When Narendra Modi took over as India's prime minister in May 2014, he had the mammoth task of reviving the Indian economy which had taken a beating under the United Progressive Alliance (UPA)-II regime. After three years of repairs and reforms, the current account deficit has been reduced to a historic low of 0.7 per cent; forex reserves are at an all time high of US$ 360 billion; the consumer price index (CPI)-based inflation came down to 2.18 per cent in May 2017; and the Gross Domestic Product (GDP) stood at 7.1 per cent in the first quarter of 2017.
However, the economy is not just about macro economic growth; a closer study of three key sectors of the Indian economy (listed below) reveals another story.
- Financial institutions
In September 2014, the Modi government launched its flagship programme, Make in India, to encourage manufacturing of goods, both national and multinational, within India. Toward this, the government simplified manufacturing-related processes and checklists. An Investor Facilitation Cell was set up to guide and assist investors during the entire tenure of their business. Consequently, India’s ranking on the World Bank's Ease of Doing Business list improved from 134 in 2015 to 130 in 2016.
Since then the number (and value) of industrial projects set up in the country has increased by 28 per cent since 2013; foreign direct investment (FDI) has accelerated to US$ 60.08 billion in the last three years as against the US$ 36.05 billion received in 2013-14; merchandise exports have also begun picking up after witnessing a fall of 5.5 per cent year over year (YOY) in November 2016 as against 10.43 per cent in 2013.
However, these numbers do not match the reality posed by the weak Indian industrial activity since 2014. According to India's Central Statistics Office's data, the annual IIP growth rate was 1.1 per cent in financial year (FY) 2012, which has now fallen to 0.7 per cent in FY 2016. Industrial output is showing a slight growth in 2017 owing to the growth in the mining and quarrying sectors and the electricity segment with no contribution from the manufacturing sector.
Low growth in the manufacturing sector has immensely impacted the jobs in the country. Unfortunately, even the Make in India and Skill India missions have not helped the government achieve its target of creating 10 million jobs. Although 4,06,032 youths have been trained in FY 2016 (till 25 December) under the Pradhan Mantri Kaushal Vikas Yojana, unemployment has risen from 4.9 per cent in 2013-14 to 5 per cent in 2015-16. The number of beneficiaries of the Prime Minister's Employment Generation Programme (PMEGP) has fallen from 4,28,000 in 2012-13 to 3,23,362 in 2015-16 (a 24.4 per cent fall).
The response to the Modi government’s Pradhan Mantri Fasal Bima Yojana (PMFBY) - an insurance coverage scheme for financial support to farmers in the event of notified crop failure due to natural calamities, pests and diseases - has been positive from states like Andhra Pradesh and Maharashtra, which have allocated INR 1,855 million in the state budget of 2016-17.
Another scheme, the Pradhan Mantri Krishi Sinchayee Yojana (PMKSY), was launched to increase the coverage of irrigation and improve water use efficiency. In January 2017, NITI Aayog laid out a detailed roadmap for implementation of the irrigation scheme, prioritising ongoing projects. The move is expected to fast-track PMKSY - 99 priority irrigation projects and 21 projects with a total irrigation potential of 5.22 lakh hectares were expected to be completed by June 2017 (the data is yet to be released).
Under the e-National Agriculture Market (e-NAM), the government also aims to link 585 (so far 417 markets from 13 states have been integrated) regulated agri-markets across the country to increase agricultural output and reduce productions costs.
Despite the many initiatives, India’s agri-GDP under the Modi government grew by just 1.7 per cent per annum, which is less than half of what was achieved during the final three years of the preceding UPA government (3.6 per cent). This in turn has hit farmers' income and led to an increase in demand for farm loan waivers. But a waiver is a temporary solution and it can erode credit discipline, make banks conservative towards lending to farmers and deteriorate the state's fiscal position.
The Pradhan Mantri Jan Dhan Yojana (PMJDY) (launched in August 2014) has shown impressive results: as of June 2017, 28.90 crore bank accounts have been opened with a total balance of INR 64564.09 crore in accounts. However, in the haste to achieve targets, banks did not perform proper checks, leading to duplicate account holders.
The government’s Digital India project launched in July 2015 aims to eradicate corruption by ensuring digitisation and formalisation of the economy. Although e-payments picked up after the demonetisation announcement on 8 November 2016, they declined as soon as cash was replenished. Demonetisation contracted cash supply and slowed GDP growth but bore a few benefits such as increased digitisation, greater tax compliance and reduction in real estate prices. The number of persons in the tax net has increased by 91 lakh post demonetisation.
The health of India’s banking sector remains a concern. Non-performing assets (NPA) have been increasing and banks' asset quality has been deteriorating. As per the CARE Rating’s research report, the gross NPA ratio of 13 public sector banks rose by 143 per cent in the two-year period from March 2015 to March 2017. Only 5 of those 13 banks saw an increase of INR 50,000 crore between March 2016 and March 2017. To combat the grim situation of NPAs, India's Ministry of Finance released an ordinance on 4 May 2017 that allows the Reserve Bank of India (RBI) to enforce the Insolvency and Bankruptcy Code (IBC) 2016 on firms that fail to repay money borrowed from banks. Although the RBI's Internal Advisory Committee (IAC) has already identified 12 accounts of corporate borrowers (names undisclosed) for insolvency proceedings under the IBC, it will be interesting to see how the RBI will tackle the indispensable political-corporate nexus. NPAs have weakened growth in IIP because companies stuck with high debts are not keen to invest immediately even after the resolution of bad loans.
In its latest accomplishment, the government rolled out the Goods and Services Tax (GST) on 1 July 2017. Through a single tax system, the GST aims to reduce complexities and compliance cost of various taxes, lowers the tax rate and broadens the tax base, in turn increasing the tax revenue collection. However, proper implementation of the GST is crucial to prevent a setback for the economy.
Overall, through several initiatives and flagship programmes, the Modi government has been able to revive the economy and simplify the rules and procedures to initiate economic reforms in the country. However, it has failed to provide jobs, uplift the farming community and save financial institutions from NPAs. The government will have to structurally address these concerns of the economy.