How India’s economy has fared under Modi

When Narendra Modi became Prime Minister in May 2014, his Bharatiya Janata Party formed India’s first majority government in almost 30 years. Modi’s tenure ends in May 2019. By then, elections involving more than 900 million people will have chosen 543 members of the lower house of the Indian Parliament and, therefore, a new government. This will be the biggest electoral exercise in the world.

Several factors will influence the people’s choice of their representatives and Modi’s prospects for re-election. One of these will be the perception of Modi’s performance as Prime Minister. Of particular importance will be the changes that have occurred in the Indian economy since Modi took power.

During Modi’s first term as Prime Minister, economic growth and taxation revenue have risen while inflation and the fiscal deficit have fallen. Macroeconomic stability and growth prospects have improved. Real GDP growth is estimated at 7.2 percent over 2017–18 and 7.23 percent over 2018–19. In comparison, over 2013–14, the last fiscal year of the previous government, real GDP growth was 6.39 per cent.

Real GDP per capita growth estimates suggest an acceleration from 5.3 percent over 2017–18 to 5.94 percent over 2018–19, compared to 5.03 percent over 2013–14. Figures for 2017-18 and 2018-19 may be revised upward as more data become available. CPI inflation is estimated to have dropped from 9.6 percent over 2013–14 to 4.7 percent over 2017–18.

When it comes to the management of the government’s finances, estimates suggest central and state fiscal deficits have come down from 6.7 percent of GDP over 2013–14 to 5.9 percent over 2018–19. Partly as a result of various tax reforms such as the goods and services tax launched in July 2017 and better compliance, the tax-to-GDP ratio has improved considerably too. Combined direct and indirect tax revenue is predicted to rise from 10.14 percent of GDP over 2013–14 to 12.13 percent over 2018–19. In a time span of five years, this increase is very significant.

Prospects for accelerated economic growth have also improved. After a long hiatus, gross savings is expected to rise between 2017–18 and 2019–20 from 28.8 percent of GDP to 30 percent and gross investment from 30.6 to 32.2 percent. In 2018, India received more than US $ 38 billion of inbound foreign direct investment compared with China’s US $ 32 billion, buoyed by stable fundamentals, the Insolvency and Bankruptcy Code passed in May 2016 and fresh opportunities in sunrise sectors.

India has also improved its standing in ease-of-doing-business rankings by 65 positions in four years. It is currently 77th among 190 countries. Economic growth prospects in the near-to-medium term appear strong. The IMF projects growth of 7.3 percent in 2019 and 7.4 percent in 2020. But recent performance in international trade has been disappointing, as has the government’s handling of accumulating non-performing assets in Indian banks.  The exports-to-GDP ratio slipped from 17.2 percent over 2013–14 to 11.9 percent over 2017–18. Imports-to-GDP dropped from 25.1 to 18 percent over the same period.

Financial flows have been healthy and India’s current account deficit has remained steady at 1.9 percent of GDP over 2017–18. Yet the trade deficit is large, which can be concerning for countries at India’s income level.

Higher growth in recent years has also been more inclusive. All households willing to get an electricity connection will soon get it under the ‘one nation, one grid’ rule. 80 million new LPG connections were provided for the poor. Under a housing assistance scheme, 13 million homes have been constructed during the past four-and-a-half years, compared to just 2.5 million over the previous government’s 10 years in power. 130 million loans were given out for self-employment schemes.

The successful implementation of the goods and services tax has seen the size of the informal economy shrink. India’s experiment promoting financial inclusion through opening bank accounts has also been successful. The Pradhan Mantri Jan Dhan Yojana programme has led to the opening of 340.3 million bank accounts with a total of over Rs.885.6 billion (US $ 12.5 billion) deposited in these accounts. Almost every Indian now has access to a bank account with its associated insurance and pension benefits.

The government has had considerable success in combating corruption. Tax authorities confiscated assets worth Rs.690 billion in the past two years as part of the anti-corruption Benami Transactions Act. 

In addition, 33 million fake LPG connections, 30 million fake ration cards, 8.7 million fake employment-guarantee cards, 440,000 fake meal scheme enrolments and 300,000 money-laundering shell companies were closed. In the 2018 Corruption Perception Index, India ranked 78th out of 180 countries, ahead of China at 87th and Pakistan at 117th.

Modi’s term as Prime Minister has seen a significant acceleration in economic growth, falling inflation and fiscal deficits. The accumulation of non-performing assets by the country’s banks and India’s large trade deficits remain challenges. Economic growth has been inclusive for all sections of society — development is now a people’s movement in India. Whether this economic performance is sufficient for the electorate to grant Modi a second term in office will be clear in a few months.
(Raghbendra Jha is Professor of Economics in the Arndt-Corden Department of Economics, Crawford School of Public Policy, The Australian National University)