Modi Is a Very Lucky Man

With the global economy upbeat, the PM enters poll season on a rising tide

When asked to promote a general with many qualifications, Napoleon Bonaparte asked, “Is he lucky?” While merit and hard work matter a lot, luck can make or unmake outcomes.

Napoleon would have approved of Narendra Modi: he is lucky. When Modi assumed office in 2014, the economy was tottering and the fiscal deficit was out of control. But in his first year, the price of oil crashed from $120 a barrel to barely $40.

This good luck, according to some estimates, may have helped boost GDP by 1-2 percentage points and slash the fiscal deficit. Modi, naturally, claimedthat the economic recovery was his own good work.

Achhe Din are Here Again

Luck deserted him in 2017, when the economy decelerated even as the global economy accelerated. The double whammy of demonetisation and the goods and services tax (GST) glitches slowed the economy. Instead of retaining its position as the world’s fastestgrowing major economy, India slipped behind China.

But the Economic Survey presented to Parliament on Monday says ‘achhe din’ are coming. It predicts GDP growth will accelerate to 7-7.5% in 2018-19 against 6.75% in the current fiscal year, making India the fastestgrowing major economy again.

In retrospect, the timing of demonetisation and GST turned out to be exactly right from a political viewpoint. The dislocation and damage to the economy were done in 2017, leaving time for the economy to recover smartly in 2018-19, in the run-up to the next general election. The global economy is expected to keep booming, raising all boats. So, Modi should enter the next election season on a rising tide. Lucky man.

He has solid achievements to his credit too, mostly of an incremental nature. He retains his image of a genuine corruption-fighter. The Economic Survey shows that the number of indirect taxpayers has risen a whopping 50% after GST, while his attacks on black money have helped greatly increase the number of new incometax filers.

The twin balance-sheet problem — overleveraged companies going bust and endangering overleveraged banks — is nearing resolution with the auction of giant defaulters, who look like attracting substantial bids. The fiscal deficit is down, inflation is down, and the current account deficit is a modest 1.5% of GDP. India’s good macro-fundamentals have been rewarded with a credit upgrade by Moody’s. GST has suffered from initial glitches, as expected, but should be very positive for the economy from next year.

However, Modi has failed dismally to provide jobs for all, as promised in his last election campaign. Farm distress has hit many pockets, and his pledge to double farm incomes looks doomed. His ‘Make in India’ programmehas flopped, with industrial growth touching a mere 3.2% despite record inflows of foreign direct investment. On balance, his economic record is reasonably good, but no electionwinner. He needs luck too.

Was the timing of demonetisation and GST mostly good luck? Some may argue that the timing of demonetisation was carefully planned. I see no evidence of that. Demonetisation was so badly bungled that it looks like a decision taken on a personal whim, with grossly insufficient planning.

Soiled Currency in Laundry

Could there be anything more ill-planned than voiding 85% of all currency without first ensuring enough capacity to print new notes to replace them? Or of opting for different-sized notes that ATMs could not handle? Or of replacing high-value notes with even higher-value notes, making it easier than ever to handle large cash hoards? Against initial expectations that a big chunk of hoarded black money would be rendered useless, virtually everything was laundered.

The avoidable distress of this bungling was enormous. Regardless, voters saw demonetisation as proof that Modi was serious about cracking down on black money, and this helped him win the Uttar Pradesh election last year. You could call this reward for a brave decision. You could also call it a lucky escape from a bungle.

The timing of GST owed as much to luck as good management. While almost all political parties saw merit in GST, sundry wrangles had thwarted a decision for over a decade. Arun Jaitley deserves credit for taking fiscal risks in guaranteeing the states generous compensation for any revenue losses. Yet, he is lucky that the states clinched the reform in the middle of his term, and not at the end — in which case GST glitches could have spoiled the economy in the run-up to the next election.

Things could still go wrong. Oil prices have shot up and are forecast to rise further in 2018. In theory, this could hit growth. But I expect the opposite. A booming world economy has boosted all commodity prices, not just oil. The positive effects of the global boom on Indian exports will more than offset the impact of rising commodity prices. That was the case in the boom years 2003-08: despite record oil prices, India enjoyed record GDP growth.

Asset bubbles are evident in markets across the world. The bursting of these could create a global recession that hits India too in 2018-19. But given Modi’s luck, I suspect the bubbles will burst only after his re-election.

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