Prime minister Narendra Modi completed his first year office in the midst of a shower of bouquets. “ The biggest achievement of the National Democratic Alliance government headed by Prime Minister Narendra Modi”, wrote former chief spokesman and now minister of communications, Ravi Shankar Prasad, “is to restore confidence and hope in India”. Others have echoed this in various ways. But if that is really so why is the RSS so deeply worried that there has been a steep decline in his government’s popularity in the last few months?
The answer is simple and stark. People voted the Congress out not because it had proved corrupt or indecisive – for the first is endemic, and the second the norm, in Indian politics. They did so because the economy had stalled, their future had become uncertain, and no one in that government seemed to care.
From 2003 till 2011 the economy had grown at more than 8 percent per year. Industrial production averaged 10 per cent a year and briefly touched 14.5 percent. NSS data show that in each of these years the economy created seven million new jobs. But in 2011 industrial production ground to a sudden and complete halt, and quarterly employment surveys by the Ministry of Labour and Employment showed that job growth had fallen below a million a year.
Allowing for some lack of comparability in the two sets of data this nevertheless means that up to six million young people who would have got jobs had growth continued at its earlier pace found themselves forced to continue living off their already highly stressed parents .In addition tens of millions of others – small businessmen, shopkeepers, artisans and construction workers felt an alarming rise in vulnerability.
Modi promised them a speedy economic recovery and its concomitants, jobs and security. But a year has passed and nothing has changed. The BJP’s leaders know this and have begun to grasp at straws to show that the economy has turned the corner. But most of the available evidence points in the opposite direction. The claim that India’s growth rate has shot up to 7.4 percent and outstripped China’s has been shown by the government’s own Economic Survey as being a statistical illusion created by a change in the method of calculation.
The real state of the economy is reflected by the continued stagnation in manufacturing which has increased by an anaemic 2.3 percent in 2014-15. But to say that the Modi government has not succeeded in turning the tide is not to suggest that he has not tried.
In a recent interview Kumaramangalam Birla, head of the Aditya Birla conglomerate, gave a long list of reforms that include a fair and transparent auction process for coal blocks and spectrum for mobile telephony; a pooled pricing system for natural gas ; restructuring public sector banks’ bad loans to free credit, market-based pricing of petrol and diesel, replacing a plethora od local taxes with a Goods and Services Tax, drastically limiting the ‘Inspector Raj’ and amending various other acts to free the labour market.
All of these reforms are long overdue. They will remove hurdles to sustaining growth once it gets started. But they will not kick-start an economic revival because none of them addresses the two huge roadblocks that have brought development to a halt. The first is the non-availability of land for new projects. The second is an acute dearth of capital for investment. Both of these are self-inflicted wounds.
The paucity of land arises from the refusal of every government since Independence to recognise that land belongs to the people who own or live on it and not to an abstract entity called the State. In a democracy, therefore, people must be persuaded, not forced, to part with it. To do this they must benefit from the transfer, and not become its victims. The 2013 land acquisition amendment conceded this in principle but did not go far enough. Mr Modi’s proposed amendments are a step backwards and will only make land harder to obtain.
The shortage of capital to finish stalled projects and finance new ones, does not arise from a dearth of saving but from investors’ unwillingness to invest. Its root cause is the sky-high cost of borrowing . In March A.M. Naik, the chairman of Larsen and Toubro, stated bluntly that at the interest rate of 12 percent that many industry groups were having to pay, no one would come forward to invest. A simple calculation shows why.
The construction period is four to five years for a coal based power plant, 8 to 9 years for a nuclear plant, and 10 to 12 years for a hydro-power plant . So even with the best of financial planning a nominal interest rate of 12 will add 40 percent to the capital cost of a coal fired plant, 70 percent to the cost of a nuclear plant, and more than 100 percent to the cost of a hydro power plant during the construction period. This virtually guarantees their insolvency even before they go on line.
A high borrowing rate discourages investment in two other ways: it diverts savings from the share market to bank deposits and brings down share prices. This makes it harder for promoters to raise equity capital and share their risk with other investors . At the same time it makes hire purchase more expensive. This lowers demand, especially for consumer durables like computers, automobiles, home electronics and electrical appliances, which are at the cutting edge of industrial growth.
At the root of the flight from investment lies the RBI’s obsession with controlling inflation by raising the interest rate. This began in the time of RBI Governor Y.V Reddy in January 2007, but has been turned into a religion by the current Governor, Raghuram Rajan. Rajan has turned a deaf ear to every entreaty to interest rates since the day he became Governor claiming that he is not convinced that inflation is over when India was actually experiencing a deflation of 2.33 percent, measured by the wholesale price index for the past year. This has pushed the real cost of borrowing for sound, to a crushing 14.3 percent.
Marginal rate cuts of a quarter percent at a time will therefore not do. What India needs for the revival of investment is an unambiguous commitment by the government that in future its interest rate policy will be geared to promoting growth, not fighting inflation. Should the latter be needed it will be done by reducing government spending and not by crushing credit. Implementing this will require long term interest rates to be brought down not by half a percentage point but by five percent over the next year to a level at most one or two percent above the rate of inflation. This is no longer just an economic imperative but a political one as well, for the BJP’s honeymoon period in office is coming to an end.