Originally Published 2018-02-27 10:21:30 Published on Feb 27, 2018
Economy First: Will it yield quick results?

Today everything that the NDA government is doing for the economy is aimed at a deeper political agenda which is the General Elections 2019. Recently at the Global Business Summit held in the capital Prime Minister Modi showcased India’s New Economy and its achievements. The focus on the agricultural and rural economy and doubling of farmers’ incomes are also driven by the political aim of pleasing the farmers’ lobby for its huge number of votes. Farmers have shown their displeasure with the state of agricultural economy in many ways and famers suicides are continuing in the countryside. Starting with the small size of holdings which makes agriculture unviable for 99 million farmers, there are a number of hurdles in the way of their realizing higher incomes. The increase in MSP 1.5 times will probably work in some cases but the real marketing reforms have yet to start on a wider scale. The States have a big role to play in executing marketing reforms and the government has given encouragement to such reforms by connecting agricultural markets with the eNAM (National Agricultural Market) which is an electronic common market for trading agricultural commodities.  Such a market makes it easier for farmers to connect with sellers. But without standardizing and grading of produce and increasing warehousing facilities, eNAM is a nonstarter.

The Modi government has to make a success of the ‘Make in India’ campaign before the General Elections, yet it has hardly been successful in terms of increasing the share of manufacturing in GDP to more than 16 per cent when the aim was to raise it to 25 per cent by 2020. In employment generation, raising the rate of the industrial growth to double digit level or boosting the rate of export growth, the Make in India campaign has not delivered. The government is also faced with rising imports and slow export growth with trade deficit widening.

The competition from our own neighbours like Bangladesh in garments and China, Vietnam, Cambodia, South Korea in other items has been cut throat. Hence, despite Mr. Modi’s speech in Davos extolling the virtues of free trade, the NDA government has gone ahead with protectionist measures and imposed higher customs duties on 45 items as well imposed an across the board surcharge on all imports. This protectionist trend has been criticized by many neo liberal economists but it must be remembered that all countries that are today championing free trade, protected their markets in the past. If it is a temporary measure, it may be good for our Micro Small and Medium scale enterprises (MSMEs) but if it lasts longer it will bring back the production of shoddy goods and India will not be able to compete in the world markets.

The protectionist move will however please the MSMEs whose production has also faced major disruptions caused by demonetization and GST. With their huge labour force of about 106 million, the workers and owners of MSMEs belonging to the middle classes are worried.  The increase in duties are however attracting the ire of President Trump and the German ambassador to India who think it is unfair to raise duties on Harley Davidson motorcycles and auto parts. The EU may even retaliate with higher duties on certain products from India.

To revamp the Make in India campaign and give a boost to MSMEs further, a new Industrial Policy may be coming out in the next couple of months. The government may help in branding of MSME products, a long required need which will help them find markets abroad. It may permit fixed term employment (already allowed in apparel and leather industries) in all sectors, enabling them to circumvent the existing labour laws which restrict hiring and firing of workers.  MSMEs will create jobs if they recover, important for fulfilling Modi’s promise of giving 10 million jobs a year to the youth, which is unlikely.

Among the big ticket items of government expenditure, recapitalization of banks got an allocation in Budget 2018 for public sector banks of Rs 88,000 crore in addition to the Rs 2.11 lakh crore recapitalization plan over 3 years aimed at bringing them back to health. It is an attempt to build confidence in the whole banking system whose balance sheets went awry during the previous government’s time due to laxity in lending policies of public sector banks to big industrialists who later became willful defaulters or absconded abroad.

Unfortunately taking credit for refurbishing the banking system by injecting a huge amount of money has been spoilt by the latest scam surrounding Nirav Modi who became a celebrity jeweler in recent times and who got himself photographed with Prime Minister Modi. People’s confidence has been shaken by the scam involving Rs 11400 crore. Despite all the blame game, the fact remains the fraud has surfaced in 2018 and something urgent is required to bring back people’s confidence in the banking system. Mr. Modi has broken his silence at last and has promised action.

The biggest surprise item of the budget was the Health Insurance scheme announced in Budget 2018 which by all standards is a welcome and desirable scheme. But why was it not introduced three years ago? Now there is little time to see its fruition with poorer sections benefiting from it. For the last ten years, there has been much discussion on the inadequacy of public healthcare in meeting the growing demand and the glaring malpractices of private healthcare.  Several reports endorsed by prominent doctors stressed the need for universal healthcare. The scheme announced in Budget 2018 is a step towards it but it is too late to do something as ambitious. Naturally it would cross one’s mind that it was done for electoral purposes. Besides the financing of such a scheme which gives health insurance of Rs 5 lakhs annually to 500 million low income persons is not exactly clear  for a scheme which is supposed to start in mid 2018.

Without mending the economy and just boasting about the ‘achievements’, the NDA government cannot hope to win in 2019 because people’s jobs, a safe and reliable banking system, good investment prospects for business and improvement in the welfare of the common people in terms of health, housing and education are the most important determinant of people’s voting pattern and its outcome.


This commentary originally appeared in The Tribune.

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