Indian Prime Minister's Narendra Modi 2014 election victory was partly based on a reputation for competent economic management during his tenure as Chief Minister of his home state of Gujarat.
His government's record has not matched the promise. It should be a central issue in the 2019 election, with jobs, incomes and poverty levels already figuring prominently in the campaigning. Unfortunately, a lack of progress on economic reforms combined with the resort to easy economic populism by both the Bharatiya Janata Party (BJP) government and the Congress led opposition does not auger well for the future.
While the economic growth rate of 6%-7% under Modi looks impressive by both Indian and global standards, it has been underpinned by factors, such as low oil prices, and strong capital inflows underpinned by loose monetary conditions in advanced economies. Both these are now reversing.
The level of growth has been inadequate to create the 1 million jobs per month needed to accommodate new entrants to the work force. It was disclosed in late January that unpublished data from the National Sample Survey Office, a government body, showed 6.1% were out of work in 2018. That was three times more than the last survey, produced in 2012, and the highest level since the early 1970s.
Recently, 93,000 people applied for 62 jobs as a government peon in Uttar Pradesh and 23 million applications were received for 90,000 posts at Indian Railways. Modi's big ideas, such as the "Make in India" program, have turned out to be vacuous slogans, when it comes to creating jobs.
Vulnerabilities are emerging. The budget deficit is around 3%-4%, primarily due to rising government expenditure including some quixotic items; notably a $405 million, 183 meter statue (four times the height of the Statue of Liberty) of Vallabhbhai Patel, a hero of Modi's BJP. The current-account deficit is around 2.5% of gross domestic product, driven by higher oil prices and weakening exports. When state government deficits are included, the twin deficits (budget and current account) are approaching 10%. Foreign investment inflows which allowed shortfalls to be financed are slowing. In 2017-2018, foreign direct investment into India only grew by 3%, well below the 8.67% in 2016-17, 29% in 2015-16, 27% in 2014-15, and 8% in 2013-14. These pressures have driven sharp declines in the Rupee which stands at 72 to the U.S. dollar compared to 60 when Modi was elected, a 17% decline.
Some elements, such as the oil price, are outside India's control. Changes in the global economic structure have made the traditional development options of low-cost, low-skilled manufacturing in global supply chains difficult. But there have been important policy failures.
The government has not addressed problems in the agriculture sector (some 20% of the economy). Sales prices have not kept pace with rising costs resulting in stagnant or falling farm incomes. Price support schemes have proved ineffective. The sector remains reliant on unreliable monsoons and inadequate irrigation. Despite write offs, high debt levels, linked to usurious rates from rural moneylenders, weigh on smaller farmers.
The state-dominated banking system has around $150 billion of nonperforming loans, or around 15% of the loan book. Poor practices abound. Flush with foreign inflows, banks lent heavily to the shadow banking system which makes up around 25% of the credit market. The failure of Infrastructure Leasing & Financial Services, also known as IL&FS, a major infrastructure lender, highlighted the estimated $120 billion exposure that banks and mutual funds have to non-bank lenders.
The government has not properly recapitalized government-owned banks. Private banks have not written off suspect loans, sometimes to over-indebted businesses who are major supporters of the government. Market discipline is poor with IL&FS being taken over by the government to avoid a default.
The government's privatization program has not progressed, illustrated by its failure to sell a debt-laden Air India. The government's infrastructure strategy -- sanitation for all by 2019, a roof over every head by 2022, electricity for every household and connectivity to every village -- has not been completed.
The Aadhaar universal biometric identification system, based on naive faith in technology, has not met expectations. There are problems of fraud, data sharing and loss of privacy. Despite upgraded IT systems, noncompliance with the comprehensive goods and services tax system remains around 30% of taxpaying entities, and collections may be as much as $14 billion or 15% behind the government's target.
The government's demonetization program exemplifies the problems. On November 6, 2016, large-denomination notes were banned, in a misguided attempt to regain control of India's shadow economy, estimated at 20-25% of the GDP, and attack corruption. But the effect was to slow economic growth and undermine small businesses and rural communities with little impact on either transparency or corruption.
Economic failures have shifted the prime minister's focus. The government has changed the calculation methods for economic statistics, masking the lack of economic progress.
Government interference in independent bodies is increasing. Modi has forced the resignation of successive Governors of the Reserve Bank of India. The government wants a more compliant RBI to improve its re-election prospects by cutting interest rates, relaxing restrictions on bank lending, leniency for distressed corporate borrowers and financing likely pre-election spending.
While the formal election campaign has not begun, both government and opposition have already sought to buy votes through populist measures. The government announced a universal health care system and guaranteed minimum income schemes for farmers. The opposition is proposing a fashionable universal basic income scheme. More such grand gestures can be expected before the election. The programs are unfunded and short on detail. If the past is any guide, then few of the programs will be effective or benefit the needy.
To fulfill the Prime Minister's promise of better days ahead, any future government needs to address deep-seated systemic problems. Improving tax collection and pruning nonproductive election focused government spending would be a good place to start. Tackling the problems of rural areas, making it easier to employ workers, improving land usage, making well directed investments in electrification, roads, railways, ports, airports, education and health as well addressing serious environmental issues such as polluted air and waterways would be helpful. Reducing corruption and political influence-buying by businesses and the wealthy would improve the investment environment. Without progress on these fronts, India will always be a country of the future. The current bout of election promises won't change that.
Satyajit Das is a former banker. His latest book is 'A Banquet of Consequences' (published in North America as The Age of Stagnation). He is also the author of Extreme Money and Traders, Guns & Money.