Prime Minister Narendra Modi coasted to a magnificent victory in the 2014 parliamentary poll in India winning an absolute majority and punctuating the ‘coalition era’ in the country’s politics on a platform of ‘development agenda’, which the world applauded as a mandate for accelerating market reforms.
However, the annual budget presented to the parliament on February 29 in New Delhi careered away from the ‘reforms’ and concentrated on poverty alleviation and the regeneration of the multitude of villages where the ‘real India’ lives.
It is a stunning turnaround that raises a host of issues for the domestic as well as foreign policies. India is heading for some crucial provincial elections during this year and the next, which the ruling party must win. The mother of all fights in 2017 – elections in the state of Uttar Pradesh with a population exceeding 200 million – becomes an existential battle in itself.
On the foreign-policy side, it is entirely conceivable that Modi will no longer be the rockstar he used to be in the western world. Much of the hype about him in the West was built on the expectation that he is a market-friendly leader of a fast-growing big economy.
On the other hand, in the changed circumstances, China may become an indispensable partner for Modi. An expected visit by President Xi Jinping to India later this year assumes great significance.
From the US point of view, ‘reforms’ actually meant greater market access for American companies wanting to export to India. In particular, there has been a clamor for banking reform that would open up government-owned banks for foreign investment. The deposits in the government banks amount to over half of India’s GDP. The budget made no announcements on privatizing or globalizing the government banks.
An Indian commentator well-known to be a votary of the neo-liberal development agenda, Shekhar Gupta wrote in an acerbic tone that the budget confirms that Modi is not a liberalizer of the economy. “The tone of the (budget) speech, and the detail also, show a reformer in retreat.”
But, while presenting the budget in the parliament, Finance Minister Arun Jaitley, himself a fellow-traveler of Gupta in his enthusiasm for free-market economy, was unapologetic. Evidently, this budget reflects Modi’s revised development agenda, but Jaitley is willing to own it:
- Left-of-centre is a definition that the media gets stuck in… The budget is for the reality of India… the rural India is in distress and agriculture needs attention… in such harsh realities, the first right of investment is that of social, rural, infrastructure and agriculture sectors.
The budget made no significant relaxation for foreign direct investment in any new sector of the economy or proposed any increase in the existing ceilings – the only exception being the agro-industry. Indeed, the budget’s main focus is on agriculture and the revival of rural India, which is in great distress following two successive failed monsoons.
The budget allocations for the rural sector speak a story by itself – ‘rural development’ ($14.6 billion), farming sector ($6 billion), irrigation ($14.4 billion), rural employment generation ($5.8 billion), agricultural credit ($150 billion) and so on. The Modi government targets that all villages in India will have electricity by May 2018 and that farmers’ income will be doubled by the year 2022.
To be sure, the government has become acutely sensitive to the mounting agrarian crisis in the country. Why should not it be? The strident Hindu nationalism can only succeed up to a point and for a short while to distract the attention of the masses. But it will be in the impoverished Indian villages that Modi’s fate will be sealed in the coming state elections through this year and the next.
Modi intends to make his “pro-village, pro-poor and pro-farmer” budget a major campaign platform in the forthcoming elections. He claimed that the budget would make “qualitative change” to the lives of people in rural India.
Indeed, the fate of the Modi government – and Modi’s leadership of the government itself – critically depends on his ability to win the elections in Uttar Pradesh, which is the Hindu heartland. There is a growing feeling in the country that Modi only talks, but fails to deliver on promises.
Having said that, Modi’s decision to take a left turn and head for rural development as the mainstay of his development agenda (rather than manufacturing industry under the rubric of his ‘Make in India’ project) also makes economic sense.
The fact of the matter is that the Indian economy has its specific features. The acolytes of neo-liberalism ignore that in reality India’s economy is riding on the back of the informal sector, which generates 90% of the total jobs in the country and accounts for half of India’s GDP. (The corresponding figure for the formal sector is just 15% of the GDP.)
The big corporate do not create jobs on anywhere near the scale what India needs and Modi promised. Modi realizes this. To quote him, “People think it is big industries and corporate houses that provide higher employment. The truth is, only 12.5 million people are employed by big corporates, against 120 million by MSME (medium and small scale) sector.”
The Economic Census for 2013-14 estimated that close to some 60 million non-farming and non-construction businesses in the informal sector alone yielded 128 million jobs, much of it in rural India. Yet, paradoxically, it is the formal sector that monopolizes the credits offered by government banks, while the job-creating entrepreneurs (largely drawn from the lower castes) in the informal sector get a paltry 4% of their credit needs from the banking system and have to borrow at usurious rates of interest.
The budget provides a whopping $30 billion to provide financing for the informal sector under a scheme called the Pradhan Mantri Mudra Yojana which carries Modi’s imprimatur.
Equally, the role of foreign investment and exports in India’s growth story is vastly exaggerated. India has a domestically driven economy, driven by domestic savings (exceeding 30% of the GDP currently) and household consumption.
The net foreign investment in India during two decades of liberalization averaged around 3% of national investment. But foreign investment mainly funded external deficit more than development within. Suffice it to say, domestic impulses in both investment and demand were the core factors in the Indian growth story.
What India needs most as support from outside is on the infrastructure segment. It is linked to the overall revival of the economy, removal of bottlenecks in production and, most important, creation of jobs in large numbers. The budget has earmarked roughly $37 billion for the infrastructure sector but it is a decline of 12%. Modi will have to resuscitate his original plans to attract large-scale Chinese investment in India’s infrastructure development.
Is Modi taking a gambit by taking this dramatic turn to the ‘left’? Arguably, he is only playing safe in a highly volatile external economic environment by focusing on the ‘real India’ which can be trusted to remain the locomotive of growth for the economy.
It is a pragmatic decision on the part of Modi to redefine his ‘development agenda’ and to relate it to India’s agrarian economy. The risk is of course there insofar as this was not what the elitist middle class and the corporate sector would have expected of Modi – “a hard swing to old Congress-style agro-povertarianism”, as Shekhar Gupta wrote disdainfully.
Ambassador MK Bhadrakumar served as a career diplomat in the Indian Foreign Service for over 29 years, with postings including India’s ambassador to Uzbekistan (1995-1998) and to Turkey (1998-2001). He writes the “Indian Punchline” blog and has written regularly for Asia Times since 2001.