Why PM Modi seems to have given up on hopes of transforming India

Modi's promise of a new political economy, one oriented around the private sector, productivity and growth was illusory.

India’s Prime Minister Narendra Modi is in a spot of trouble. He has to face reelection in a few months amid growing dissatisfaction with his government’s performance; he’s likely to use every lever available to eke out a win. One such lever, unfortunately, was the interim federal budget that his lame-duck government presented last week, to keep official machinery running till the next government can come in with a mandate and make decisions about taxation and spending. As many of us feared, Modi broke with bipartisan convention: He used the occasion essentially to launch his election appeal to India’s voters. And, unfortunately, it’s one that they have heard before.

The big news in the interim budget was that Modi intended to give smallholders a small annual income to supplement their earnings. Many other countries support their farmers similarly; India, in fact, uses a complex system of agricultural subsidies that is both inefficient and, arguably, breaches World Trade Organization rules. But, Modi’s intent in introducing the scheme at the very last moment — in fact, past the very last moment — isn’t to reform agricultural policy; he’s clearly hoping to address his rising unpopularity in rural areas. To some degree, his hand was forced: The main opposition Congress Party had announced plans for a minimum income guarantee just a few days earlier.

Modi didn’t stop there; he had a bunch of other goodies in the budget to throw to undecided voters, including a tax cut for low earners. As a consequence, the government won’t make its fiscal deficit target for the financial year and shifted its target for the next year by an even greater margin. The worst part is that there isn’t really any great crisis that would justify breaching fiscal rules, only electoral considerations.

Those who supported Modi prior to his election in 2014 imagining that he would lead India away from populist economics must be kicking themselves now that’s he turned out to be an arch-populist himself. The question is: Why? Why did a politician who during his campaign and his first days in office insisted that he would transform India’s economy return instead to the old vote-buying formula he had once mocked?

Perhaps because, when judged by his own promises, Modi’s term has been a failure. The government may claim that India’s economy is growing faster than it ever has, but there isn’t exactly a lot of optimism on the ground. Worst of all, his political foot-soldiers, the under-employed young men who fill India’s northern states, haven’t seen their lives change appreciably.

Just a couple of days before the budget, India got convincing proof of this failure. The government had long argued that unemployment wasn’t a problem. There wasn’t any data in the public domain to settle the question one way or another.

Business Standard