100 Days of Modi 2.0 Government: Status of the Economy

As Modi 2.0 Government is completing 100 days in power, this article attempts to throw light on the economic developments since the new government formed and dwells upon what it can do for the economy.

Hyderabad: The National Democratic Alliance (NDA) is completing 100 days in office, in its second term on September 6, 2019. It came to power with a thumping victory, with BJP’s landslide triumph in the general elections held in the summer of 2019. When voted back to power, the Government carried along with it, hopes, aspirations and expectations to deliver more in its second term. As it is going to complete 100 days in power, this article attempts to throw light on the economic developments since the new government formed and dwells upon what it can do for the economy. It is, in fact, an attempt to look back, in order to look forward.

By the time the new Government assumed its office, it has to confront the headwinds of the financial and macro-economic uncertainties. On one hand, Non-Banking Finance Companies (NBFCs) were facing serious liquidity crunch after the collapse of Infrastructure Leasing & Financial Services Limited (IL&FS), and on the other hand, the health of public sector banks was still a major concern. On the external front, clouds of trade war were looming and global economic stability was at stake. Agrarian crisis was also precipitating and increasing rural incomes was a bigger challenge. In the meantime, monetary authorities were attempting to address the liquidity issues with an accommodative monetary policy. However, there were no substantiate fiscal boosters to the economy, given the constraints of fiscal deficit targets, and the market sentiments started weakening in the post budget period.

Slowdown on its Way

After nearly three months, the ruling dispensation is now confronted with the clear signs of an economic slowdown with the huge job losses in the automobile and Fast Moving Consumer Goods (FMCG) sector. While the auto mobile industry laid off 3,50,000 workers between April and August 2019, FMCG’s growth as a whole, which is supposed to be robust, is only growing around 10 per cent in the April-June quarter of 2019. What is more alarming is that the brands like ‘Parle’, that serves largely to the less income groups and rural areas, had laid off nearly one tenth of its workforce, owing to falling demand for their products. In addition to this there is a huge fall in the sales of products like soaps, spices and packaged tea, whose sales largely depend upon the consumption of the Indian middle class and less income groups.

This trend indicate that the consumer spending is touching new lows and the common households are cautious about their spending and consumption, which is not a good sign for the economic growth. In fact this would have a serious impact on the aggregate demand in the economy, which in turn would have a cascading effect on the output, employment, income and the eventually, the Gross Domestic Product (GDP) of the country.

In fact, the Government today confronts the same situation what it faced when it took office three months ago. The only difference is that the intensity of the problems has increased. To make them more challenging, the country’s GDP growth fell to 5 per cent in April-June quarter from 5.8 per cent in the quarter of January-March. It is this gravity of the situation that prompted the government to jump into action to announce policy measures.

The Government in Action Mode

The Government of India has come up with a sleuth of measures to address the situation. On 28th August 2019, Finance Minister Nirmala Sitharaman announced assuring measures, which included the exemption of start-ups from 'angel tax', rollback of enhanced super-rich tax on foreign and domestic equity investors. The Government also reiterated its commitment to infuse Rs 70,000 crore into the public sector banks. In addition to this, measures were announced to address distress in the auto sector, which included removal of ban on government departments in buying new petrol/ diesel vehicles and a plan to encourage scrapping of old vehicles.

The Micro, Small and Medium Enterprises (MSME) was also assured that pending GST refunds would be done within 30 days.

Followed by the measures, the Union Cabinet, on 28th August 2019 permitted 100 per cent Foreign Direct Investment (FDI) under automatic route in contract manufacturing, coal mining and associated infrastructure and also relaxed the rules related to the FDI in single brand retail. It also expanded the definition of 30 percent domestic sourcing under in this context.

In addition to these measures, the Government also allowed online retailing under single-brand retail and relaxed rule of mandatory brick-and-mortar store and also approved 26 per cent FDI in digital media.

The major policy reform in the NDA’s second term is the merger of 10 public sector banks into four entities, announced on 30th August 2019, thus taking the total number of India’s PSBs from 27 to 12.

In addition to this, measures have also been announced to reform the PSB boards, which would go a long way in improving their governance.

While all these measures would boost confidence in India’s financial markets, additional concrete efforts should also be implemented in order to boost the aggregate demand, which is the real problem. This is due to the fact that a steep fall in the GDP growth is caused largely due to sluggish demand and weak investment growth.

Special emphasis should be laid upon accelerating the rural growth and addressing the basic issues of agriculture. There is also an urgent need to step up the public expenditure, even at the cost of fiscal deficit, given the looming slowdown in the economy.

A complete package of expansionary fiscal measures, supported by an accommodative monetary policy and simultaneous second round of economic reforms is what the Indian economy needs at this point. In the long run the policy makers need to focus on sorting out issues related to income inequalities, which could otherwise lead to concentration of wealth in the hands of few individuals, and thus effectively reducing the aggregate demand in the long term.

With the NDA having enough political capital, it is not an impossible task to accomplish, by wading through the troubled waters of economic slowdown.

(Written by Dr.Mahendra Babu Kuruva. He is an Assistant Professor, Department of Business Management, H.N.B.Garhwal University, Uttarakhand.)