GDP debate: Modinomics vs Manmohanomics
The notion that the decline in GDP is the result of demonetisation is a myth
Between 2009-10 and 2013-14, the period during which Manmohan Singh was India’s Prime Minister, the Indian economy grew at 6.7 per cent and emerging market economies by 6.43 per cent. Between 2014-15 and 201819, the Indian economy, under Prime Minister Narendra Modi, grew at a superior yearly run rate of 7.4 per cent, despite the emerging market countries growing by 4.52 per cent. The recent 4.5 per cent gross domestic product (GDP) print for September 2019 quarter for India, has, however, reignited the Modinomics versus Manmohanomics debate.
Where the Modi government has done significantly better than Singh’s United Progressive Alliance (UPA) government, is infrastructure. The length of national highways, which stood at 91,287 km in March 2014, had increased by March 2019 to a solid 135,676 km, growing at 8.25 per cent a year. This was versus a modest run rate of 5.29 per cent under his predecessor. The number of airline passengers grew by an annual 9.2 per cent in the UPA regime, versus a robust 15.28 per cent in Modi’s first term.
More importantly, Modinomics has managed the growth-inflation conundrum very effectively. In April 2014, retail inflation, defined by the consumer price index (CPI), stood at 7.72 per cent, with food inflation at 9.21 per cent. The CPI, however, averaged at just 4.3 per cent in Modi’s first term, with food inflation at barely 1.59 per cent between October 2016 and October 2019. Importantly, food inflation was reined in, despite an average 24 per cent hike in the minimum support price (MSP) for kharif crops in 2018.True, in October 2019, CPI touched 4.62 per cent, but the cumulative retail inflation in the AprilOctober 2019 period is still benign, at just 3.47 per cent.
The current slowdown in India is cyclical and not structural in nature, because fundamentals of the economy are in fine fettle. The IHS Markit India Manufacturing PMI, rose to 51.2 in November 2019, from 50.6 in October 2019. While comparisons are often odious, India continues to decisively outperform peers. The recent sluggish pace comes against the global backdrop of 17 months of a protracted Us-china trade war, a technical recession in Singapore with GDP growth rate of barely 0.1 per cent in the September 2019 quarter, Venezuelan bankruptcy, double dip recession in the world’s eighth largest economy, Brazil, in May 2019, continued turbulence in the UK around Brexit, a recession in Italy, steep slowdown in Japan amidst a trade war with South Korea and most importantly, industrial recession in Germany — that is battling negative bond yields and its slowest growth rate since the 2011 European crisis. The September 2019 PMI number for Germany, the fourth largest economy globally, dropped to 49, the first time since April 2013 that Germany’s PMI fell below 50.
In India, reduction in corporate tax from 30 per cent to 22 per cent and for new companies to 15 per cent, hike in dearness allowance to 17 per cent from 12 per cent, increase in export credit limit under priority sector lending norms for small exporters, from ~25 crore per borrower to ~40 crore, corpus of ~25,000 crore for stalled housing projects, yearly pay-out of ~6,000 to 14.5 crore farmers irrespective of land holding size, 100 per cent FDI in coal mining, sale of coal and contract manufacturing, 26 per cent FDI in digital news media, ~70,000 crore recapitalisation package for public sector banks and allowing additional 15 per cent depreciation for vehicles bought till March 31, 2020, are measures that will address the demand side of the economy, which has been tepid.
It needs to be mentioned here that passenger vehicle sales in India crossed the three million milestone for the first time in 2016-17. Maruti Suzuki took 37 years to sell 20 million vehicles in India, with the first 10 million vehicles taking 29 long years to sell. Interestingly, the last five million units were sold in barely three years, between 2016-17 and 2019!
Repeated chatter that the current decline in GDP is the result of demonetisation is a myth. The number of income tax payers jumped in 2018-19 to 84.5 million from just 36.8 million in 2013-14. Thanks to demonetisation, the total number of unified payment interface (UPI) transactions in October 2019 hit a record 1.15 billion. Under Singh’s tenure, the number of digital transactions stood at a measly 93.2 million in 2012-13. Under Modi’s leadership, digital transactions were a whopping 9.217 billion in volume terms in 2017-18!
Fear mongering about efficacy of goods and services tax (GST), is also incorrect, as GST has strengthened tax compliance, with the indirect tax-toGDP ratio going up to 5.4 per cent postGST, from 4.4 per cent in 2014-15.
Externally, too, things under Modi look far healthier than they ever were under Singh, with the share of shortterm debt in total debt, at only 20 per cent in March 2019,versus 24.8 per cent in March 2013. Also,the ratio of short-term debt (original maturity) to foreign exchange reserves rose at a disturbing 33.1 per cent in March 2013, compared to 26.3 per cent in March 2019. That the Modi government, which successfully completed its first term and six months of the second term, with no balance of payments crisis to date, speaks volumes about the external debt management of the economy, despite challenging global geopolitics. Foreign exchange reserves were at a record $448.60 billion as on November 22, 2019. Under Singh’s tenure, the current account deficit (CAD) was consistently above 3.5 per cent, reaching a dangerous level of 6.7 per cent in the December 2013 quarter, whereas the average CAD figure in Modi’s first term was well below 2 per cent. Talking of foreign direct investment (FDI), while India averaged $18.2 billion in FDI annually under UPA-I and, $38.4 billion under UPA-II, in the Modi government’s 5.5, the annual FDI figure averaged handsomely at almost $60 billion.
In terms of fiscal prudence too, the Narendra Modi regime wins hands down, with an average fiscal deficit figure of only 3.7 per cent for the 2014-15 to 2018-19 period, which is much better.