Prime Minister Narendra Modi’s first term was all about the execution of path-breaking economic reforms such as the Goods and Services Tax (GST) and Insolvency and Bankruptcy Code, and reinforcing India’s deficient infrastructure – measures that helped combat the crises that were to follow in its second term.
Barely had the government settled down in its second term when the going got tougher with the onset of the Covid-19 pandemic in 2020, which was to test India’s resilience in full, followed two years later by the war in Ukraine that threw global supply chains out of gear.
Much of Modi 2.0 was dominated by Covid, the Russia-Ukraine war and managing the fallout of these two global events.
The pandemic led to one of the most stringent lockdowns imposed anywhere in the world, hurting livelihoods and small businesses. It was followed by a successful vaccine rollout and a sweeping vaccination drive that protected much of the nation.
The vaccine rollout, in fact, would be the biggest accomplishment of Modi 2.0; it enabled businesses to get back onto their feet, the economy to bounce back, and life to get back to normal.
“The vaccine rollout was a remarkable thing to achieve at such a scale. The government was firm in its implementation,” says Ajit Ranade, Vice Chancellor of the Gokhale Institute of Politics and Economics.
Before the pandemic hit, India’s GDP growth in 2019-20 was 4 percent, down from 6.5 percent in 2018-19. The pandemic that hit India in March 2020 upended the economy, as it did that of many other nations. On March 24, 2020, the government of India imposed the first nationwide lockdown.
Growth contracted sharply in the second quarter of FY 2020 (-24.4 percent year-on-year), moderating to -7.4 percent year-on-year in Q3 of 2020, inching towards positive in the fourth quarter at 0.5 percent and in the first quarter of 2021 at 1.6 percent.
The government announced a slew of schemes from free food to income support for those at the bottom of the pyramid, credit schemes for small businesses, foregoing revenue, cash transfers and employment provisions to low-wage workers and stepped-up capital expenditure.
“Expansion of physical infrastructure across the country took 2-4 years, we can see the results now. India’s management of the domestic economy has created dynamism that despite Covid and the crisis linked to the Russia –Ukraine war, India has emerged as a growth leader amongst larger economies and is making a very tangible contribution towards growth in spite of the external sector facing certain headwinds,” said DK Srivastava, Chief Policy Advisor, EY India.
Between March and November 2020, the government announced relief packages worth Rs24.35 lakh crore.
Finance Minister Nirmala Sitharaman tweeted that the Modi government has spent Rs 91 lakh crore on social sector programmes and infrastructure development from 2014-15 to 2021-22.
After the outbreak of the Ukraine war, India was also quick to switch to cheaper Russian oil to soften the impact of inflation. According to a reply in the Parliament, the move, which did not go down well in the western world, helped save India over $3 billion in the first 10 months after the outbreak of the war.
The management of the economy this time was unlike the strategy adopted during the 2008-09 global financial crisis when G-20 countries had coordinated their efforts.
This time, the world was confronting the same events but every country adopted its own approach. India faced criticism for not bailing out some sections or not giving them larger doles.
The idea of an Urban MNREGA was often mooted, but in hindsight, India's reliance on fiscal expansion rather than monetary expansion seemed to have borne fruit. Policymakers did well in providing adequate liquidity even as it involved a surge in the fiscal deficit but it minimized the adverse impact on growth. Countries that relied on heavy monetary expansion have suffered from high inflation – much higher than India -- for which they are now paying the price.
“India has come out of the Covid-19 pandemic and managed the aftershocks of the Russia-Ukraine conflict reasonably well, it remains the fastest growing G-20 country,” said CRISIL Chief Economist DK Joshi.
India did not resort to consumption stimulus -- which is still a bit debatable. Ranade says India’s inflation record could have been better as Inflation has consistently remained above RBI’s upper tolerance limit of 6 percent since January 2022 although the Consumer Price Index eased to 4.7 percent in April 2023.
India also used this period to build on its success story of Production-Linked Incentive schemes by expanding them to several new sectors, a switch from its Make in India initiative in the first term that was a non-starter.
“Holding the ship steady in light of once in a century pandemic, supplementing it with macroeconomic policies, consistently managing, being mindful of fiscal dangers, and continuing to build on infrastructure which is a long-term game is politically a very generous thing to do. The downside has been that the government has not been very mindful of Inflation,” says Ranade.
India’s forex reserves have hit a one-year high at $600 billion and GST collections an all-time high of Rs1.87 lakh crore in April. India has set for itself a fiscal deficit target of 4.5 percent of GDP by 2025-26.
The Big Challenge
The big challenge is to uplift growth while maintaining the fiscal deficit in line with targets specified in the Fiscal Responsibility and Budget Management Act (FRBM Act) and managing inflation.
If India is able to grow 7 percent while balancing the other fundamentals, it would be a winner. So far, the missing piece in the India story is private sector investment.
The government has so far focused on expanding spending, but the private sector, which has touched 70 percent capacity utilization, is yet to invest robustly, meaning the economy is yet to fire on all its cylinders.
Economic Survey 2022-23 showed that private sector investment as a share of GDP had fallen to 21.3 percent by 2015-2016 and continues to hover in the 20s. The PLI scheme needs to be strengthened and expanded to frontier areas of technology and regulatory red tape reduced for government to attract investments.
The first few years of the Modi government were consumed in transitioning to GST and dealing with the impact of demonetisation -- that’s when the tax-to-GDP ratio fell and investments overall languished.
It took India 3-4 years to adapt to the reforms. With the external situation looking dire, India’s best bet is to keep its tryst with “minimum government, maximum governance.” Nine years on, it is still very much a work in progress.