Economic Challenges for Modi 2.0

Supporters of BJP and PM Modi are euphoric as NDA government has returned into power with increased majority in 2019 Lok Sabha elections with BJP itself increasing its tally to 303. NDA is also expected to garner majority in Rajya Sabha as early as 2020 making it much easier for it to get through its desired proposals and legal enactments in both houses of the parliament. This will allow BJP to further speed up the implementation of its cherished political agenda overriding the weakened challenge from opposition parties. Does that mean that the government no longer has any tough challenges to overcome? Not really.

Fact remains that though BJP has decimated the electoral power of opposition parties, they were never its real challengers. The biggest threat to BJP rule has always been risk of mass protests because of simmering discontent among the peasants, workers and lower middle class people owing to the constantly deepening economic stress and misery in their lives. Presently it has overcome that threat with the nationalistic jingoism, promises of welfare packages like Kisan Mandhan, Shram Mandahan, Ujjwala, etc and the strength of its organisational machinery. However, the economic problems facing the country and the hardships caused to the people have seen no resolution and will continue to worsen. Despite all this, the people have given another chance to Modi leadership as it could successfully project itself to be at least making some decisions and efforts in that direction, successful or otherwise, whereas none of the opposition leaders and parties in contention was seen presenting a coherent alternate agenda for this and also carried the blot for earlier deterioration in the economy during their rule. But that doesn’t mean that people are happy and content with their economic lot and will not waver in their support to Modi if they don’t see any alleviation of economic hardships.

Despite loud trumpeting of India being the fastest growing nation on the path of becoming an economic superpower, anybody looking at facts even fleetingly will find that the Indian economy, on the contrary, is in dire straits and in the cross hairs of a serious slow down. January-March 2019 Gross Domestic Product (GDP) growth has been computed as 5.8% which is lowest in last 5 years and almost the same as during the same last quarter of Manmohan Singh government in 2014. The veracity of these GDP growth figures has been questioned by large number of economists in India and abroad, but even if we take these at face value, these point to impending slowdown in economy. Index of Industrial Production (IIP) for February and March 2019 confirms this slow down as after showing stagnant growth of 0.1% in February it showed downward trend of 0.1% in March. Out of the 22 industry groups, 13 have shown decline with capital goods production decreasing by 8.7% in March after decline of 8.8% in February earlier.
GDP data also confirms that private consumption growth has been severely constrained as the income growth has been flat or negative for majority of the working people in real terms both in rural as well as urban areas. Consumer durable sales were already showing stagnant growth for several months but even fast moving consumer goods sales are flat in recent months as people apprehending further problems and income stagnation are cutting down even on essential necessities of their daily life like soaps, oils, tea, coffee, etc as demonstrated by tepid sales announced by consumer companies like Unilever, Marico, Dabur, etc. Besides we have also seen huge declines in sales of such products as cars, two wheelers, tractors, etc leading to deep production cuts by big manufacturers like Maruti and resultant retrenchments in the vendor companies supplying parts to them.
On the other hand, public consumption or government expenditure has also gone down as the government tax and non-tax revenues have been short of target by more than 1 lakh crore rupees with both Income Tax and GST collections under budget targets because of economic slowdown. As a result, fiscal deficit has gone beyond budget estimates to 3.39%. This is also to be seen in the context that government has hidden much of its deficit by the jugglery of accounts known as off budget financing as it has not fulfilled its payment obligations to many public sector undertakings like FCI, Oil Marketing Companies, PFC, Discoms, etc and huge debt is outstanding in their balance sheets which is actually the government debt hidden there to hide acute fiscal crisis in government finances.
All of this is resulting in low or negative job creation scenario. On 31st May government, after long denials and dithering, has officially confirmed that NSSO in its periodic labour force survey (PLFS) has found unemployment rate to be 6.1% which is at highest level of last 45 years. However, even more worrying is the labour force participation rate (LFPR) of only about 40% which is among the lowest in all comparable economies worldwide and shows the desperation and deep distress for the people especially the youth, 30% of whom are now neither in any education or training programme nor in a regular employment. Worse is the situation for women for whom LFPR has gone below 15% evidencing overwhelming majority of women being stuck in the vicious and back breaking unpaid work, domestic or within the family based production system. Even now we are coming across more news of retrenchments in all sectors of economy from Jio and BSNL in Telecom to public sector banks because of closing down of thousands of branches consequent to mergers completed and planned.
Rural distress reflected in huge number of suicides by agricultural workers and small medium farmers unable to repay huge debts arising out of stagnant wages or falling crop income and high costs of living because of rising prices especially very expensive education and health services have been discussed at length without any resolution in sight. Modi had promised doubling of farmer incomes by 2022 but there is no sign of it’s materialising. Instead the things are getting worse with large number of small farmers joining the labour market which is already over supplied.
We can keep on citing number of such issues as banking NPAs, liquidity issues in NBFCs and Mutual Funds, crisis in real estate market, increasing burden of indirect taxes on common people, lower capacity utilisation in industry, increasing industrial bankruptcies, etc. But let us now see what is the real issue here? Real problem is squeezing of demand in both internal and external markets. We shall examine here internal factors in brief to show that this is a crisis of capitalist economic system for which Modi government has no resolution except to transfer its burden from the big capitalist monopolies on to the common people pushing them into indigence and dire poverty.


After the neo liberal economic reforms started in 1990s, the Indian capitalists, to lower production costs in the intense competition for markets, have constantly increased investment in constant capital (technology, machinery, buildings, materials, etc) as compared to variable capital or employment of labour. Therefore, the employment creation elasticity has continuously declined, i.e., less and less jobs have been created compared to same level of growth in GDP. Besides, wage growth has declined and casualisation of jobs has increased, which results in less wages for same work for large number of contract and ad hoc workers compared to permanent workers. Consequently, share of labour in gross value added has declined vis-à-vis that of capitalists. Hence consumption demand of the working class has not increased on the same level as that of the growth in economy. Freely expanding bank credit for retail consumption has for long been deployed for increasing this demand. However, with enough jobs not being created and wages not growing commensurately, there was bound to be a limit to this expansion as the loans ultimately need to be repaid at some stage breaking this cycle. Thus, the contraction of demand and lowering capacity utilisation of industry in last decade.
Most of these investments in constant capital were made by expanding bank credit in the GDP. Especially after the global financial crisis of 2008, UPA government, to avoid that crisis, encouraged huge investments in infrastructure by nudging public sector banks to relax credit norms and disburse loans freely. However, demand contraction owing to stagnant job creation and wage growth, the profit rates per unit of capital deployed have declined, and sufficient cash is not being generated by operations. This has severely impacted loan servicing capability of corporates with many unable to even service interest on huge bank credit leading to Non Performing Assets (NPAs) or bad loans and liquidity crisis in financial sector both banks and NBFCs. This has also resulted in worsening investment climate with new investment proposals of only 9.5 lakh crore rupees last year were at lowest levels in 14 years, with share of private sector being at 45% down from usual 60%. Low level of new investments, increased government debt and high fiscal deficit indicate impending recessionary conditions and further job losses.

So how does the new BJP government propose to deal with these economic challenges?

These are some of the prescriptions that we garner from election manifesto, speeches, NITI Ayog and RBI policy decisions and FICCI-CII declarations. More capital infusion in banks and injection of more liquidity into financial markets by open market operations and Swap deals by RBI so that Banks and other NBFCs / FIs lend more to industry. Reform labour laws to free capitalists from any restrictions on hire and fire, casualisation, labour welfare and work place safety issues. Reform land laws and relax environmental regulations for easy and cheap availability of land, forest, mines and other natural resources to corporates. Give more incentive packages in the form of lower taxes and other fiscal and non-fiscal concessions for exports through Special Economic Zones (SEZ) now being renamed as Employment and Economic Hubs. Lower interest rates to reduce costs of capital by cheaper bank loans to encourage further investments in constant capital. Bigger bail out packages to bankrupt companies. Lower corporate and other direct taxes. Huge spending of 100 thousand crores on infrastructure to kick start the demand by expansionary economic policies.
But, as one can see all of this is more of the same medicine which led to present critical situation of the patient, Indian economy. Hence be prepared for more jolts and shocks.

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