Prime Minister Narendra Modi’s first tenure began in relatively benign global conditions. Positive indicators on international trade and remarkably low oil prices prompted his Chief Economic Advisor Arvind Subramanian to say that India was in a “sweet spot”, poised to be propelled into double-digit growth. But after a middling performance over the next five years, punctuated by his disastrous decision to demonetise 86% of India’s currency overnight, Modi begins his second term in completely different conditions.
Tensions over global trade have led to worries of barriers being put up around the world, bellicose behaviour from US President Donald Trump is leading to fears of a war with Iran and driving up oil prices. Perhaps most importantly, Modi’s stewardship of the economy over the previous five years has resulted in the worst growth figures since 2014 and fears of a marked slowdown.
Between January and March 2019, the economy grew by only 5.8% – meaning India is no longer the “fastest growing major country”. Almost every indicator reflects how dire things are. Vehicle sales appear to have fallen off a cliff. The government has confirmed that unemployment is at a four-decade high. Consumption figures have nosedived. Factory output contracted in March, for the first time in 21 months. Tax collection figures are well below the level that was budgeted for.
In 2014, Modi could point to the previous government for giving him an economy full of structural concerns, primarily the twin-balance sheet challenge. This time, he only has himself to blame. The slowdown coincides with global trade tensions, an oil price spike and fears of a bad monsoon. Besides, there are also fears, now rather well-founded, that the government’s economic data may itself be a less-than-accurate version of reality.
Nirmala Sitharaman, the new Finance Minister, has her work cut out for her. She will have to focus on reviving the economy and convincing global capital that India is still an attractive market. Sitharaman will also somehow have to remain true to the fiscal deficit targets set out by her predecessor, Arun Jaitley, giving her little room to work with on the expenditure front, even as the consumer economy sputters.
Double-digit growth now seems like a distant dream. But any more neglect of the economy’s structural weaknesses, which some have argue pre-date demonetisation and the botched Goods and Services Tax rollout, will leave huge numbers of people mired in poverty. Efforts like the PM-Kisan, an income support scheme for farmers, act as a useful balm without addressing the underlying problems.
Sitharaman’s most important tasks might be two fold: focusing her government’s energies on solving the economic crisis instead of simply ceding space to the social engineering and cultural battles promised by Home Minister Amit Shah and Modi during the vitriolic election campaign.
Even if the Prime Minister’s Office does look away from polarising the citizenry and campaigning for the next election long enough to focus on the economy, Sitharaman will have to ensure that she prevents another quick-fix-turned-disaster move like demonetisation, which would make it seem like the government is accomplishing something, even though none of the root issues are being solved.
Whether Sitharaman, with a much less distinguished economic team surrounding her than her predecessor, can pull this off might end up being one of the defining questions of Modi’s second term.
