What the Elections Didn’t Say About Modi’s Management of the Economy

As World Bank data show, FDI as a percentage of India’s GDP by the end of 2017 was even less than what it was in 2006.

It rarely happens that a government voted back to power with a massive electoral mandate, both in scale and size, is hit by a bombshell on the first day of taking office.

However, on May 31, 2019, the second Narendra Modi government received its first set of macro-economic data that confirmed that the Indian economy is slowing down.

The country’s economic growth rate decelerated from 7.9% in the fourth quarter of 2017-18 to 5.8% in the fourth quarter of 2018-19. The overall growth in 2018-19 stands at 6.8% – a five year low.

Critical to bear in mind that this is not the first time that the GDP growth rate has continuously fallen for more than four quarters under the BJP government. From more than 9% in the last quarter of 2015-16, the growth rate, pounded by the surgical strike of demonetisation, kept falling for the next six quarters, reaching 5.7% in quarter one of 2017-18.

To put this in perspective, a drop in the GDP growth rate means the failure to generate wealth for the country, thus impacting investment and job creation. All this is a far cry from the promised double-digit growth rates.    

Another important development has been that after the elections, the suppressed soul of an NSSO report has finally found utterance. The report confirms that the story of the unemployment rate being at 6.1% in 2017-18, the highest in the last 45 years, reported by the Business Standard four months ago, was not fake but real news.

Another worrying factor is falling investment in the economy. For instance, according to World Bank statistics, gross fixed capital formation (GFCF) as a percentage of Indian GDP has been continuously falling since 2011, when it stood at 34.3%.

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This fall has continued even during Prime Minister Narendra Modi’s tenure, with GFCF falling from 30% in 2014 to 28.6% in 2017. This continuous decline in GFCF since 2011 is in sharp contrast to the continuous rise in GFGC from 25.3% in 2002 to 35.8% in 2007, which was the highest GFCF ever for the Indian economy so far. Domestic consumption, from toothpastes to automobiles, is also down, thus making the slowdown even more profound in impact.

In view of the above, what makes the massive electoral victory ironic is that an ‘aspirational’ India, dejected from a corrupt, dynastic and paralytic Congress government, voted for  Modi in 2014 because he promised economic growth and development. The assurance of jobs and achhe din (good days), and not ‘Hindus versus Muslims’ or teaching a lesson to Pakistan, made a large number of people flock towards Modi.

But, in the last five years, the much-touted Modinomics – a term coined by Modi’s elitist cheerleaders in the mainstream media – has come a cropper.

It wasn’t the economy, stupid!

History will remember the 2019 general elections as the one where it was surely not the economy that mattered.

So, what mattered? Well, a set of major and minor factors all working in tandem in favour of the BJP and Modi. First, religious polarisation due to the successful pursuit of cultural populism, as the CSDS-Lokniti post-poll survey data clearly shows. While caste identity may not have mattered, cultural/religious identity did.

Second, jingoism (some call it hyper-nationalism), with frequent references to India’s armed forces during the election campaign, that was packaged and aggressively sold as an example of loving the country.

Third, there was lots of adulation for a ‘macho’ leader who can ‘teach’ Pakistan a lesson (no one knows whether Pakistan has actually learnt any lesson); and who can also ‘teach a lesson’ to India’s internal enemies. The ‘muscular’ language of ‘Hum ghar mein ghus ke marenge (We will enter the enemy’s house and kill them)’ and ‘Our nuclear weapons are not for Diwali’ gave a massive adrenaline rush to many, especially the youth, who felt empowered as Indians forgetting their economic hardships,

Fourth, socialist-style welfarism, inspired by Indira Gandhi’s left-wing populism, was successfully used to usurp the subaltern narrative (building houses, toilets and providing gas cylinders, though in a patchy manner, as several data-based stories show).

Fifth, massive propaganda and marketing campaigns, run 24/7, fuelled by enormous money power to ensure that every small thing done is sold as if some major revolution has happened, of the kind the country never witnessed in the last 70 years.

Sixth, enormous help from large sections of the pliant media (especially electronic) that turned the very purpose of journalism on its head. This media, instead of holding the government accountable, was busy holding the opposition parties accountable and played ball with the government on its jingoistic narrative.

Seventh, capitulation of state institutions such as the Election Commission of India.

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Eighth, a lacklustre opposition with limited political imagination, whose leaders were busy nursing their own personal ambitions rather than developing a credible alternative narrative.   

All these factors, collectively, swept the core ‘bread and butter issues’ under the carpet. The assiduously built and carefully calibrated strongman image of Modi, combined with the lack of a credible alternative, made several people forget their economic hardships.

Foreign direct investment figures as a case study of successful marketing  

Another major piece of bad news to hit the government is that FDI inflows to India contracted by 1% in 2018-19 (see Table 1) notwithstanding all the tall claims that we kept hearing ad nauseam in the last five years about India becoming an extremely attractive destination for FDI. Glitzy programmes such as ‘make in India’, ‘digital India’ etc. were marketed with much bombast and bravado to attract FDI.

One almost felt that India before 2014 hardly received any FDI and that, like everything else, all good things started happening from 2014 onwards.

However, the contraction of the rate of growth of FDI inflows raises concerns about the success of ‘make in India’.

Yes, it is true that total FDI inflows to India increased during Modi’s first term, recording an increase of 22%, 35%, 9% and 3% respectively from 2014-15 to 2017-18 (note the decline in rate of increases post 2016-17).

But this isn’t quite as impressive when compared to the rate of increases in FDI inflows that India witnessed from 2004-05 to 2007-08. The FDI inflows in these four years increased by 47%, 72%, 125% and 97% respectively.

Table 1: Foreign Direct Investment (FDI) Equity Inflows to India, 2003-04 to 2018-19 (in $ millions)

Year Amount of FDI inflows % growth over previous years
2003-04 2,188
2004-05 3,219 ( + ) 47 %
2005-06 5,540 ( + ) 72 %
2006-07 12,492 (+ )125 %
2007-08 24,575 ( + ) 97 %
2008-09 31,396 ( + ) 28 %
2009-10 25,834 ( – ) 18 %
2010-11 21,383 ( – ) 17 %
2011-12 35,121 (+) 64 %
2012-13 22,423 (-) 36 %
2013-14 24,299 (+) 8%
2014-15 29,737 (+) 22%
2015-16 40,001 (+) 35%
2016-17 43,478 (+) 9%
2017-18 44,857 (+) 3%
2018-19 44,366 (-) 1%

 Source: Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India.

Moreover, the strength of the economy can be gauged better not from the total FDI inflows, but from FDI inflows as a percentage of GDP.

As World Bank data show (see Table 2), FDI as a percentage of India’s GDP by the end of 2017 was even less than what it was in 2006.

In fact, the most spectacular increases in FDI as percentage of GDP happened from 2003 to 2008, showing an increase from 0.6% to 3.6%, with the latter being the highest ever figure for India.

Table 2: FDI net inflows as % of GDP

Year Value
2003 0.60
2004 0.76
2005 0.88
2006 2.13
2007 2.0
2008 3.6
2009 2.6
2010 1.6
2011 2.0
2012 1.3
2013 1.5
2014 1.6
2015 2.0
2016 1.9
2017 1.5

Source: The World Bank

The fact that India’s performance in receiving FDI inflows post-2014 was nothing spectacular in comparison to pre-2014 can also corroborated by examining India’s rank on global FDI inflows (see Table 3).

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In 2009 itself, India was ranked ninth on global FDI inflows. India’s rank deteriorated by a few places from 2010 to 2013, and improved from 2014 onward. Today, it is more or less the same as what it was in the late 2000s.     

Table 3: India’s rank on global FDI inflows

Year Rank
2017 10
2016 9
2015 10
2014 9
2013 14
2012 15
2011 14
2010 14
2009 9

Source: Various World Investment Reports of the United Nations Conference on Trade and Development (UNCTAD).

The BIT link

Another link that needs to be explored in detail is whether India’s decision to terminate several of its bilateral investment treaties (BITs) has also contributed to this decline in the rate of growth of FDI.

This is more so because India started terminating BITs in 2016, which coincides with a deceleration in FDI growth. Of course, two things happening at the same time is not sufficient to conclude causation. Nonetheless, the new government should evaluate the role the termination of BITs could have played in adversely affecting investor sentiment, especially given the empirical evidence that BITs have played a positive role in attracting FDI inflows to India.  

In sum, the election is over and now is the time for governance. The economy is in trouble and it needs immediate attention.

The government has lot of political capital and should use it to take tough decisions for the sake of the Indian economy, away from populism. Will it do this, or will it stick to the populist path?

Prabhash Ranjan is a Senior Assistant Professor of law at South Asian University and author of India and Bilateral Investment Treaties: Refusal, Acceptance, Backlash published by OUP in 2019. Views are personal.