It was all politics, and little economics at this year’s hustings. The ruling National Democratic Alliance, led by the BJP, never fought the 2019 general elections on economic issues. Its three-month-long election campaign had little or no mention of the party’s five-year economic achievements, but the promise of a muscular Hindutva nationalism—showing Pakistan its rightful place in the world or taking on the mighty China. That it won the elections by such a thumping majority also showed that its polarisation strategy for the past five years had paid rich dividends as well. While most Hindus voted for the BJP and its alliance for restoring the Hindu national pride in India, very few of 185 million Muslims sided with the ruling alliance.
But to argue that the BJP’s five-year economic policy did not have any positive impact on the voting pattern would not be correct. Many of those at the bottom of the pyramid did gain from Prime Minister Narendra Modi’s five-year rule. Those of the poor, who had never seen the inside of a bank, now had an account under the Pradhan Mantri Jan-Dhan Yojana; house wives, who were forced to cook on “chulhas”, could now boast of an LPG cylinder under the Pradhan Mantri Ujjwala Yojana. Some others who benefitted from the Housing for All scheme got houses, or saw them houses lit up with electricity for the first time under the government’s “electricity for all” scheme. For them, the BJP government had made good its promises, despite the on-going rural distress.
But what kept the poor going through these difficult times is that unlike in the earlier years, food inflation was contained. For instance, even when the farmers suffered droughts in FY15 and FY16, and when they did have a bumper crop in FY17, or demonetisation came calling, adversely impacting their income, prices stayed down. “That could have been a very important factor for farmers voting for the Modi government, because their income was never eroded by high inflation,” says Sunil Sinha, principal economist at India Ratings and Research, a rating agency. Other macroeconomic factors like fiscal and current account deficit, too, were kept in control.
Yet, the new NDA government is assuming power at a critical juncture in the country’s history. It does not have the luxury, as it did in 2014, of ultra-low crude oil or commodity prices. For instance, by August 2014, crude oil prices had slipped to $35 a barrel, providing an unexpected bonanza for the government. That meant a low import bill and hence, a reduced current account deficit. Secondly, liquidity in the system was never a real issue despite rising levels of non-performing assets, especially at the public sector banks. “Today, the country’s financial sector is facing a ‘crisis of confidence’ after the IL&FS crisis, with most mutual funds, pension funds, and banks refusing to lend to non-banking financial companies (NBFCs), a major player in the financial sector,” Sinha says. Their apprehension is that if such a thing could happen to a major player like IL&FS, it could happen to any smaller NBFC, and therefore they have adopted a risk-averse strategy. And unless the government takes some immediate steps like asking the Reserve Bank of India to open a new window to finance these NBFCs, a number of small and medium enterprises (SMEs) could take a hit.
After all, many of these SMEs, while being dependent on NBFCs for funding, contribute nearly 40% to the country’s exports and more than 35% to the country’s GDP. Still struggling with the aftermath of demonetisation and a badly-implemented goods and services tax (GST), they need immediate help from the government. Getting the GST right and correcting niggles of the well-meaning Insolvency and Bankruptcy Code (IBC) too becomes important challenges for the new government. “How do we get the best out of the sunk investments in companies that are stuck in the IBC is as important as it is to find an early and fair resolution,” says a banker on condition of anonymity.
But more worrying is the slowdown in the overall economy, especially in India’s consumption story. Fast moving consumer goods companies, car, tractors and two-wheeler manufacturers are already reporting lower sales and things could get worse if effective steps are not taken through correct policy prescriptions. It is important to realise that India’s consumption measured in terms of private final consumption, has been growing at 7-7.2% every year, for the past 10 years and is contributing 55-60% of the country’s GDP. “If the consumption story slows down, India’s overall growth story, too, will slow down in the coming years,” argues Rathin Roy, director, National Institute of Public Finance and Policy.
With little support coming or unlikely to come in the near future from the external sector or trade, as there are no signs of a softening of stance in Sino-US relations, and the private sector refusing to invest significant amounts in increasing capacities—the other pillars in India’s growth story—it is imperative to get the consumption story going again. For India to grow at 7-7.5% and to ensure that the consumption story stays on course, the government has to take care of rural distress. After all, in recent years, most of the growth in the consumer durables and non-durables space has come from the rural sector, an important element in the consumption story.
But finding a solution to rural distress will not be easy, nor will it be finding jobs for millions entering the employment market, reversing falling corporate profits or inducing them to make more investments. But like this election has proved, good economics really doesn’t matter for voters these days. Good rhetoric does.