Why Modi government 2.0 might have to change its political economy script

The current government completed its first 100 days in office on September 6. On the economic front, how different has this period been from the first 100 days of the Narendra Modi’s first stint in government, which started in May 2014?

Economic indicators do not lend themselves easily to such high-frequency analysis. Gross domestic product (GDP) data for the current fiscal year is available only for the first quarter, which ended in June. The new government had spent only a month in office by then. Even other high-frequency statistics such as inflation, index of industrial production and rural wage data are not available beyond July. What is also true, however, is that indicators such as GDP statistics normally do not show drastic movements within a span of three months. Also, any evaluation of economic performance has to be mindful of the historical context in which both governments took over.

Let us now look at GDP statistics for the first and second Modi government. In the quarter ending March 2014, the last full quarter under the second United Progressive Alliance (UPA) government, GDP growth was 5.3%. GDP growth numbers had also been fluctuating wildly towards the end of the of UPA II government. They had fallen by two percentage points between September 2013 and March 2014 after having risen by more than three percentage points between March 2013 and September 2013. In the first two quarters after the new government took over in May, GDP growth increased by 3.4 percentage points again. GDP growth was on an upward trajectory until June 2016.

To be sure, the GDP numbers which have been cited here were not available until January 2015, when the Central Statistics Office (CSO) released GDP figures with 2011-12 as the base. The old series put the new government’s initial economic performance in poorer light, with GDP growth figures for quarter ending March 2014, June 2014 and September 2014 being 6.1%, 5.8% and 6% respectively. They were 5.3%, 8% and 8.7% according to the new series.

The short point is that the first Modi government inherited an economy which was already in a recovery phase, but still very volatile. To its credit, the new government stabilised the recovery.

It got lucky on one important front while trying to do this. India’s crude oil basket (COB) had been above $100 per barrel for more than three years before May 2014. Food inflation had been growing at double digits for more than a year until December 2013. Even non-food inflation was way higher than what it is today. Inflation started falling sharply after oil prices crashed in the second half of 2014-15. The Consumer Price Index’s annual growth was 7.2% in July 2014. It came down to 3.3% by November 2014. COB price came down from $102/barrel in August 2014 to $55/barrel by March 2015. The government also made a fiscal windfall from low oil prices in terms of higher taxes because it did not pass on the entire benefits to consumers. Windfall gains leading to low inflation and an improved fiscal capacity were key contributors to high economic growth.

Let us fast-forward to the second Modi government now. India’s GDP growth has been declining for five consecutive quarters. Contrary to there being a GDP series revision which gave a positive shock to statistics, questions are being raised whether the current series overestimates GDP. Those making this critique include the chief economic advisor of the first Modi government. Inflation and oil prices are much lower than what they were when Modi became took over in 2014. This precludes the possibilities of any windfall gains which could give a boost to growth.

If the September-quarter GDP numbers do not show a significant recovery, or even worse, demonstrate that the slowdown is continuing, the clamour for fiscal stimulus will only increase. Any significant stimulus will entail the risk of a rise in inflation. To be sure, there is nothing undesirable about some rise in inflation if it is a by-product of policies which stimulate aggregate demand. Unless demand picks up, investment growth will remain tepid. Investment-led high growth has been officially laid down as the path to India becoming a $5 trillion economy by 2024.

This economic shift, if it happens, might drastically change the government’s economic narrative, though. Low inflation was perhaps the biggest economy-related pitch of the first Modi government. It’ll be interesting to see whether changed economic realities in the second term lead to a change in this script. Retail food inflation in August has already reached 7 % in urban areas.