Opinion
Questions on India's economy that Modi and Gandhi should answer
Summary
- India’s two main political parties are yet to say what model they prefer for developing the Indian economy. Unfortunately, neither party’s leader has offered a basis for confidence in economic policy reforms.
The Lok Sabha election is drawing to a close, leaving us no better informed on India’s economic future. The campaigns of both the Congress-led INDIA and BJP have produced more questions than answers.
India’s economic model is broken. The economy needs a structural transformation for moving labour out of unpaid distress work and disguised unemployment on farms to better-paying productive jobs in factories. Without this, we risk our enormous demographic dividend going waste. Besides, we should not have farmers toiling in the sun as the planet heats up.
How do INDIA and BJP propose to kick-start that transformation? This is unclear from their manifestos, speeches and interviews. The campaign has generated noise on redistribution of wealth. In any country, it is legit to question how the competing claims of various interest groups on the distribution of gains from economic growth would be settled. It would help if INDIA’s Rahul Gandhi and the BJP’s Prime Minister Narendra Modi tell us what according to them is the best way to sort out distributional conflicts and handle inevitable trade-offs.
Gandhi ought to explain INDIA’s policy position on the Congress manifesto promise of legal minimum support prices (MSPs) for farm produce. A similar proposal for law-backed MSPs, agriculture economist Ashok Gulati said, was rejected by Manmohan Singh of the Congress when he was PM. Gulati was chairman the official body that recommends MSP hikes during Singh’s tenure.
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Has the party disregarded Singh’s position on this subject or has he had a change of heart? Either way, the Congress must explain how price discovery can take place in farm markets if a legal MSP is made binding on all buyers. The fallout inescapably would be excess supply of MSP products and shortages of others. How will supply respond to demand in the absence of price signals?
The PM, in turn, should explain his government’s modest record on macro-economic policies and the urgent changes they need. Three of the four engines of GDP growth—private consumption, private investments and exports—are out of steam. Increased welfare spending and ‘laabharthi’ economics haven’t quite fired consumption spending. Wages are not growing. Labour’s bargaining power is not improving.
The government cut corporate tax rates and is making its capex sweat. But private investment remains sluggish. Economists at a conference on India’s economic growth at the Indian Statistical Institute last month debated if the fiscal multiplier is working at all. Has the relationship between public and private investment snapped?
The fiscal stimulus administered by the Congress-led UPA government to help the economy recoup from the shock of a global crisis had sent the deficit rising. It was almost 6.5% of GDP in 2009-10 at its peak, after which the UPA reduced it by cutting spending and sacrificing GDP growth in the process. It bequeathed a fiscal deficit of almost 4.5% of GDP to the BJP government in 2014.
The Modi government increased tax rates on fuels, which helped reduce the deficit to about 3.4% by 2018-19. However, the deficit started going up again, rising as high as 9.17% of GDP in covid year 2020-21 as lockdowns reduced tax collections. In April 2024, on the eve of elections, it was 5.8%, according to the 1 February budget’s estimate.
Even before the pandemic wrecked government finances, the government had already invoked the ‘escape clause’ of the Fiscal Responsibility and Budget Management (FRBM) Act to take leeway in the fiscal deficit for 2019-20. No other government has ever invoked this clause.
Given the implications for inter- generational equity, inflation and GDP growth, what does the PM think can be done to resolve India’s chronic fiscal stress problem?
The Congress promise of ₹1 lakh per year cash transfers to a woman in every poor household may be one way of nudging the economic growth engine of private consumption. But Gandhi should explain what data-base would be used to identify beneficiaries and avoid leaks, and if he has a plan to mitigate the increased risk of populism; ₹1 lakh a year may be hiked ahead of every election season. It would also help to know if fiscal stress worries his party.
Also read: Nyay Patra: ‘ ₹1 lakh per year, 50% govt job quota’, Congress' key promises for women ahead of Lok Sabha polls
As for the BJP, the 10-year record of its government rests largely on implementing ideas that originated in previous governments or states. Its flagship PM Kisan was taken from Telangana’s Rythu Bandhu and Odisha’s Kaliya. Its welfare narrative depends to a large extent on a rural employment guarantee and free foodgrain scheme that were inherited from the government led by Singh. The GST rollout and inflation-targeting framework for the central bank also originated in the Congress-led administration. Both were work-in-progress in 2014.
So too, the digital economy, including direct benefit transfers, which has been scaled from its modest debut on technology platforms built under the previous regime. The BJP’s signature ideas, demonetization and electoral bonds, turned out to be disasters. Electoral bonds were struck down by the Supreme Court for being unconstitutional. Is the BJP thinking of investing in its capacity for policy design?
