Have six months of Narendra Modi’s rule produced the achhe din (good days) promised during his election campaign? To some extent, yes. But this owes more to good luck than good policy. The most dramatic improvement by far is falling inflation. After years of double digit inflation, consumer inflation is down to just 5.5%.Wholesale price inflation has fallen even more dramatically, to just 1.8%, with food inflation down to 1.4%. Petrol and diesel, which rose inexorably for years, are now falling steeply.
On other fronts, progress has been modest to non-existent. GDP growth was projected to be a modest 5.5% this year, but looks like it is falling short of that. Bank credit has steadily decelerated. Exports, which grew quite rapidly in the first half of 2014, have decelerated since, and actually fell 5% in October. Industrial growth is a pathetic 2.8% for the first half of the fiscal year. Even during the licence-permit Raj, when GDP growth averaged only 3.5%, industrial growth used to average 5%. We have sunk below that.
Modi has ensured that government files are moving faster and clearances are rapid. But this has not translated into a boom in orders for machinery or construction. Machinery output has risen a bit, but after years of decline it should be jumping by 20% per year. Consumer durables have actually declined 12.4 % in the first half of the fiscal year. Government revenue has been growing at less than half the projected 19%.
This is a constipated economy, not a healthy one. Optimists say Modi’s enema will unclog the constipation within a year. That’s possible but not certain.
The stock market has boomed because of over $30 billion of foreign inflows. Modi is seen as a turnaround agent, and investors are giving him time to change matters. He has undoubtedly energized the bureaucracy and investors.Yet he is more showman than reformer. His Jan Dhan and Swacch Bharat schemes are new versions of old Congress schemes. He funked any major reforms in the railway budget or general budget. In many areas he has taken small steps forward, with lots of publicity but no radical reform.
What’s clear is that Modi is lucky. The dramatic improvements in inflation and related areas owe nothing to his initiatives and everything to good luck, arising from crashing global commodity prices. This year’s budget assumed that oil would average $ 110barrel, but it has actually crashed to $78barrel. This has enabled fuel prices to be slashed, taming transport costs.Falling oil prices have ensured that the balance of payments is under control, notwithstanding a surge in gold imports and the recent slowdown in exports. Finally, the oil price crash has hugely improved the fiscal position. Budgetary subisidies for oil and fertilizers have been slashed, and the finance ministry has been able to raise the excise duty on petrol and diesel, partly making up for the big shortfall in tax revenues.
Even the moderation in food prices is a global outcome, not a Modi outcome. Global food prices started rising in 2004 and then skyrocketed in 2007, but have fallen sharply over the last year. The UPA government kept raising the procurement prices of grain for many years in stages after 2007, to help Indian farmers catch up with world prices, and this created a persistent upward pressure on food prices, pulling up the entire price index. Now, with global prices falling, procurement prices are being raised by less than the overall inflation rate, so food is dampening the price index instead of exacerbating it.
Wheat and maize were both at $8bushel two years ago, but wheat is now down to $5.5bushel and maize to $3.75bushel. India is a big importer of edible oils, whose prices have also crashed. As against this India exports tea, cotton and iron ore, and their falling prices have been a minus for India. That has been offset by decreases in the price of commodities that India imports -coal, copper, rubber, edible oils, and non-ferrous metals.
The sudden taming of inflation means that the RBI can now start cutting interest rates.Lower interest rates will improve the balance sheets of the government and corporations, and staunch the mess in banks. The stock market boom created by foreign inflows means even dodgy infrastructure companies can raise millions. Slowing world growth has affected our exports. But on balance, global events have done far more for industry than Modi’s “Make in India“ slogan or foreign trips.
In sum, the first six months of Modi’s rule are better described as achhe sitare (lucky stars) than achhe din (good days). Good luck is always welcome, but does not last forever.