When the Bharatiya Janata Party (BJP) and its allies swept to power with a massive majority a little over four years ago, expectations were sky-high. After years of corruption scandals, people expected the new government to reverse the previous administration’s policy paralysis and move economic growth into high gear. “The key thing for the government in 2014 was to appear to be doing something,” says Amir Ullah Khan, professor of economics at the Hyderabad based Maulana Azad National Urdu University and visiting faculty at the Indian School of Business.

The new government certainly hit the ground running. At the first cabinet meeting chaired by Prime Minister Narendra Modi, the Centre constituted a special investigative team to unearth black money. Months later, the Supreme Court cancelled more than 200 coal licences that it ruled were allocated arbitrarily. Big companies such as the Aditya Birla Group, Jindal Steel & Power, and Essar Power had investment plans linked to these licences. The government’s swift decision to come out with a framework to auction coal blocks, as well as a ramp-up in Coal India’s production, prevented what could have been India’s largest energy crisis. “Before 2014, business sentiment was suffering because there was a sense of policy paralysis. Certainly, the BJP-led government managed to change the sentiment through its policy actions,” says Sunil Sinha, principal economist at India Ratings and Research .

If the BJP-led National Democratic Alliance government’s policy moves boosted the economy, some external factors also helped. One, the global recovery cycle kicked in; second, looser monetary policies by both the U.S. Federal Reserve and the European Central Bank; and third, commodity prices were at their lowest in recent times.

Favourable conditions such as high growth, low interest rates, low commodity prices, anda good monsoon were undone by the note ban.  

The combination of factors helped to rein in retail inflation at 3.7% at the end of FY18 compared with 9.4% at the end of FY14, while economic growth ticked up to 7.9% in FY16. “The control on inflation was a combination of luck and solid action by the government. Oil prices started falling soon after the BJP came to power and with the Reserve Bank of India (RBI) not reducing interest rates, inflation was kept under check,” says Khan.

In many ways, the economy was riding on the fall in global crude prices. Brent crude kept falling for the next year-and-a-half after the BJP took over, bottoming out at $34.74 a barrel in January 2016.

The low prices went a long way in shoring up the government’s finances. Rather than passing on oil price gains to consumers, the government increased excise duty 12 times to boost revenues. This allowed it to spend on infrastructure projects and control deficits.

“But the government also took action to cut down a lot of its expenditure, especially in the social sectors to control deficits,” says Khan. It seemed like the government had everything going for it the first two years: High growth, low commodity prices, and a good monsoon.

But four years later, all is not well with the economy. Major reforms in land acquisition and labour laws have been slow to take off, deterring private sector investment. “Combined with the fact that interest rates had not been cut by the RBI, private sector investment remained low,” says Khan.

Perhaps the biggest blow came from the government’s demonetisation decision. Experts say the move undid all favourable factors such as higher synchronised global growth, low interest rates across the world, and a good monsoon that could have pushed India’s growth to 9% levels.

“Demonetisation was a big disruptor... Small businesses that were disrupted haven’t been able to recover,” says Sinha. “When we could have grown faster than 8%, growth slumped to 7.1% in FY17 and 6.7% in FY18.”

If the currency ban hit the economy, the implementation of the goods and services tax (GST) also caused some disruption, even though most experts agree it was a necessary reform. To add to it, the government was unable to check the rise of bad loans at public sector banks, which at the end of FY17 added up to Rs 6.84 lakh crore, according to RBI data.

The government had barely begun recovering from the twin blows of demonetisation and GST when crude prices began rising again. Brent prices are back above $70 a barrel, bumping up its import bill and threatening to hit the economy. Sinha says that the conditions that India saw in FY17 and FY18 will not be seen again for at least the next 10 years. According to CRISIL, a runaway rise in oil prices could increase inflation and impact other macro indicators. “A back-ofthe-envelope estimate shows every $10 per barrel increase in crude oil price can shore up India’s fiscal deficit by 8 basis points (bps) as a percentage of GDP and similarly the current account deficit by 40 bps,” the ratings agency said in a recent statement.

Experts believe that though the macroeconomic parameters look better on paper, structurally a lot of weakness remains in the economy which will be tested in the coming year. “Rising crude oil prices mean inflation is still vulnerable. The fiscal deficit and current account deficit are increasing and private investment is not taking off, and not to mention job creation is slow,” says Khan.

As the government enters the last few months in power, it is clear that it has lost the opportunity to propel India’s economy to historic levels of growth. How the voters will judge the BJP is anyone’s guess.

(This article was originally published in the June 15 - September 14 special issue)

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