Modi@1: Running out of luck on the economy

After one year in power, Narendra Modi is pretty much on the back foot, even if he continues to display bravado in his public pronouncements. He knows within his heart that he has wasted a lot of his political capital without getting much in return, says M K Venu.

Indian and foreign businesses had backed Narendra Modi with the greatest vigour before the 2014 general election. They had fervently hoped that Modi would pull India's economy out of the quagmire and usher in a new phase of prosperity. They are all disappointed, by and large.

They are also publicly speaking out now. Well-known global investor Marc Faber said in an interview to Business Standard that Modi had disappointed in regard to the reforms he had promised. Faber also questioned whether India's GDP was indeed growing at anything above five per cent, whatever official statistic might say.

Another reputed American investor, Jim Rogers, was more blunt and said, 'Modi was all talk and no action.' Again, Rogers seems to be measuring Modi against all the promises of the Big Bang economic reforms made by the National Democratic Alliance government.

Mind you, these global opinion-makers were all staunch supporters of the new regime. Their bitterness now is largely on account of promises not met.

The Economic Times last week conducted a survey of top Indian CEOs that showed they are deeply disillusioned with Modi as economic growth had not revived and industry continued to face a massive demand problem. Many complained that Modi, like United Progressive Alliance leaders, is focusing more on populist schemes like Jan Dhan Yojna and less on the urgent need to revive the economy.

After one year in power, Narendra Modi is in an unenviable spot. The business community thinks he is not doing enough to boost the economy. They feel tax terrorism is still alive and kicking. Big investors expected that the NDA would swiftly bring a friendly land acquisition law, liberal labour law and Goods and Services Tax within six months of coming to power. Narendra Modi has not delivered these reforms.

At the same time, he has ended up creating a perception of being pro-rich because of the vigorous effort by his government to push through some reforms, especially the land ordinance. So the overall political management of reforms has been very poor.

So Modi is really caught in a cleft stick. His heroic effort to bring an easy land acquisition bill has earned him the displeasure of the farming community which is already reeling from an unprecedented crises in the farm economy. His inability to push through the ordinance, in spite of his great effort, has disappointed the business community.

So after one year in power, Modi is pretty much on the back foot, even if he continues to display bravado in his public pronouncements. Modi knows within his heart that he has wasted a lot of his political capital without getting much in return.

The final GDP growth number for 2014-2015 is expected to be very disappointing, much less than the 7.4% estimated some months ago. The fact is the farm economy is in a shambles and is expected to register zero growth, according to agriculture economist Dr Ashok Gulati. Growth in industry is also very weak as reflected in possibly the lowest corporate earnings growth in many years.

The Index of Industrial Production may not show more than 2.5% growth for 2014-2015. If both agriculture and industry are so sluggish, it will have a spillover effect on the services sector. So GDP growth for 2014-2015 could turn out to be much less than the anticipated 7.4%. And this actually means less than 5% GDP growth under the old methodology which was controversially altered some months ago. Remember, with the change in methodology, what was 5% earlier is roughly 7% now.

Therefore, the worst year of the UPA's economic performance, marked by severe policy paralysis, was 2013-2014 when GDP grew only 4.7%. This, under the NDA's new methodology, has become 6.9%. Therefore, there is all-round scepticism about the new number series released by the government's statistical department. The government's own economists are not convinced about the new numbers!

That said, the economic situation on the ground seems really depressed with rural demand for a range of consumer durables and other products showing negative growth. Neither the PM nor the finance minister are looking at this deepening crisis, especially in the rural markets which generate demand for 60% of FMCG products, in a holistic manner. There is, in fact, a need at this stage for both fiscal and monetary stimulus to kick-start demand.

But both Modi and Jaitley are locked in a needless legislative battle with the Opposition over the land ordinance. If Jaitley had sent the amendments to the existing land law to a joint parliamentary committee earlier on, he could have focused on the passage of the GST, which by itself would have been a victory for reforms. But thus opportunity was missed and this had created all-round disappointment.

It appears that Modi is running out of luck. He had famously boasted being a lucky prime minister during the Delhi elections. International oil prices had less than halved and that seemed to have brought an all-round uptick in economic sentiment. At that time consensus among global FIIs was that they will prefer India as compared to other markets like China, Brazil, South Korea, Taiwan and Russia. But everything seems to have reversed over the past few months.

The FIIs, with a cumulative investment in Indian stocks of about $300 billion at market value, are looking at other emerging stock markets for returns and no longer treat India as the most preferred destination as they did last year. FII net outflows have been of the order of Rs 12,500 crore (Rs 125 trillion) over the past month. The stock market index has seen the biggest correction of 10% in a short time. This has caused speculation whether the markets are gradually going into a bear phase. Market theoreticians offer comfort by suggesting a bear phase normally begins when the market corrects by at least 20%. That has not happened yet.

However, it is worrisome that India is the worst performing stock market among emerging economies this year. In China, the stock markets have shown 30% growth since January. The Sensex growth remains in negative territory. FII inflows, which primarily influence market movement, are flat to negative since January this year. India's currency is also under pressure in recent months. The FIIs hate currency volatility as it impacts their returns.

For instance, if they take a view that India's currency would go down another 5% to 7% by 2015-end, they would wait till the rupee bottoms out and finds a new equilibrium. If they invest now their dollar returns would get hit by the rupee's fall. This worry among the FII would tend to make India a more vulnerable market in the months ahead.

Overall, both the real economy and the financial markets face stormy weather. Narendra Modi and Arun Jaitley are advised to get down to identifying the critical areas of plumbing so that the economy is brought back to health. They should not fritter away more political capital, fighting needless battles with the Opposition in the Rajya Sabha.

Image: Prime Minister Narendra Modi at the 6th Asian Leadership Conference in Seoul, South Korea, May 19. Photograph: MEA/Flickr