March 18, 2017    9 minute read

Is All Well in Modi’s India?

Post-Demonetisation Era    March 18, 2017    9 minute read

Is All Well in Modi’s India?

The victory of the Bharatiya Janata Party (BJP) in major state elections in India has consolidated Prime Minister Narendra Modi’s position at the helm of one of the world’s fastest growing economies. The BJP’s recent victory in Uttar Pradesh — India’s largest state, with a gargantuan population of 220 million — has refreshed Modi’s parliamentary mandate and given renewed vigour to his policies.

In 2014, Modi rode to election victory on the crest of a wave of overwhelming support for development, anti-bureaucratic, and anti-corruption policies. As his critics observe, after nearly three years of BJP rule life has scarcely changed for hundreds of millions of Indians who live on just $3 a day and lack sewage systems and electricity.

Yet India’s sheer size is matched with the sheer scale of problems its government and population face. If William Beveridge, who in 1943 famously identified five ‘evils’ plaguing wartime Britain, applied his methods to twenty-first century India he might easily find several dozens.

Lending Crisis

India’s state banks, vestiges of Indira Gandhi’s nationalisation programme, are loaded with non-performing loans rashly granted to infrastructure projects that have either stalled or collapsed. The nation’s private banks are hardly faring better: in Q4 2016, ICICI reported 7.8% of its loan book was non-performing, up from 4.7% in the same period in 2015. Lenders are consequently withholding the fresh credit cycle that India’s private sector needs.

February’s budget, however, made no provisions for bank recapitalisation, and the resignation of Raghuram Rajan, the internationally-respected head of the Reserve Bank of India (RBI), last year does little to address the banks’ vexing issues. Rajan had pushed banks to restructure their toxic assets and whether Urjit Patel, his successor, will be as instrumental in tackling the problem remains to be seen.

The Solution

Meanwhile, the present cost of recapitalisation is forecast to rise to $90bn by 2019, according to Fitch Ratings. Arvind Subramanian, India’s chief economic supervisor, supports the creation of a Public Sector Asset Rehabilitation Agency (PARA), which would enable lenders to bifurcate their performing and non-performing assets, and resume lending. Yet questions abound regarding the efficacy of such an endeavour.

$90bn is the projected cost of the banks’ recapitalisation by 2019

Subramanian thinks that by compelling the RBI to reduce its holding in government bonds and return some to New Delhi, India could effectively issue fresh sovereign debt without any further borrowing.

Lenders could then, in theory, sell their poorly-performing loan assets to the newly-minted PARA and, in turn, buy government bonds. The government could, in turn, recapitalise the “bad bank” with this cash, and inject the remaining proceeds into commercial lenders.

The side effects of such a move could be harsh. Pushing the RBI would anger investors and damage the institution’s standing and independence. Moreover, increased involvement by New Delhi in the banking system may reduce the prospects of privatising India’s remaining 19 state-owned banks. Most obviously, it is also hard to see how relieving banks of their non-performing assets will encourage pecuniary prudence among lenders.

Infrastructure Development

The stymied flow of credit has exerted a concurrent strain on Modi’s efforts to replicate his success in developing infrastructure during his thirteen-year tenure as Chief Minister of Gujarat —the so-called “Gujarat Miracle”— on a nationwide level.

In 2016, Finance Minister Arun Jaitley estimated India needed $1.5trn in investment to give seven hundred thousand villages roads by 2019, solve the rural sanitation problems, address the country’s outdated railways, and address the deficit in rural electrification. While the government recognises that public efforts are required before private funds commit resources, it is unclear how India’s parsimonious private sector can rise to the occasion.

Presently, amidst the slowdown in Indian lending, significant capital flows towards India’s infrastructure projects come from overseas. Among a myriad of other international investors, the Carlyle Group intends to invest $73m in Feedback Infra, an Indian infrastructure developer based in Gurgaon, the capital of Haryana state. To a large extent, infrastructure development is intrinsically linked to the global economy and should uncertainty transform into a worldwide downturn, the burden of narrowing India’s infrastructure gap would fall yet further onto the government.

Great strides have nonetheless been made towards improving the nation’s infrastructure. Modi’s “Clean India” policy has directly promoted sanitation across some 4000 cities. Moreover, a solar project in India’s southern Tamil Nadu state recently replaced California’s Topaz Solar Farm as the world’s largest solar power plant. The government also aims to power 60 million homes using solar energy by 2022 and produce 40% of its power from renewables by 2030. Although numerous villages across the nation have seen virtually no change in living standards since independence, it is undeniably—and finally—underway.


India also suffers from a dearth of jobs. Modi’s “Make in India” push to drive up domestic manufacturing is well reflected in the recent budget, which promised public investment in the textiles, leather, and tourism sectors, will hopefully roll out training programmes and boost job growth. Yet, India simply lacks the high-quality factory jobs that lifted hundreds of millions of Chinese out of poverty.

The stagnant private sector investment has left many young Indians without jobs. Moreover, for those in the nation’s burgeoning IT industry, the increased implementation of technology poses a serious threat. Capgemini India’s chief executive, Srinivas Kandula, recently stipulated that up to 65% of the country’s IT workers could face redundancy over the coming years.

In spite of all this, India is presently recording unprecedented drops in unemployment — over 50% in particular states. As expected, this incredulous statistic is due to a sharp increase in state-sponsored work schemes. While undoubtedly a useful method of tapping into the large pool of unemployed manual labourers, this is merely a temporary solution that falls far short of reducing unemployment.

Broad Reforms

In a few months, the BJP is set to unveil the new Goods and Services Tax (GST), which ventures to cut through the convoluted web of federal and level tax laws and increase the nation’s tax base. The GST is also linked to the BJP’s efforts to stamp out corruption, which has chronically plagued India and hampered business development at all levels by reducing officials’ ability to impose arbitrary levies and charges.

The move was well received by corporates, who view the GST as a key step to revitalising private sector demand and encouraging foreign direct investment — a key Modi policy — which in turn may assist job creation for India’s beleaguered youth. Amazon, for instance, commenced its Indian operations in 2013 and has focused on developing its business in the country following its failure to adequately penetrate the Chinese market. But like in China, resistance from India’s local companies has proven formidable – homegrown Flipkart and Snapdeal have dogged Amazon’s efforts all the way, not to mention the creeping influence of Jack Ma’s Alibaba.

The Demonetisation

Despite being hit the hardest by last year’s demonetisation, nation’s poor are still viewing Modi in a favourable light. Among his policies to improve social mobility across India, the “Jan Dhan” bank account schemes have given millions of India’s poorest some semblance of financial independence.

The government also reports that last year’s cancellation of 86% of the nation’s banknotes in order to clamp down on the “black economy” has had little impact on GDP growth. Q4 2016 growth slowed marginally to 7% from 7.4% in Q3, against the wide consensus that it would fall to 6% or lower. Quite reasonably, many question how scrupulous the government’s figures are.

40% of Indian GDP originates from the informal sector, which, naturally, is incredibly difficult to measure precisely. Many cash-in-hand businesses were forced to suspend operations during the cash crisis — the precise impact of which is probably not captured by official statistics. Still, Fitch estimates that India’s GDP will grow a further 7.2% in 2017/2018.

Overall, the hysteria over the sudden demonetisation appears to have died down and the fresh 500 and 2000 rupee notes are in circulation. As one Uttar Pradesh farmer said of Modi’s decision to scrap the notes ahead of the recent election:

“He may have hit us in one eye, but he hit the rich in two eyes.”

However, not all Indians are so upbeat about the BJP’s policies.

Social Issues

For many, the spectre of the 2002 Gujarat riots, which occurred during Modi’s tenure as Chief Minister of the state, highlights the dangers of the BJP’s Hindu fundamentalism. After an arson attack perpetrated by Muslims against a train carrying Hindu pilgrims claimed 57 lives, state-wide anti-Islamic riots resulted in the deaths of over 1000 people.

Yet, communal violence in India is not a recent phenomenon. The 2002 riots are one atrocity in a long line of religiously-motivated attacks by both Hindus and Muslims harking back to the country’s independence and beyond. Those who insist that Modi is eroding India’s traditions of secularism ought to question just how “secular” the country has ever really been. Nevertheless, it will require no small effort to relieve the nation of its religious tensions, and many in India and abroad will be eagerly waiting for signs that the BJP will address this issue head on.

A Bright Future

Those who condemn Modi as a right-wing demagogue ought not to be chastised for viewing him through zeitgeist of twenty-first century Western politics — such is natural. Nonetheless, despite still suffering from many ailments, India’s star is undeniably ascending as it emancipates itself from the shackles of draconian laws, inflated bureaucracy, and decrepit infrastructure. Provided the BJP can devise some policy to efficaciously tackle the lending crisis, India’s growth should continue.

As Congress MP Shashi Tharoor, who has written several books on India under British rule, pointed out recently, there is perhaps no greater sign of the nation’s rising place in the world than Theresa May visiting New Delhi to seek Indian investment.

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