I am convinced now, that successful politicians do not keep all promises. Yet they are loved by their followers and leave an indelible mark on history, because of an uncanny sense to look beyond the obvious and make daring decisions. Narendra Modi is certainly one of the politicians who meets all these criteria. He has yet to fulfill his promise of delivering high economic growth. And with Corona Pandemic hitting the global economy hard, it’s unlikely that he will be able to fulfill it in near future. Yet, he is loved by millions (Including Yours Truly) for putting Nehruvian Consensus to the rest and showing Islamists their right place in Indian politics.
PM Modi is fully aware of this expectation. In fact, he has many times overtly promised economic well being as one of the main benefits of voting BJP. To make this promise good he launched a series of reforms in 2015. Next year, when India celebrates Three Decades of throwing away the License-Quota-Permit raj, it’s interesting to see how Modi Reforms stack up against reforms carried out by 5 non-Congress governments between January 1991 to March 1998.
These 7 years are such a unique period, that I can’t believe that Political Analysts have missed it. And hence also suspect it’s part of the larger understanding to avoid talking about it. This was a period (but for Jan to May 1991) when no Gandhi was either a Congress President or Prime Minister. And this also happens to be the period when India’s most daring reforms were carried out. Too much of a coincidence, I think.
The ‘Reforms’ were rolled out in July 1991. But the way for them was paved by an audacious act by then PM Chandrashekhar and FM Yashwant Sinha. The fiscal management by earlier two governments (Rajiv Gandhi and VP Singh) was so awful, that when Chandrashekhar became PM in November 1990, the coffers were empty. To tide over this crisis, in exchange for $ 2.2 billion, the Government had to pledge 67 tons of Gold Reserves to the Bank of England. For which Congress exacted revenge by withdrawing the support. Which meant fresh elections, giving an opportunity for Congress to come back to power, with PV Narsimha Rao as PM. Narsimha Rao, to his full credit, picked up from where the earlier Government had left and went on to reform as per guidelines laid out by PM Chandrashekhar in February 1991.
Now, these 1991 reforms are so expansive that it’s impossible to write on all of them here. But to get a flavor and facilitate comparison with Modi Reforms, will discuss some of them in brief.
- Fiscal Reforms: 8.4% in 1990-91 was brought down to 6.5% in 1991-92.
- Monetary and Financial Reforms: 2(a):The Statutory liquidity ratio (SLR) and Cash Reserve Ratio (CRR) drastically. 2(b) : Interest rates on deposits, which were controlled by RBI made flexible. 2(c) : Way cleared for the opening of Private Banks.
- Capital Market Reforms: Government control over capital markets were removed, replacing it with a regulatory framework.
- Industrial Policy Reforms: Industrial licensing abolished, MRTP act repealed. With this, 80% of the industry was taken out of the licensing framework.
- Trade Policy Reforms: Imports and exports were freed. Eg. Peak import was reduced from 300% to 150%. Setting up of trading houses with 51% foreign participation allowed.
- Steps were taken to promote FDI and Rationalization of Exchange rates. Eg. The rupee was devalued in one shot by 20%.
These reforms were so radical that they changed the whole outlook of the MNC and domestic businesses towards India. Resulting in massive investment, quick growth which generated hundreds of thousands of jobs. Translating in sudden jump in incomes and change in lifestyles for a sizable population, mainly in urban India.
In 2014 when Modi was elected on the backdrop of disastrous handling of Economy by UPA 2, the expectations were the same as 1991. And Modi in an effort to match those, did try to unleash the economic agenda with the Land Acquisition act in 2015. But once it was defeated by the united opposition, galvanised by Rahul Gandhi’s “Suit-Boot ki Sarkar” he quickly abandoned the plank. And much to the chagrin of his core voters – Urban Middle Class, he went for incrementalism and povertarian economics.
The incremental steps included programs such as Make in India, Stand-up India, Startup India, Mudra Loans, MSME loans etc. Coupled with these, he ensured that RBI keeps the interest rates low. These were supposed to ease setting up, running and winding up businesses. And bring FDI into many existing companies and start many new ventures. They did result in some amount of FDI and a few hundred start-ups. But in no way, they created the big bang, which was promised.
So why couldn’t Modi do in 6 years, what ragtag, tottering, minority Governments achieved in 7 years?
Because the Modi Reforms differ fundamentally with 1991 Reforms. 1991 was an all-out effort to save the economy from going bust. Modi Reforms were more about disciplining the businesses and improving tax compliance. Let us take the most important- GST, Insolvency and Bankruptcy Code (IBC), Reduce Corporate Tax rate, Direct Benefit Transfers (DBT). And, though not a policy reform as such, add Demonetization to this.
GST hailed as one of the greatest reforms, made millions of traders uncomfortable, as it increased their paperwork and made cash transactions difficult. Anybody even with limited knowledge of Indian businesses knows how important ‘Cash’ transactions are to traders. Two biggest industries which were adversely affected by GST and Demonetisation were iron/Steel and Construction leading to job losses. It also killed a large section of the informal economy. What it helped was the formalisation of economy and tax collections.
IBC again was a tool which promised to end crony capitalism and stamp out zombie companies. It certainly did that. It also reduced India’s stressed assets and improved recoveries. But anyone in its right mind will not say all these helped in job creation or increased incomes.
Out of the reforms mentioned, Reduction in Corporate tax rate and DBT resulted in an increase of disposable income. Again reduction in taxes happened after reelection, in Sept 2019. When realisation dawned, that growth is further slipping away. So something which was to be implemented in 2014, took 5 years. Clearly, Modi disappointed the business community here.
DBT was one thing which was implemented with gusto and a sense of direction. And it certainly helped in poverty reduction. Perhaps only one economic program, which was a success. That’s because Modi, though not a Leftist, is a RSS Pracharak. And RSS prides itself for promoting the economic vision of Antodaya (अन्तोदया), having its roots in Integrated Humanism. Antodaya which aims at the rise of the weakest section of society, is hardly in agreement with tenets of Capitalism.
Lastly, Demonetisation to me, was another step to reduce the purchasing power of the rich by taking cash away from them and redistribute it as cheap credit through banks. The plan didn’t work as banks have consistently refused to lend to smaller & new businesses without collateral.
Adding two more examples here, which will make the redistribution obsession clear. Appeal to middle class to let go LPG subsidy (#giveitup) and steep increase in fuel prices. Both these are clear cut attempts to take away from comparatively affluent class and pass it on to the poor.
To sum up, notwithstanding the adulation for PM Modi, I must infer that his Economic Reforms were more about bringing behavioural change in the society. Till now they have failed to bring any additional economic well being or generate new jobs. Hardly any doubt that PM Modi’s ‘5 Trillion Dollar’ dream is a silver bullet for all these economic ills. But again, with current conditions and policy restraints, even reaching closer to it,will require devolution of power.
On the plus side what PM Modi has delivered to the Middle Class is consistent low inflation and many big ticket items on cultural agenda. Such as abrogation of article 370, criminalising triple talaq and construction of Ram Mandir at Ayodhya. And to repeat, has ensured that topics concerning Hindu masses are brought to fore and Congress’ sponsored pseudo secularism is put to rest. However, the promise of delivering Economic well being remains unfulfilled.
Evaluating from 1991, the politically most itchy years between 1991-1998 were the glorious days for Economic Reforms. Against that, the most adored and powerful Prime Minister’s 6 years are a disappointment.
