3.5-year itch: Don’t let 2014 euphoria turn into despair

October 22, 2017 ()


GDP growth data is like a grade in the government’s report card, at least in intellectual circles. This grade is for a core subject: the economy. The Narendra Modi government is subjected particularly hard to this test. After all, many saw this government as a compromise with secularism, a price to pay in exchange for strong economic growth. “Yes the BJP has a communal ring to it, but who cares, if it can make India rich,” was how many non-traditional BJP voters justified their vote to Modi in May 2014. These voters led BJP to a big victory, and we got a stable, right-wing government. Many thought economic growth would fly now. People expected the fiery Gujarati entrepreneurial spirit to reach the PMO, a departure from the slow, soft-spoken, academic style of Manmohan Singh.
This ‘nayi bahu’ type excitement for Modi was unparalleled. And as anyone who has gone through the ‘my nayi bahu is the best’ phase will attest, when you expect so much, a bit of disappointment is bound to follow.

The Yashwant Sinha letter not only got traction, it had relatively few defenders outside the BJP. Objectively speaking, his letter was low on data. It was also somewhat alarmist, predicting an extremely unlikely ‘crash landing’. However, it did make the point that this turbo-powered government may have underperformed in a core area — the economy.

There is no denying that GDP growth continues to slow down. Given our low base, we should have been close to a 10% annual GDP growth rate by now. So why are we at 5.7% (or 3.7% according to some)? This hasn’t hurt the BJP politically yet, given that masses don’t track GDP like intellectuals. However, once there’s a media perception that this government cannot deliver growth (and hence jobs), the message will  trickle down. It takes away the roaring tiger image of the Modi government, and creates the embarrassing possibility that the Manmohan Singh government, for all its policy paralysis, could deliver better on growth. That’s bound to hurt.
Little wonder then that the government went into defensive mode, calling out naysayers and pessimists. It will also be concerned about the self-fulfilling nature of economic pessimism. If everyone believes times are bad, tightens their purse strings and reduces spending, then the economy does indeed go down. Euphoria 2014 has become Doubts 2017. In a worst-case scenario, this could turn into Despair 2018.

How did this happen? Was it specific measures like notebandi and GST? Or is it something about the government’s attitude that is hurting the economy, these measures being just a manifestation? Chances are it is the latter.

When Modi came to power, entrepreneurs around the country related to him. His energy, zeal, hard work and belief in India continues to be inspiring in some ways. However, the government seems to have become obsessed with one thing — black money. A lot of black money holders have done business for decades in a culture of tax evasion. These few hundred thousand people control our economy,  creating millions of legitimate jobs and adding billions to the GDP. What do we do in this situation? Suffocate them, and the jobs they create, to death? Or do we live with the good and bad they represent, and softly move them towards a cleaner system? Should we teach them a lesson for being bad, and risk businesses shrinking and jobs getting lost? Or should we come up with easier ways so the business gets cleaner over time?

There are no easy answers. However, GDP data indicates that the government may have been a bit too strict. Today, the entrepreneur fears the taxman. Nobody wants to grow or take big risks in an atmosphere of fear. Despite assurances from the tax department of no unnecessary harassment, there are so many new rules that if someone wants to make a businessman’s life difficult in this country, they can. If the entrepreneur goes into consolidation mode, we will have an economic slowdown for sure.

The government also seems to have missed out on the concept of ‘change management’. When you are making life difficult for people, you have to give them incentives to accept the discomfort. If the GST switchover was going to be cumbersome, the least the government could do was to reduce rates drastically in the ‘change management’ phase. Instead, for many products and services, rates were higher than before. Noble intentions to clean up India are not enough to ensure that people cooperate through the change. Every transition, even if it’s for the greater good, has to be managed well.
The government needs entrepreneurs if it wants the economy to grow in double digits. Teaching them a lesson may be justified, but will sadly hurt growth. Taxes should be kept low, as getting through the transition smoothly is more important than penalising them. Instead of playing the strict teacher trying to get the homework done, the government would do better to slowly turn them into motivated students who want to do their own homework.


Visit publication site →

Facebook Twitter