How Modi won India’s elections but paralyzed the economy – Nikkei

By Henny Sender | INDIA |

The [Indian] political and economic crises are tightly interwoven. When Narendra Modi became prime minister at the head of the Bharatiya Janata Party in 2014, he promised to do for India what he did for his home state of Gujarat, where he had presided over an economic growth spurt. He would revive manufacturing, modernize the financial sector and end the crony capitalism associated with the Congress Party, which had ruled India for most of the post-independence period.

That boom failed to materialize during his first term, which was marred by a botched rollout of a sales tax and the cancellation of most bank notes — which, in cash-centric India, hit particularly hard. Regardless, he was reelected with a huge majority in 2019.

What Modi did carry over from his time in Gujarat, though, was intercommunity violence. In 2002, while Modi ran the state, at least 1,000 people died in clashes between Hindus and Muslims.

Moreover, instead of using its mandate to tackle the mounting economic challenges, Modi’s government has doubled down on Hindutva, its populist, Hindu nationalist agenda. Backed by the Rashtriya Swayamsevak Sangh, a Hindu ultranationalist group seen as an ideological driving force behind Hindutva, it has revoked Jammu and Kashmir’s autonomous status, changed the country’s citizenship laws to deny recognition to Muslim immigrants from neighboring countries, and tried to enforce Hinduism as central to India’s values and identity. Almost all of the government’s political capital has been thrown into this massive social project. Economic reform has fallen by the wayside.

“Prime Minister Modi won the election,” said an executive at a Mumbai venture capital fund. “But he lost the economy.”

BOOM TO BUST

The signs of India’s economic decay are visible in the commercial hub of Mumbai. Cranes atop the skeletons of residential towers have been stationary for months, as developers struggle to win credit in the face of lackluster demand.

In the countryside are similar signs of suspended activity. Demand for big-ticket purchases such as tractors has softened, while sales of even the cheapest everyday items have been weak. When Gautam Sharma, head of Nissin Foods’ Indian operations, visits local shops in rural India to gauge demand for everything from his own instant noodles to individual sachets of shampoo, he says he is stunned by the lack of appetite.

“People consume when they have faith in the future, but the government has destroyed that faith,” Sharma said. “People aren’t consuming because they fear the future. There is an atmosphere of mistrust.”

Nor has anything been helped by the Modi government’s string of economic policy debacles. In November 2016, the BJP government abruptly canceled almost 90% of the cash in circulation — a move described as both an effort to eliminate “black money” and corruption, and a boon for ordinary Indians. “This step will strengthen the hands of the common man in the fight against corruption, black money and fake currency,” Modi vowed at the time.

But in an economy as cash-reliant as India’s, pulling money from the system saw transactions slow dramatically. Daily wages at small businesses — barbers, weavers and small-scale farmers — all dropped, on average, from 400 rupees a day to a mere 150. And a side effect of this drastic measure saw opposition parties deprived of funds to fight state elections in Uttar Pradesh, the most populous area in the country.

Demonetization was followed in June 2017 by the botched execution of the goods and services tax. A praiseworthy concept, it was marred by an overly complicated, constantly shifting formula for calculating the taxes incurred, and imposed heavy costs on smaller enterprises that could ill afford the expense.

The final blow came in the fall of 2018, with the implosion of Infrastructure Leasing & Financial Services, a triple-A rated nonbank lender, which gutted the credit market. IL&FS and other nonbanks had become important sources of credit after traditional banks, struggling under the weight of bad debts, stopped lending to companies and households. Instead, they loaned to nonbanks, who on-lent the money at a higher rate. Over the past five years, the ratio of banks’ soured loans has jumped from around 4% to more than 9%.

BACKLASH

No government can afford to ignore the economy entirely, however, and there are signs that a backlash against the BJP is building.

During the campaign leading up to Delhi’s elections on Feb. 8, it was hard to believe that the two top contenders were taking part in the same contest. During the campaign, the BJP leaned into its anti-Muslim rhetoric, branding women who led protests against its citizenship law as “terrorists” and calling the Muslim-majority suburb of Shaheen Bagh a “breeding ground for suicide bombers.” The incumbent Aam Aadmi party, led by Arvind Kejriwal, emphasized its record of improving basic services, particularly education. Aam won with an overwhelming majority.

“The divisive election campaign illustrates how identity politics can overwhelm the service delivery message,” said Amitabh Dubey, political analyst for research company TS Lombard in Delhi.

After Modi’s BJP won its massive mandate last year, some pundits said India had all but become a one-party state. But the BJP has since lost local elections in Maharashtra, where Mumbai is located, and the smaller state of Jharkhand, as well as Delhi. The new citizenship bill has provoked huge protests across the country that are only intensifying.

“Hindutva is a diversion from the economic woes and the lack of a real agenda to tackle them,” said the local Indian head of one major international investment fund in Mumbai.

That could lead to more division, more unrest and quite probably a more aggressive crackdown. As one Mumbai-based lawyer said: “India could soon have the worst aspects of authoritarianism, without any of the economic efficiencies.”

Read the full article, ‘How Modi won India’s elections but paralyzed the economy’ (Nikkei Asian Review, March 2020), here.

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