Modi’s been lucky; now make it sustainable

When a general with excellent credentials was recommended for promotion, Napoleon asked “But is he lucky?“ In politics, as in war, luck counts for a lot. Narendra Modi today is riding a wave of good luck.

GDP growth in the April-June quarter hit 5.7%, the highest for two years. BJP spin-masters say “achhe din“ have arrived. Sorry , this is temporary, and represents good luck more than good management.

Modi became Prime Minister only on May 26. His ministers would barely have understood their portfolios in the April-June quarter. They did not create faster growth in that quarter. Ex-finance minister Chidambaram claims faster GDP growth was due to Congress initiatives. Sorry, no. The Election Commission prohibited any new decisions once the elections were notified in April. Nobody can claim credit for the April-June GDP improvement, not even the EC! Despite good credentials, Chidambaram was an unlucky FM in 2012-14, and (as Napoleon would have predicted) this contributed to his party’s electoral defeat. He started well, pushing through FDI in multi-brand retail and getting the Cabinet to clear lakhs of crores of stuck projects. The stock market boomed, and inflation decelerated, bringing promise of interest rate cuts.

Then bad luck struck. Demand for gold suddenly skyrocketed in early 2013, creating a record trade deficit. At that point, Fed chief Bernanke hinted at a rise in US interest rates. In response, billions of dollars exited from all emerging markets (including India) into the US. The rupee crashed from Rs 55 to Rs 68 per dollar before recovering slowly to Rs 62.

The falling rupee greatly increased the rupee price of imported items like diesel and fertilizers, smashing Chidambaram’s plan to prune subsidies and curb the fiscal deficit. The RBI had to raise interest rates, scotching chances of an industrial recovery . The global economy slowed, and India with it. Chidambaram correctly blamed bad luck in external factors for many problems, but such explanations do not convince voters.

Modi was lucky to face such an unlucky opponent. He continues to be lucky: Brent crude has fallen to just $101 barrel after touching $115barrel earlier this year. This has hugely reduced the oil subsidy , and will reduce the fertilizer subsidy too (fertilizer and oil prices are correlated). This good luck will help the BJP achieve its fiscal targets. Cheaper oil, coal, gold and silver will help check the trade deficit too.

After three years of falling growth under the UPA, some bounce-back was inevitable. Modi was lucky to have fought an election at the bottom of the economic cycle. In the US, Obama fought the 2008 election in the middle of the Great Recession, and Clinton fought the 1992 election right after the 1991 recession. Like Modi, they were lucky winners.

Global GDP growth is now picking up after three years of slowing down. Chidambaram often wailed about the slowdown, while Modi today keeps silent about his luck in benefiting from this year’s global recovery . Meanwhile the US Fed has kept interest rates low, so the tsunami of dollars that exited emerging markets in the second half of 2013 has flooded right back in 2014, lifting Indian markets to record heights. This makes it much easier for the BJP government to achieve disinvestment targets, and for its ailing banks to raise fresh capital.

While Modi has unquestionably been lucky, it’s wrong to say that he has done very little to spur growth. His policy changes have been only incremental, and he has disappointed those anticipating radical change. Yet he can claim credit for improving the economy even before getting elected. When opinion polls began to predict his election victory from January onwards, that itself helped attract a flood of dollars into India, lifting markets and strengthening the rupee (something that helped curb inflation). These trends have continued after his election.

He has done little policy overhaul. But he has instilled confidence in the bureaucracy , and files are moving again.Administrative rules have been tweaked to expedite projects.Animal spirits of investors are soaring.

However, Modi must learn from Chidambaram that confidence is fickle, and can collapse in microseconds. Much more is needed to sustain rapid growth. The monsoon has been subnormal, so food inflation remains high. At some point in 2015 the US will start raising interest rates, and dollars could flood out of all emerging markets including India. Modi’s policy increments and administrative improvements will carry him some distance, but no further.

Without major policy changes, the deep structural problems of the economy will ultimately re-assert themselves. At that point, his luck may run out too. Let him stand warned.

What do you think?