“The country is in no mood to suffer unemployment, inadequate basic amenities, lack of infrastructure and apathetic governance,” finance minister Arun Jaitley declared as he presented the Narendra Modi government’s first budget (pdf) in 2014.
“We shall leave no stone unturned in creating a vibrant and strong India,” Jaitley added, underlining the administration’s mission statement, “sabka saath sabka vikaas”, together for everyone’s development.
But three years after a landslide electoral victory, the Modi government is far from fulfilling its promise.
That’s not to say that there hasn’t been progress. The prime minister has pushed through some major reforms like the goods and services tax (GST), a much-needed bankruptcy law, and renewed focus on building the country’s vastly inadequate infrastructure. There have also been big-bang experiments like demonetisation, which temporarily took the wind out of the economy and left rural India gasping.
Albeit with some statistical jugglery, India is now the world’s fastest growing major economy with its GDP poised to grow at between 6.75% and 7.25% this year.
Yet, the trouble is that the real growth engine—private sector investment—is still spluttering, while the government pours in the moolah to keep things going. ”Basically, the growth in investment is only coming from the government,” explained Devendra Kumar Pant, chief economist at India Ratings. The country’s private sector, which built up a tonne of capacity between 2003 and 2009, is waiting for demand at home and abroad to pick up, according to Pant.
Investments are measured by the proportion of the gross fixed capital formation (net increase in physical assets such as roads, factories, and machinery) to the GDP. While the government has been spending on infrastructure—the current budget allocates Rs3.96 lakh crore towards the sector—under-utilisation of existing capacity and weak balance-sheets are keeping private firms away.
Another important indicator of real growth is demand for electricity, which is lacklustre at the moment.
“Industries make up for almost 50% of the electricity demand in India. But for the last two-three years, industrial demand has come down significantly because of excess capacity among companies. We are still between six and nine months away from a pick up in the industrial economy,” said Rupesh Sankhe, senior analyst at Reliance Securities, a brokerage.
One indicator of the demand for power is the plant load factor (PLF), a measure of the actual output of a power plant compared to the maximum it can produce. Low PLF is a sign that there isn’t enough demand.
Even the Modi government’s much-hyped policies like “Make in India,” aimed at increasing the share of manufacturing to 25% of the GDP, aren’t delivering as expected. “Although the manufacturing sector has seen robust growth in recent years—similar to the economy at large—it’s share of GDP has remained broadly stagnant around 16% and far from Modi’s goal,” said Angela Bouzanis, senior economist at FocusEconomics, an economic research and analysis firm. “In contrast, services’ share has climbed and the importance of agriculture has diminished slowly.”
As a result, the gross value added—the measure of a sector’s output—for manufacturing has been rather sluggish. And job growth in key labour-intensive sectors has been at a multi-year low in 2015 and 2016.
On the upside, though, the relatively steady growth of services, along with a clutch of reforms, has helped drive foreign direct investment (FDI) to an all-time high. The government has been able to reassure global investors about its policies, open up more sectors to FDI and cut red-tape which has often put off foreign investors.
On May 24, for instance, the Foreign Investment Promotion Board (FIPB), a single clearance window for FDI applications, was disbanded to ease inflows and quicken the process. Last June, the government eased local sourcing norms for foreign single-brand retailers like Apple and approved automatic FDI approval in sectors like aviation and broadcasting.
“The government has spelt out projects clearly and investors have clarity about reforms and policies, which has increased their comfort,” said Deven Choksey, CEO and managing director of KR Choksey Shares and Securities, a brokerage.
Despite all the action, India’s ease of doing business ranking, calculated by the World Bank, jumped only seven places from 2014 (137) to 2017 (130). The country is still placed below many of its Asian peers, including Indonesia and Malaysia.
“India showed considerable improvement in ease of getting electricity, with its ranking leaping from 51 in 2016 to 26 in the world. However for most other categories, such as registering a property or dealing with construction permits, the gap has barely changed since the 2016 ranking,” said Rajiv Biswas, Asia-Pacific chief economist at IHS Markit, a consultancy.
Another sticky issue has been exports, which have been falling while the Modi government wants it to touch $900 billion by 2020. Perhaps it was just bad luck, but a global fall in commodity prices seems to have spoiled India’s export party.
“Some of the India’s top exports like petroleum products and iron ore have declined in value due to the collapse of prices. The global slowdown also affected exports such as gems and jewellery and machinery and capital goods,” said Pravakar Sahoo, professor, Institute of Economic Growth, New Delhi.
It hasn’t helped that India’s exports come from just a few sectors, Sahoo added. In the last few months, however, exports have seen a slight recovery with stronger global demand.
Agriculture has had a hard time through much of the last three years, with weak monsoon and two continuous drought years (2014 and 2015). Given that over 50% of the sown area in the country is dependent on the monsoon, inadequate rainfall can be devastating for the over 119 million people who depend on it.
Thankfully, the rain gods were kind last year (though some parts of southern India still had it rough), boosting farm production and rural wage growth.
In fact, rural wages, which began rising in 2016 after stagnating for two years, indicate that the slowdown in rural demand is temporary, brokerage Nomura said in a report earlier this year. The government has also firmed up its allocations towards agriculture. This year, Jaitley raised the target for farm loan disbursal to Rs10 lakh crore from Rs9 lakh crore, besides setting aside Rs9,000 crore for crop insurance and Rs20,000 crore for an irrigation fund.
Still, the fruits of India’s economic growth aren’t reaching all strata fast enough. India lags many of its BRICS peers such as China, Brazil and South Africa in social development. India’s human development index ranking, which measures life expectancy, education, and per capital income as calculated by the UNDP, has dropped over the last few years, even though the overall score has increased.
“Persistent inequality reflected in the low human development attainments of the most marginalised groups, including scheduled castes, tribal and rural populations, women, transgenders, people living with HIV, and migrants, have brought down India’s HDI score,” according to a report by ratings firm Crisil, released earlier this week.
Evidently, three years in, Modi’s dream of “sabka saath sabka vikaas” still looks distant.