Modi 2.0: Can the reelected Indian prime minister act on the economy? | New

Mumbai, India – Promising to spend large sums of money, Narendra Modi won a second term as Prime Minister of India earlier this month, and by a larger margin than expected. This was despite two disastrous economic policy moves and a slowdown in growth.

But his electoral victory was probably the easiest part. Now, once the inauguration ceremony is over, he and his coalition led by the Bharatiya Janata party will have to keep their election promises, just as the government's finances are deteriorating.

The party's manifesto for 2019 included a series of expensive spending promises, including $ 1.4 trillion over five years for infrastructure, as well as a significant investment in the troubled agricultural sector of the United States. India, and planned to turn India into a global manufacturing center.

The Indian economy seems to need a boost. Economists at the Central Bureau of Statistics estimated that gross domestic product (GDP) rose 6.6% in the last quarter of 2018, down from 7.7% the year before.

While data on GDP and other statistics have recently been extensively reviewed, many other indicators also point to difficulties. Sales of cars and motorcycles are down indicating a drop in consumer spending and inflows of foreign direct investment capital are at their lowest in six years.

But badysts say Modi is politically well placed to implement a series of major economic reforms, after gaining an overwhelming majority in the lower house. The BJP could also reach a majority in the Upper House by 2020, to the vacancy of seats in states that are party strongholds.

But the main problem of this plan in the implementation of these plans is that his government already spends more than its revenues, and with a larger margin than expected. Its so-called budget deficit in relation to the size of the economy officially raises to 3.4%. But a report not confirmed by the media this month suggested that it could have reached 4.5% in February.

"In April, the central government announced that it would borrow 4,400 billion rupees ($ 63 billion) in the first six months of the fiscal year … an astonishing amount of money and unprecedented that shows how much the tax pressure exerted by the government is under, "said Al Jazeera Saurabh Mukherjea, director of investments and founder of Marcellus Investment Managers.

The government received 15% less in tax and other income than it had expected between April and December 2018. For this reason, "no rational observer" expects the government to Government is now embarking on an economy of spending, said Mukherjea.

Indian voters "understand this paradigm of pre-election generosity followed by a tightening of the purse strings," he added.

'Need the time & # 39;

Some economists believe that policymakers should pursue large spending programs despite a growing budget deficit.

"A bigger public investment is precisely the need of the moment, no such" fiscal orthodoxy "is needed," R Nagaraj, an economist at the Institute for Development Research, told Al Jazeera. Indira Gandhi.

Governments should not be afraid of increasing domestic debt if the funds are used productively, if inflation is managed and if private investment is stimulated, he added.

Nagaraj points out that India's debt-to-GDP ratio, which according to IMF data is 67%, is "one of the lowest in emerging economies" and significantly lower than that of China (estimated to 253% in June 2018). The government "should not waste its political capital, as it did last time, but go ahead" with projects that could create jobs and revive the local economy, Nagaraj added. .

A $ 1.4 trillion investment in public infrastructure over five years may seem ambitious, given that total government spending in 2018-2019 was $ 352 billion. However, "if you include schools, clinics, public transportation and hospitals in the same package, then that is fine in the government's capacity," said Mukherjea.

If the government sells roads to private investors, as it has done with airports, "gradually, these expenses will be less demanding," he added.

& # 39; Dressing Solutions & # 39;

One of the most visible economic crises of recent years is the struggling rural economy of India.

Tens of thousands of farmers from across the country marched in the capital as part of a series of protests in November 2018. They wanted higher prices for their crops in a flooded market. cheap imports and export blocking, while the government was trying to control food inflation. .

They also requested loan waivers to help reduce the high level of personal debt, one of the main reasons why thousands of poor farmers commit suicide each year.

In response, the government has promised a huge 114% increase in funding from the Ministry of Agriculture to help cope with the worsening crisis. The February interim budget announcement included provisions for a new pension plan for farmers, an income support guarantee of $ 86 a year, and interest-free loans of up to $ 1,437.

Maitreesh Ghatak, professor of economics at the London School of Economics, describes many of these grants as "exceptional solutions" that do not solve the structural problems.

"What we really need is a greater investment of institutions and infrastructure, price and insurance reforms to protect against the risks of degradation," he said. .

Ghatak believes that current proposals are "support mechanisms" that do not encourage farmers to abandon unprofitable crops or explain why they are not able to receive better prices for their products.

Industrial policy "complacent"

In its commitment to double the size of the Indian economy to reach $ 5 trillion by 2025, the government has reaffirmed its commitment to its Make In India campaign. Launched in 2014, the program aims to develop the country's fragile manufacturing sector.

Unlike many other Asian economies, India has not yet moved from a predominantly agrarian economy to an industrialized economy. The contribution of the manufacturing sector to GDP has stagnated at 15% over the last five years. Bangladesh has recently surpbaded India in this regard, according to data from the World Bank.

According to Nagaraj, India became "complacent" in the late 1990s, as policymakers thought the country's services sector would leap forward, shifting the agricultural workforce to the service sector financial.

Many, like him, hope that the government will strive to formulate a new industrial policy and create a better business climate.

"In 1994, China and India spent about the same [research and development] as a percentage of GDP, but China has begun to promote technological progress while leaving things to market forces. Today, China spends three times more than India, "Nagaraj said.

"This should not continue," he added, calling for greater state involvement in long-term financing for investments, improving local infrastructure and providing energy for the environment. technological support.

However, a global economic slowdown and protectionist policies that reduce the demand for goods in key markets such as the United States and parts of Europe could hinder New Delhi's ambitions to boost manufacturing and double exports .

"Manufacturers will have to recapture the domestic market," Nagaraj suggests, adding that it would help India become a less import-dependent economy while supporting the sector's growth.

A brewing crisis

The markets reacted positively to the announcement of a BJP victory, waiting for it to lead to a period of political stability. The administration has received worldwide recognition for its progressive economic reforms. The introduction of a national system of value-added tax (VAT) and new bankruptcy courts have allowed India to figure 65 places on the World Bank's ranking on the ease of doing business from the World Bank in four years.

But a bad application of VAT left many small businesses in heavy red tape, forcing them to lay off staff.

And Modi's shocking decision in 2016 to withdraw more than 85% of traffic funds – as part of an anti-corruption action – harmed consumers, curbed growth and frightened private investment, as evidenced by the slowing down of new project proposals.

None of this has hurt the stock market – the main BSE Senbad index is up almost 10% since the beginning of the year. But many economists point out that India's weak wage growth and research suggest that rising unemployment is a more accurate sign of the poor health of the economy.

Another problem that could stumble Modi during his second term is the country's private lenders, called ghost banks, or non-bank financial corporations. The central bank, the Reserve Bank of India, proposed earlier this month to set minimum financial safety margins for these companies so that they can meet the demands of depositors.

Last year's collapse of infrastructure leasing and financial services (IL & FS), a large shadow bank, is a striking example of the scale of this crisis. After a series of failures on the part of the company, the government intervened and took control of it to prevent the forced collapse of other lenders.

Meanwhile, the proportion of missing payments from borrowers to state banks is increasing, which poses another economic problem to the new government.

"Our version of the collapse of Lehman Brothers is underway and should be the government's most urgent concern," said Mukherjea, evoking the credit gap created by the fall of IL & FS.

However, despite the rescue of IL & FS by the government and the RBI's injection of $ 30.3 billion into public sector banks, badysts warn that the sector will continue to plunder the public finances if the problems Structural issues continue to be ignored.

As the new Modi government prepares to take office, it seems that its administration needs to spend more time putting out fires before it can start building roads.