Everyone Thinks the Economy Is Issue No. 1 for India’s Modi. It’s Not.
Little separates various Indian political parties on the economy. That’s why the prime minister’s new government is making its mark by delivering on its social and cultural agenda.
Narendra Modi’s landslide win in last May’s Indian general election raised expectations that the prime minister would chart a new economic course in his second term. These hopes were premised on Modi and his Bharatiya Janata Party (BJP) enjoying another five years in power with a stronger mandate than they won in the previous election in 2014, as well as a leadership unfettered by opposition from both outside and within the Hindu nationalist ecosystem. But just over 100 days into Modi’s second term, the indications—from the annual budget, parliamentary legislations, and Modi’s public speeches—are that the BJP’s political and cultural agenda has taken precedence over economic concerns. And this has happened despite the country’s GDP growth rate slumping to 5 percent in the last quarter, the lowest in six years.
The prioritizing of social and cultural issues can be seen in the success of some of the BJP’s long-cherished goals, such as the recent stripping of certain autonomies of Indian-administered Kashmir and the passing of legislation criminalizing instant triple talaq—a practice in which a Muslim man could divorce his wife by saying the word “talaq,” or “divorce,” three times. The latter was done despite the Indian Supreme Court already having outlawed triple talaq and could well be a trial run for a uniform civil code, which, like the abrogation of special privileges for Kashmir, has been high on the BJP’s agenda. The BJP has also fulfilled its promise to put in place a National Register of Citizens in the eastern state of Assam, which seeks to weed out immigrants who cannot prove they are residing in the country legally. There are signs that this could be replicated in other states, too. Each of these moves has created a climate of uncertainty among India’s Muslims, but not only do they fulfill pledges in the BJP’s campaign manifesto, they are also broadly popular across the country’s Hindu majority. It could be said, however, that these government priorities have contributed to the Modi government dropping the ball on the economy.
When Modi was elected in 2014, there was a public expectation that he would usher in pro-business policies of the kind that he was known to have encouraged when he led his home state of Gujarat. While Modi came up with several government schemes with snappy names, such as “Make in India” or “Startup India,” there is a consensus that these did not really deliver the desired outcomes. In fact, despite making “minimum government, maximum governance” one of its prominent 2014 campaign slogans, the Modi government not only retained many of the welfare schemes of the earlier Indian National Congress party-led United Progressive Alliance but also introduced and considerably expanded several other populist schemes. For instance, standing in Parliament in 2015, Modi derided one of the flagship welfare schemes of the United Progressive Alliance, a rural employment guarantee scheme, as a “living monument” to poverty in the country. But in the same speech, he also declared that his “political wisdom” did not allow him to discontinue the scheme. The government has continued to fund the rural employment guarantee, apportioning $8.3 billion to it in the 2019 annual budget.
Indeed, on the social welfare front, the broad contours of the BJP government’s policy have not been very different from that of the Congress’s. Many of the flagship programs of the BJP government, such as the Swachh Bharat Abhiyan (Clean India Program), were an expansion of and improvement on earlier government schemes. The difference was that under Modi these schemes were better funded and far better publicized.
One of the successes of the BJP government in its first term was not in ushering in market reforms but in better and more efficient delivery of government schemes. Between 2014 and 2019, for example, Modi’s government delivered new cooking gas connections to 72 million poor families. There is now good evidence showing how this scheme benefited the BJP in the 2019 election, particularly in rural India and among women.
Early indications are that the BJP’s second term will continue with the policy of expanding welfare schemes for the poor and fine-tuning their delivery. Like all governments in India, Modi and the BJP cannot afford to alienate the constituency of the poor, which forms an estimated 22 percent of the country’s population. The 2019 election showed that a combination of welfarism and nationalism can trump economic issues. This has possibly led the Modi government to take the same path in its second term. Before the 2019 general elections, the BJP government in its interim annual budget had predictably announced a slew of measures to target poor voters, including a quarterly cash handout to small and marginal farmers. One of the first acts of the Modi government upon reelection was to extend the scheme to all landowning farmers.
Some have argued that Indian political parties are not driven by ideology. While this has proved to be untrue on the question of religion and secularism, where there is a divide between the two national political parties, the BJP and Congress, on the economy the differences have largely been cosmetic. An argument can be made that the BJP has been hobbled in its attempts to push market reforms because of its traditional belief in swadeshi, or national economic self-reliance—in other words, a philosophy at odds with an embrace of capitalism and the free market.
In India, welfare measures will always take precedence over tough economic reforms because the former wins elections. And while national elections are usually held every five years, there are always some state elections happening in India. Later this year, Maharashtra, where the country’s financial capital, Mumbai, is located, heads to the polls along with smaller states such as Haryana and Jharkhand. The BJP is the incumbent in each of the three states, thus reducing the chances of major economic reforms.
This paradigm—of welfare measures being more important than difficult economic medicine—was perhaps best illustrated by Modi’s victory speech after the 2019 elections results, when he said that in 21st-century India, there would be only two castes: those who are poor and those who work for the upliftment of the poor. Modi was not only referring to the BJP’s victory as having dissolved caste differences, but he was also signaling the government’s intent to work for the poor. Indeed, India’s annual budget, presented in July, did not give any indication of fundamental economic reforms despite stating an ambition of increasing the size of the economy from $2.8 trillion to $5 trillion in the next few years.
That Modi can afford to ignore businesses is testimony to the way the BJP has grown. Before 2014, the BJP was seen as an upper-caste and largely urban party with significant support among the business and trading classes. The 2014 general election saw the BJP stitch together a broad national social coalition, cutting across castes. Not only did the party replicate its performance in 2019, it also added on a remarkable performance in rural areas—and it was able to do so despite a poor record on job creation and alleviating farmer distress. There were several reasons for this, including Modi’s own popularity, the BJP’s well-oiled and well-funded election machinery, the government’s welfare schemes, and the weakness of the opposition—but the broader takeaway for Modi would have been that economic indicators such as growth rates and stock market numbers have a limited impact on his electoral prospects.
The latest growth numbers and the gloom in the Indian business community have, however, belatedly stirred the government into action. Following on the windfall from the Indian central bank’s unprecedented payout last month of $24.4 billion to the government, which could help provide a fiscal stimulus to the economy, the Modi government has announced a merger of inefficient state-run banks and some easing of foreign investment rules. The government has also rolled back a surcharge on capital gains for both foreign and domestic investors. But that is hardly the kind of restructuring that economists were hoping for. Indians—and global investors—would do well to check their expectations.