Growth Brings In Fresh Challenges For The Modi Government

Growth Brings In Fresh Challenges For The Modi Government

by Pratim Ranjan Bose - Nov 1, 2021 07:13 PM +05:30 IST
Growth Brings In Fresh Challenges For The Modi GovernmentEconomic activity picking up.
  • Consistent efforts of the Narendra Modi government to address core issues and bold decision-making during the Covid-19 pandemic have paid off.

    The task ahead is to manage the success and steer the economy to sustainable growth.

After the acute crisis, good times are back in India. The foreign news outlets, which had a negative view about the economy until recently, are now cheering for ‘world-beating growth’. Those who predicted doom after 24 per cent gross domestic product (GDP) contraction in lockdown-hit June 2020 quarter; now grudgingly admit that the country has turned the corner.

Consistent efforts of the Narendra Modi government to address core issues and bold decision-making during the Covid-19 pandemic have paid off. The task ahead is to manage the success and steer the economy to sustainable growth. This is easier said than done as rapid growth brings a new set of challenges and governments in the past were caught unaware of it.

Politics And Growth

P V Narasimha Rao government went out of power when the economy was on a high growth trajectory, after the low (1.05 per cent) of 1991. Atal Bihari Vajpayee made pioneering moves to improve core competence of the economy and pulled growth rates from 3.8 per cent in 2002 to nearly 8 per cent in 2003. Just when things were looking brighter, he lost the election.

Manmohan Singh inherited a booming economy and derailed it in four years. The hype created around coal, telecom, power sectors pulled the rug from under his feet. On the other hand, an unprecedented investment rush, without due legal and social infrastructure, triggered unrest.

India witnessed a million mutinies between 2005 and 2007. Apart from the relocation of Tata Nano from West Bengal, withdrawal of a special economic zone (SEZ) proposal by Reliance in Maharashtra and closure of a greenfield aluminium refinery project by Vedanta group in Odisha were some of the low points of the United Progressive Alliance (UPA) era. Many investments promised in mineral-rich states of Odisha, Jharkhand and Chhattisgarh were called off in the face of anti-land acquisition agitation.

The apparent disconnect between economic prosperity and political success is most evident in West Bengal. The status-quoist Jyoti Basu government of Communist Party of India Marxist or CPI(M) was in power for 24 years. By the time Buddhadeb Bhattacharjee of CPI(M) wanted to change, he was out. Mamata Banerjee’s Trinamool Congress didn’t push the industrialisation agenda and is in power for the third term.

The Narendra Modi government has managed these contradictions too well so far. No government could take an as unpleasant decision as removing subsidies on diesel and win elections with a landslide majority as well. Crafty decision-making and right political messaging convinced the less privileged that the government stands by them. Low inflation in the past helped the cause.

Politically, Bharatiya Janata Party (BJP) looks unstoppable at this juncture. Barring its ‘failure’ to assume power in West Bengal, everything went as per the party’s expectations over the last year. A massive inner-party reorganisation — that included retiring some state chief ministers and senior central ministers and elevating new faces — went on smoothly.

Of the coming state elections, Uttar Pradesh is the critical one. Any upset here may invite political uncertainty. But as things stand today, the balance seems to be tilted in BJP’s favour. The outcome in Punjab has a bearing on national security and BJP leadership is clearly at work to prevent such situations.

Political Stability And Reforms

Having said that, there are concerns. Roughly 38 per cent of the Punjab population is Hindus. Many of them voted for Congress in the past, as BJP allied with Akali Dal. BJP may now ally with Amarinder Singh, the erstwhile face of the Punjab Congress. It is to be seen how the equation works but if Singh is to be believed, the farm sector reforms might be a casualty (The Print, October 20).

Defined by three sets of laws passed in 2020, the reforms were set to revolutionise Indian agriculture and agri-commodity marketing. It promised to break open the stranglehold of rich farmers on agriculture subsidies and offer a level-playing field to small farmers. Additionally, it would have brought in fresh investments in agri-logistics and marketing.

The reforms were considered for a couple of decades but none dared to implement it for fear of unrest in Punjab and Haryana who perfected the art of producing rice and wheat at abnormally high cost and forcing the government to buy them at an exorbitant premium over the market price. Most of these uneconomic purchases are wasted. Additionally, the high stock position put pressure on market price, to the perils of the small farmers.

Sustainable growth depends on a sustained pace of reforms. Unfortunately, in India, most reform decisions were so far taken when the economy was in trouble.

If farm sector reforms are delayed in good times, power sector distribution reforms will be delayed too, because rich farmers also enjoy free power. AAP (Aam Aadmi Party) and Congress are proposing to continue with such largesse.

The recent trend of political parties promising free power to voters is concerning for the economy. It had its origin in the dramatic improvement in availability of electricity in the rural areas over the last decade and the success of AAP in Delhi. If not checked, it might cause serious damage to the energy sector fundamentals and impact the growth process.

The relation between the two was evident in the recent controversy over coal stock at power stations and the high price of electricity in the open market. Weak fundamentals of power generation business forced them to cut corners by stocking less coal for the monsoon season. Authorities kept their eyes closed. Unforeseen demand brought it out in the open.

Modi Is The Biggest Bet

Problems are part of any economy in the world. Even the single-party rule China is fumbling with power cuts, drop in industrial output and low growths over the last couple of months. From that perspective, the biggest bet for sustainable growth is Prime Minister Modi’s strong determination to build Atmanirbhar Bharat.

Having said that, the government must not allow hyping up of opportunities, as UPA did, leading to loss of confidence of the investor community and years of low growth. It must not be afraid to do course corrections either. Taking decisions is a primary responsibility of the government. The Modi government took decisions and some of them can go wrong. It is time to correct them.

In this context, the recent decision of the government to remove restrictions on coal imports is a welcome step. India has a supply gap of domestic coal. The government has already denationalised the sector, which will help improve supplies over the medium and long term. Any short-term approach will be counter-productive.

Firstly, given its organisational and ownership structure, Coal India has its limits, which couldn’t be breached even by a Presidential order in 2013. Secondly, any effort for a rapid increase in domestic production may trigger social unrest over land acquisition and environmental mitigation, which may impact the overall investment outlook in the country.

From this perspective, the proposal to build a buffer stock of imported fuel is a good idea and should be implemented in a time-bound manner. But, repeated news stories, quoting Coal Ministry sources, on the export opportunity of Indian coal is discomforting. The Coal Ministry didn’t make any such official claim or denied it either.

Retail Oil Price

The Modi government runs on the basic principle of taking care of the poor and less privileged and allowing the middle-class to ride on the market-driven growth opportunities. This is an established tenet of the capitalist reforms process and cannot be contested. But the problem is, the government itself is not following the logic of the market and for too long.

BJP came to power when WTI crude prices were ruling above $100 barrel. In the next few months, crude prices became soft. Till December 2020, crude was mostly around or below $50 a barrel. During the period, the government brought much petrol-diesel price parity, bringing an end to misdirected subsidies.

However, consumers didn’t enjoy the full benefit of the soft crude prices as the government increased taxes. There was logic in it. Firstly, both the Centre and states enjoyed higher revenue, which is essential for the economy. The Centre got an extra cushion to mitigate the estimated revenue shortfall of states (till June 2022) following GST roll-out in 2017. Last but not the least, it helped maintain fiscal balance.

Crude is witnessing price support in 2021 and is now ruling at around $80 a barrel; retail fuel prices have touched Rs 110 a litre on average. But governments either at the Centre or the states are not reducing the tax load to ensure fiscal balance. On the brighter side, despite Delta-wave April-September 2021 tax collections were higher than budgetary estimates.

The high retail price of fuel doesn’t necessarily translate into inflation as consumers take to energy-efficient means. As in September, retail inflation was five-month low at 4.35 per cent, which must be giving confidence to the government to continue with the prevailing arrangement.

But, the high retail oil price is surely impacting the middle-class sentiments and the government must care for it.

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