A shrinking economy and the narrative of diminishing returns

The news about India’s economy is getting worse with each day. Prime Minister Narendra Modi’s government has no control over it; his team has few options and fewer ideas.

This is not good news for a regime that works on an election to election schedule, each win being its primary goal of governance. Voters ultimately vote on their pocketbooks. Thus the talk in Delhi these days is of a coming Modi surprise – but not on the economic front.

The latest quarter GDP is down to 5.7%, but even this figure is suspect in many eyes ever since the metric was recast three years ago. Former Finance Minister Yashwant Sinha says the true GDP growth was 3.7%. Banks are stressed and bad loans of over Rs one lakh crore have piled up. Private investment is almost non-existent.

Firms across sectors are cutting jobs: IT, banking, textiles, even renewable energy, according to The Indian Express. Due to the November 2016 demonetization the real estate sector has gone into a freeze, resulting in job-losses in construction – India’s fastest growing sector of late due to its absorption of surplus agricultural labor, according to Mint.

Small businesses are being wiped out by the clumsy implementation of a complicated Goods and Services Tax (GST); it has made some suspect the government’s intention was to facilitate big retail sharks gobbling up the smaller fishes. Various economists think that the GST implementation will smoothen out in six months, yet no one is talking about the untangling’s consequences.

The government is considering a fiscal stimulus of Rs 50,000 crore. This has already scared foreign investors; the rupee is now in free-fall. This may be good news for exporters, but it has also resulted in portfolio investors seeking safer destinations. According to Business Standard, foreign investors sold over US$3 billion in equities in the September quarter. Foreign funds are going to other emerging markets, like Pakistan.

Indeed, Bloomberg recently predicted the Pakistani retail market to grow 8.2 per cent during 2016-2012, as the country has 135 million millennials with disposable income. Pakistan’s security situation has improved and its economy has been growing above five per cent the past few years. Car manufacturers like Hyundai, Kia and Renault are all building plants in Pakistan.

At the center of Pakistan’s growth is Lahore – Dawn recently said that between 2010-11 and 2014-15, while Pakistan’s average GDP growth was 3.4%, it was 5% in Punjab, and 6.7% in Lahore. This is called the “Shahbaz effect” after Punjab’s chief minister, Shahbaz Sharif (brother of recently-resigned Prime Minister Nawaz Sharif). The services sector, comprising 81% of Lahore’s economy, drive this growth.

This would make it a no-brainer that Indian retail invest in Pakistan – indeed, Reliance Industries tried setting up a fertilizer plant there in the 1990s and deployed a member of its Observer Research Foundation (ORF) to pursue peace on behalf of then PM PV Narasimha Rao with Nawaz Sharif. Business is always the best argument for peace.

Diminishing Returns
Modi’s government wants to avoid appearing paralyzed in the way that the UPA-2 did. Its hands are tied on the economy – expert opinion is divided on a fiscal stimulus, and inflation is preventing the Reserve Bank of India from lowering interest rates, which will keep private investment in deep freeze – and so New Delhi may move, it’s being said, on the security front.

Here Prime Minister Modi is in control of narratives thanks to last year’s “surgical strikes” on terrorist camps across the Line of Control, as well as to the way it prevented China from changing the status quo during the June-August stand-off in Bhutan’s Doklam valley. Much of the credit goes to National Security Adviser Ajit Doval.

The government’s options are limited, however. Initiating peace with Pakistan or in Kashmir is easier said than done. The brightest chance for peace was thrown out with Nawaz Sharif, and Pakistan will be in political turmoil for the foreseeable future. Also, the bragging over the “surgical strike” has not gone down well with the Pakistan military, without whom peace is impossible.

The talk of constitutional change in Kashmir has not helped facilitate goodwill. Union Home Minister Rajnath Singh visited the Valley recently but met hoteliers, house-boat owners, and other businessmen, which does not constitute political dialogue. The government’s hawkish rhetoric cannot be walked back.

Another surgical strike is likely to follow the law of diminishing returns, and won’t impress anyone other than the converted. Also, Pakistan may be in no mood to oblige. A war is out of the question. US President Donald Trump will likely look away if China steps in on Pakistan’s behalf.

It’s difficult to see any options though Modi is a master of theatrics and surprises. Whatever is to happen won’t be long in coming.

Aditya Sinha is a writer and journalist, based on the outskirts of Delhi. He tweets at @autumnshade