Modi being sworn in 
  • After three years of hits and few misses, the Modi government can feel satisfied with its performance on the economic front. But it would do better to remember— only the paranoid survive.

The National Democratic Alliance (NDA) Government led by Narendra Modi has completed three years in office. That is more than thousand days. Appraisals of the government’s performance are the flavour of the season. In corporate settings, appraisals are relatively more straightforward because there is an agreed set of performance metrics and targets against which appraisal is made. An election manifesto does not necessarily serve as a template to evaluate a government. It is a list of vague promises with no specific time lines. Neither the political party nor the voter takes it seriously.

In any case, appraising employees and appraising a government are two different things. In the case of the latter, one should evaluate them not only for what they did but also for what they did not do. At the same time, one must keep the counterfactual in mind. If not NDA, who would have been in office and what would they have done? That too must be kept in mind. Then, the question is whether one evaluates the government purely on economic criteria or in other aspects too. Even with respect to the economy, what parameters do we choose and why? If one of the parameters is economic growth, to what extent, does the government of the day deserve credit or blame for it? Again, we must remember if they could have made it worse. If governing is not an easy task, evaluating governance seems harder!

Not too many mistakes until…

With all these caveats out of the way, one has to start somewhere. Clearly, where one would like to give a big credit to this government is that they have not committed too many mistakes. That is a big part of governance. Knowing what not to do is more important than knowing what to do. In governance, the latter is harder. In fact, when it comes to economic development, we have a better idea of what not to do.

However, with respect to acts of commission, we have broad brushstrokes for government policy: education, access to finance, a national market, and then we pray.

Until the Uttar Pradesh government announced a loan waiver, the NDA government had not announced a populist scheme even though it had continued with the policies of the previous government on food subsidy (Right to Food) and on employment guarantee, etc. The farm loan waiver was an unfortunate decision not because farmers did not deserve to be helped. They deserved to be aided but it should have been without destroying the culture of repayment and without setting a bad example for those who honour their commitment by repaying. Once norms are destroyed, they are hard to restore. Now, many other States are following in the footsteps of Uttar Pradesh. Further, the government must impose reciprocal obligations on farmers who benefit from loan waivers and it should think in terms of long-term measures including weaning many off unviable farming.

Apart from this significant blemish, the government has not committed too many major mistakes.

In fact, the second or perhaps the most important ‘act of non-commission’ on the part of the government is the absence of big-ticket corruption. One only has to recall the debilitating impact corruption scandals had on the previous government. They induced policy paralysis as they robbed the government of credibility. They created a sense of malaise and lack of optimism in the society. In fact, the current mood of optimism, notwithstanding middling growth and sluggish job creation, could be traced to the absence of big corruption scandals in this government. That is worth praising and preserving.

… and the ‘Note-ban’ too?

The de-monetisation initiative of the government or, more precisely, its ‘banning of high denomination notes’ had come in for a lot of criticism. But, it was a bold experiment. That it did not seem to have cost the government politically is a different matter.

Has the exercise met the objectives that the government had announced? What is the impact on black money generation, on corruption and terrorism? Are there objective standards by which the government could be evaluated on the ‘note ban’ decision? We do not have answers. Has the government made a dent on the pervasive informality of Indian farming and production in Indian factories? It is still premature to comment on these too. We have learnt that the government has added 9.1 million new taxpayers in 2016-17 based on the increase in the number of income tax returns filed. That is good news but not conclusive proof that ‘note ban’ has resulted in a sustained improvement in tax collections.

Small businesses and informal credit markets (micro credit) were disproportionately affected by the ‘note ban’ exercise. Whether and when they would be captured by data is anyone’s guess. In fact, as Dr. Subbarao, former Governor of the Reserve Bank of India, argued in a note for the Institute of South Asian Studies, the correct benchmark to evaluate the note ban exercise is not the growth rate of the previous year (2015-16) but the growth that might have been achieved without the note ban exercise. On that basis, the ‘note ban’ exercise may have shaved off more than a percentage point off the growth rate of the economy.

On the impact on small businesses, unfortunately, we may not see the impact in the data for quite some time. The Annual Survey of Industries (ASI) that tracks production, employment and value addition in registered factories releases its data with a long lag. Summary results for the year 2014-15 were published in March 2017. Therefore, data for 2016-17 will be available only in the first or second quarter of 2019.

In the first year of this government – in 2014-15, the proportion of factories that employ more than hundred workers had registered a small increase. That is good news.

The total number of ASI registered factories for these three years was:

2012-13 179102


2013-14 185690

2014-15 189468

The number of factories registered under ASI and employing 100 or more workers is now 17.69 per cent of the total number of ASI registered factories. The number was 16.05 per cent in 2012-13 and 15.85 per cent in 2013-14. If this trend had been arrested by the note ban exercise, then indeed it will have extracted a heavy price.

The tag of ‘tax terrorism’ sticks

Further, the government did not collect as much as it might have expected in black money declarations because the schemes usurped too much of taxpayers’ wealth in terms of taxes on the declared wealth. It might be attributed to two attitudes: ‘punish the evildoer’ mindset and risk aversion or a cautious attitude on the part of the bureaucracy that made them anxious about potential revenue foregone under a low tax rate. Both are not desirable traits in policymakers at all times. Indeed, the bureaucracy’s naturally cautious inclinations might have also come in the way of the government continuing with its tax reforms. India had not fully put behind it the issue of retrospective taxation. Its Generalised Anti Avoidance Rules (GAAR) initiatives had witnessed some confusion and eventual backsliding. Reduction in corporate tax rates had been largely stillborn. Government’s laudable attempt to reduce labour costs by bearing a portion of employer’s statutory dues towards labour welfare had also not made much progress after an initial announcement in the 2016-17 budget presented in February 2016. Thus, while the reform of the indirect taxes can be said to have made a big leap forward with the potential introduction of the Goods and Services Tax (GST) from July this year, the government has barely scratched the surface on direct taxes. If anything, it has become more and not less complicated with the levy of additional cesses, etc. India remains a country of high tax incidence.

That is what makes the rising ‘class war’ rhetoric from the Prime Minister worrisome. Clearly, it is no one’s case that the Indian private sector is virtuous and that the government is vicious. If anything, Indian private sector is as much a part of India’s development challenges as the government has been, if not more. However, the government will have earned the moral right to go after rent-seekers and the greedy and unscrupulous capitalists, if it had made India’s tax policies and their administration reasonable and without making hostility towards the taxpayer its operating principle. If anything, this government has continued to practice ‘tax terrorism’ – a phrase coined by the current Finance Minister to describe the tax policies of the previous government. The government had not done enough to climb the moral pedestal with authority.

In mitigation and in government’s favour, one must acknowledge that this government had done very well to plug the round-tripping of domestic money sent overseas and recycled back into India by eliminating capital gains tax exemptions granted to specific international tax jurisdictions such as Mauritius, Singapore and Cyprus, under the Double Taxation Avoidance Agreements India has signed with these countries. It is not a widely heralded reform but it is quite significant.

The good thing about GST: The GST Council

The GST has been long time coming. On the surface, the design might appear sub-optimal based on the number of rates and the number of categories of goods and services. However, India has to pay that price for its Federal structure. If its implementation proceeds without too many major hiccups and technical difficulties, it could boost economic activity and generate tax revenues for the Union and State governments. One of the significant unintended payoffs from the GST implementation is that States feel that they could use the GST council as a platform for inter-state consultation. The benefits from such an interaction are hard to quantify but harder to understate. It is actually very good news. Given India’s size, many worthwhile initiatives remain confined to their local origins. Although the Ministry of Personnel, Personal Grievances and Pensions documents best practices and successful programmes from Districts and States, much more remains to be done on information sharing and replication of sound initiatives from one State to another. That the GST council could serve as a platform for that is a significant development.

For example, Madhya Pradesh government has been in the news for its rapid agricultural growth in recent years. The share of agriculture in the Gross State Domestic Product is nearly 40 per cent compared to the national average of 17 per cent. It will be useful if BJP-ruled States document their successes and failures, exchange notes on them and benefit from each other. It is disappointing that BJP ruled States had not done so.

Further, on administrative reforms, the NDA government had disappointed, notwithstanding some announcements on streamlining hiring and promotions to senior government positions. Indeed, many appointments have been made on merit but not all. For example, the Bank Boards Bureau has not been utilised for the purpose it was created. More importantly, the promise of the Prime Minister, before assuming office in May 2014, to have a council of Ministers comprising of super-Ministries, is largely unfulfilled. The improvement in the quality and speed of decision-making that such a structure could have delivered remains a matter of potential and conjecture. That is a pity. For example, we have multiple Ministries on transportation – Railways, Shipping, Civil Aviation and Surface Transport & Highways.

Infrastructure: a mixed picture

Of course, it is good news that the division of responsibility for transport solutions for the country has not come in the way of road construction picking up under this government. Contracts for road construction measured by ‘awarded length’ in kilometres had picked up noticeably since 2014-15 (Chart 1).


With respect to Railways, the cost-revenue ratio remains high at over 90 per cent leaving little for capital investment, renewal and strengthening of tracks and safety enhancement. However, in spite of ongoing uncertainties in industrial growth and private capital formation in the country, the Ministry of Railways has moved record freight tonnes in 2016-17 – 1.107 billion tonnes vs. 1.094 billion targeted. It is also refreshing to note that the Ministry of Railways plans to monetise the vast amount of data available with it. Notwithstanding such notable successes, the overall record of the government in creating public investments has fallen short.

In December 2014, the rolling four-quarter average capex announcements by the government rose 40.99 per cent over the year-ago period to Rs 1.17 trillion (Chart 2). However, public capex announcements have fallen since then even as private sector project announcements have increased, as the chart shows.

Note: Figures above denote rolling average of new project announcement over trailing four quarter. Numbers are in lakh crore rupees. Source: <a href="">‘Has the Modi govt. walked the talk on reviving public investments</a>?’ Note: Figures above denote rolling average of new project announcement over trailing four quarter. Numbers are in lakh crore rupees. Source: ‘Has the Modi govt. walked the talk on reviving public investments?’

Private sector project announcements might have outpaced the public sector but the proportion of stalled projects that reached double digits in 2013 has continued to stay elevated. For the quarter ending December 2016, the proportion of stalled projects had reached 12.1 per cent (Chart 3). This article in MINT notes, “Four out of the worst five quarters with the highest stalling rate on record have been during the Modi government’s tenure.”

The good news is that new project announcements in the private sector had picked up in 2016. The MINT article linked above acknowledges, “The rolling four-quarter-average amount of new projects in 2016 at Rs 2.08 trillion was 19.7% higher than the corresponding figure for the year-ago period.”

Data from the Department of Industrial Policy and Promotion provide further cheer. Not only did project announcements go up in 2016, projects implemented by the private sector increased from around INR 780 billion to little over INR 1.0 trillion in 2016. That is a 29 per cent increase.

Unfortunately, infrastructure improvement for agriculture remains an area where substantial improvement is yet to happen. Irrigation is a major bottleneck for agricultural productivity. The State of Indian Agriculture 2015-16 Report presents the facts starkly: “In the total 329 million hectares (mha) of geographical area of the country, the total cropped area is about 194 mha, out of which net sown area is only about 140 mha. Only about 66 mha, i.e., 47.6 per cent of the net sown area, is reported as irrigated.”

The article from MINT cited above on stalled projects shows that nearly 90 per cent of irrigation projects are held up for want of environmental clearances. Further, India’s land holdings are increasingly fragmented. The process of fragmentation is ongoing and shows no signs of ending. It is a big deterrent to productivity.

The Land Acquisition legislation passed by the previous government is deemed a big impediment to consolidation of land holdings and this government spent some political capital on it in its initial months without much success.


With respect to agriculture, the government’s performance has to account for the fact that it faced poor back-to-back monsoons in its first two years in office. It has taken several initiatives such as the soil health cards, crop insurance and a National Agricultural Market that eliminates intermediaries, etc. However, to achieve sustainably high economic growth, India’s agricultural growth has to be a lot better than what it has been in recent years, including under this government. The government spends heavily on fertiliser subsidies and they are misdirected. Land and labour productivity have to rise substantially and workers have to be weaned off agriculture. Of course, that requires growth in industrial investment and production that generates jobs. The government does not have much to show on that front in its three years. The government’s performance in agriculture is best evaluated in these two articles by Ashok Gulati and Siraj Hussain.

Finally, although Swachh Bharat (‘Clean India’) is strictly not an infrastructure project, sanitation is critical for public health. The Prime Minister’s personal imprimatur on the project and competition between States and cities on achieving cleanliness and sanitation have kept the project on the front pages and on the front burner. That deserves praise.

Unbalanced economy

The aggregate impact of all these infrastructure hurdles is that overall capital formation in the Indian economy has stalled. Of course, a big part of the explanation for the stagnation and even reversal in the capital formation is the problem of non-performing assets in the banking system and bloated and leveraged balance sheets of the corporate sector. Cronyism, optimistic assumptions made in the high growth years on future economic growth and revenue realisation, inexperience in public-private partnerships leading to distorted risk allocation between the public and the private sector, low bids in such projects with the expectation that prices could be revised higher and outright fraud have all contributed to this problem. As a result, India’s economic growth is driven largely by consumption and government expenditure rather than by capital formation generating jobs, incomes and economic growth. The table below tells the tale of an unbalanced Indian economy and its growth pattern:

Source:<a href=""> Key Economic Indicators</a>, April 2017, Office of the Economic Advisor, Department of Industrial Policy and Promotion, Ministry of Commerce, Government of India Source: Key Economic Indicators, April 2017, Office of the Economic Advisor, Department of Industrial Policy and Promotion, Ministry of Commerce, Government of India

To be fair to the government, many of its problems were inherited. It inherited a huge fiscal deficit from the previous government, as was the problem of non-performing assets in the banking system. Together, they had weighed heavily on overall investment growth. However, had the previous government got its economic policies and performance right, this government might not have been voted into office at all! Further, three years is a good period to begin to see results. That is why it was both a mixture of relief and disappointment that the Government had finally moved to address the banking sector problem – uncollectible loans made to corporate borrowers. Earlier in May, the government empowered the Reserve Bank of India (RBI) to take all necessary steps including the invoking of the newly enacted and notified Bankruptcy legislation to direct banks to recover the monies due. Relief that it had finally acted. But, disappointment that it took so long for the sense of urgency to arrive. Is this the price of democracy? That drastic actions are possible only when matters reach crisis proportion? In the case of the non-performing loan problem, the problem is concentrated in public sector banks. The government has its nominees on the Board of these banks and so does the RBI. Quite why they could not bang their heads together earlier remains a puzzle.

Macro-economic accomplishments and outlook

However, the good news is that, in spite of this important issue hanging fire until now and in spite of the unbalanced nature of economic growth, the government has scored two important successes on the macroeconomic front.

One is that it has managed to attract foreign direct investment into India on a larger scale than before and, second, it has maintained overall macroeconomic stability. Both in absolute rupee terms and as percentage of GDP, India’s foreign direct investment inflows had picked up since this government came into office in May 2014, partially offsetting the drag from domestic capital formation (Chart 4).

Source: Department of Industrial Policy &amp; Promotion, Ministry of Commerce &amp; Industry, Government of India. Data for recent years are provisional and subject to revision, as per source Source: Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India. Data for recent years are provisional and subject to revision, as per source

In addition, as this brief and succinct note by the Department of Economic Affairs claims proudly, most of the vital health parameters of the economy are stable and appropriate – GDP growth, current account balance, fiscal balance of the Union government, inflation rate in the economy and foreign exchange reserves. To a large extent, the government deserves credit for macro-economic stability. It resisted the temptation to ramp up government expenditure and was focused on bringing government spending under control despite two failed monsoons. Second, although it was opposed to the Aadhaar (Unique Identity Card for all resident Indians), before it came to office, the government changed its mind, accepted it and adopted it widely. The amount of subsidies it saved on Liquefied Petroleum Gas (Cooking Gas – LPG) cylinders to households in two years through the PAHAL scheme – 2014-15 and 2015-16 – amounted to 21,000 crores of rupees. Although the Office of the Comptroller and Auditor General questioned the savings for 2015-16, government figures were credible too. The use of Aadhaar for direct transfer of benefits – government subsidies – to citizens has immense potential for achieving lower leakages, lower fiscal costs and higher effectiveness.

Apart from these, on the macroeconomic front, the government had put in place a bankruptcy law, devolved more resources to the States as per the recommendations of the Fourteenth Finance Commission and passed a Real Estate Bill recently. With respect to RBI, although it had put in place a formal monetary policy objective and constituted a monetary policy committee, the manner in which some members of the ruling party forced Raghuram Rajan, the Governor of the Reserve Bank of India, out of his office, will remain a big blot on the government’s credibility and respect for institutional norms. It is difficult to be persuaded that the campaign against Raghuram Rajan happened without the backing of the government. That blemish apart, the government has done well on the economic front.

Consequently, the outlook for the Indian economy in the next two years looks reasonably bright. As always, any futuristic statement is not without caveats.

India’s monsoons must be well behaved. The good news is that the rainfall outlook for this year looks good. Second, India must be able to implement GST without too many hiccups and that should lead to faster economic growth and higher tax revenues. Third, the banking system must be able to resume lending to industry in India. The chances for these outcomes are reasonable.

Hence, the Indian economy faces good near-term prospects. As for the long-term, much remains to be done.

Long-term outlook

Jobs, Skills, Education – going south

India’s labour market is moribund. The government has done the right thing to ask for better quality and timely data. Without information, policymaking will be more likely arbitrary. Banking and information technology (IT) sectors are in the middle of structural changes. They are shedding jobs rather than adding. Further, while labour supply is plenty, employability remains low. The government’s ‘Make in India’ and ‘Start up India’ initiatives suggest that it has applied its mind to the problem but they are yet to bear fruit. It is too soon to declare them failures but equally, they are far from being hailed as successful initiatives. We have to record here that the government has done poorly on the education front. Some reforms with respect to higher education are said to be in the final stages of implementation but its inability or unwillingness to rescind the previous government’s ‘Right to Education’ legislation is a big disappointment. Its unintended consequences are many and mostly harmful.

In this regard, it is worth noting that the South Indian states that led India’s IT revolution are now struggling to be economic growth engines for a variety of reasons. More importantly, at least three of them face a water crisis. The BJP is keen on establishing itself in the South. It will be politically astute and economically timely for the government to nurse these States back into economic dynamism.

The bonanza from financial inclusion

Amidst these formidable long-term challenges, there is a silver lining. Besides macroeconomic stability, the government’s big success has been in the implementation of the Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme. A vast majority of the population has now bank accounts. It is similar to the mobile phone connectivity that India achieved for its citizens in the first decade of the millennium. An empirical study (‘Bank Accounts for the Unbanked: Evidence from a Big Bang Experiment’, May 2017) has shown that PMJDY accounts are increasingly actively used over time:

“70% of the accounts migrate out of dormancy into active use. Second, activity levels in PMJDY accounts increase over time, a pattern not necessarily seen in non-PMJDY accounts. In many specifications, activity increases in PMJDY accounts relative to non-PMJDY accounts. These findings are especially stark given that non-PMJDY accountholders in our sample appear to be much poorer and have transaction sizes that are one order of magnitude smaller. Finally, we find that the active accounts experience significant increases in cash balances. Government direct benefits transfer aids but does not fully explain usage. Overall, the data indicate that the unbanked learn by doing, and increase usage of accounts for transactions, liquidity management, and increasingly, balance accumulation.”


More good news is possible out of the successful financial inclusion initiative. Another paper (‘Who wants to be an entrepreneur?’, May 2016) suggests that “financial development facilitates economic growth by moving workers out of less productive, informal entrepreneurial activity into formal jobs in more productive firms.” If this were to happen, India could reasonably aspire to resemble the prosperous high growth economies of the West.

Therefore, the government might have batted itself into a favourable situation going into the last two years of its term in office before facing the voters again.

The government’s foreign policy too has been a success area. It has managed to maintain good relationship with two key neighbours – Bangladesh and Sri Lanka - and it has stood firm against China’s increasingly aggressive, belligerent and expansionist foreign policy. Its relationship with Pakistan remains fraught but that is not for want of trying on its part.

Conclusion – cannot help feeling wistful

It is time to wrap up this essay. How has the government done? It is a hard question to answer. Has it done better than the previous government? Well, that question is moot. They too might have done many of these things because the rupee crisis of 2013 left them with no option but to abandon their profligate and unsustainable economic policies. Has the government done better than the previous NDA government? Many would argue that the previous NDA government that was in office from 1998 until 2004 did the most on liberalising the Indian economy after the Narasimha Rao government of 1991-96. Its reforms lifted the economy’s potential growth rate. But, we must bear in mind that contexts are different and that the NDA government of 1998-2004 did not have to live up to very high expectations. More importantly, its record until 2002 was middling at best. Much of its accomplishments happened in the last two years.

It is never easy to govern India. Arguably, it is the most difficult country to govern in the world since it is a federation of 29 nations in terms of population size and myriad problems come with such size and diversity. Further, achieving and sustaining high economic growth in an era of fading global growth, mounting reservations on international trade and hostility to immigration, rising worries on climate change and more frequent floods and droughts is an arduous challenge. In recent times, East Asian nations have been economic success stories in the world. They faced a far more conducive and friendlier global backdrop. Even China was blessed with a relatively benign global economic environment in the first two decades of its economic liberalisation since 1979.

Therefore, while the ruling party might feel elated with its political successes in the last three years, the government’s satisfaction with its economic performance must be tempered by the enormity of the challenges that India faces and those challenges are not just economic. It is far better for the government to remain dissatisfied. Only the paranoid survive. Triumphant rhetoric is par for the course for propaganda but it is bad for sustained performance.

While it is possible to give the government a good (if not glorious) grade on what it has achieved, it is hard to resist being wistful on what might have been. Indeed, at the end of three years, only the Prime Minister can answer the question of whether his government has delivered on minimum government and maximum governance or was bogged down by the label of being a ‘Suit boot ki sarkar’.

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