as India’s growth prospects are concerned. Further, the problem of unemployment is highly intertwined with the issues of growth. youth population between 15-44 age group (more than 25 percent of the population) along with serious challenges of unemployment, the government is expected to address this effectively at the earliest (Sabnavis, 2019).

A major expectation is regarding the consistency in the general price level. Under NDA-1 the pursuit in this regard was successful to a great extent. The inflation was set at an all-time reasonable level with dropping food inflation and crude oil prices. However the speculation regarding a possible rise in the crude oil prices is a reason to worry in this context. Despite the cheap borrowing due to low inflation and fiscal deficit, the private investment failed to gain momentum. Thus, the need of the hour is to initiate action on the part of the government to attract private investment so as to stimulate productive activities. RBI is an independent regulatory body entrusted with the power to decide upon the monetary policy with inflation targeting and interest rate regulations. Hence RBI and the government liable to work together for better coordination and channelization of monetary and fiscal policies. However, under the NDA government the country has witnessed the rift between RBI and the government, which is the worst so far, in this case. Although the government has appointed the new governor of RBI, the questions over the power of RBI as an autonomous body are yet to be clarified in its full sense. Of course, the introduction of Bankruptcy Code and schemes for dealing with bad debts had positive upshot in the economy but still their more effective implementation and better transparency would be a welcome move.

Another area of concern for large masses is pertaining to India’s foreign policy and relations- both diplomatic and economic. As already mentioned, the year 2018 was a period of global trade wars between US and China thereby questioning the global economic stability followed by the India-US tariff issues. A bold response of India to US with regard to withdrawal of GSP benefits and staggering immigration policies would be a shot in the arm of NDA-2 government. In fact, the Prime Minister Narendra Modi has always been keen to maintain good relationship with foreign countries including our neighbours. In the diplomatic front, though this seems to be satisfactory the case was quite different in the case of economic relations. At this point, the oil price volatility and sanctions on Iran become a necessary mandate. With this, the oil importing countries are on the verge of supply shocks with elements of constrained supply and high prices threatening the demand and supply equilibrium. Trade wars and tariff uncertainty has led to market fluctuations especially with regard to oil prices. Although the oil prices were brilliantly regulated during election, the real picture seemed to be covered behind a veil. This high oil prices and stressed Indian rupee on the one end and the low domestic demand coupled with economic slowdown on the other end can inflict a dent on the future growth prospects of the economy. Even after measures like farm loan wavers and massive subsidization, the agriculture sector looks for more innovative and strategic approach for a sustained revival. The problem of low prices coupled with subsidization and loan wavers will most probably add more strain on the economy rather than help in easing the situation.

The present scenario demands more robust growth in the healthcare sector in order to reach global standards. The wellbeing goal of government will be successful only if the poor and marginalised sections could afford quality healthcare at lower prices (Business Today, 2019).

Concluding Remarks

With the full-fledged Union Budget now released, it is widely expected that the NDA-2 government would rise to the level of good governance with economically stable, religiously contented and politically democratic government. The list of concerns may go long; at times they seem to be contradictory like the decline in GDP and the need of more public spending on the one side and the attempts of reducing fiscal deficit on the other. Needless to say, the border issues with neighbours may have to be clearly designed keeping in mind the socio- political and economic impacts. It is very important for India to tread cautiously to remain in good books, taking into account all these turbulent situations. It is truly possible to dream big. At the same time, it is each tiny step towards the dream makes it materialised. A clearly designed policy, based on this realisation will certainly make NDA-2 government distinct and equipped in regaining the past glory and grandeur of Indian economy, slightly faded in its course of action.

 

– Contributed by:

Dr. Joshy KJ – Associate Professor and Head, Department of Economics, CHRIST (Deemed to be University), Bangalore.

Amalu Joseph – Masters student in Applied Economics, Department of Economics, CHRIST (Deemed to be University), Bangalore.

Picture Credits: Reuters



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