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Modi Govt’s Economic Impact in India (Till 2020)

Written by gkkedia Dt. March 17th, 2020

Narendra Modi ran his government against the then existing government led by the Congress party which had mismanaged the economy, fallen into decision paralysis and faced major corruption scandal after another. Modi became the answer to the woes of the citizens of India during the Lok Sabha elections in 2014 when there was a public expectation that he would usher in pro-business policies of the kind that he was known to have encouraged when he led his home state of Gujarat. He campaigned with humorous criticism to then existing Government and hopeful slogans. One of such slogans – “minimum government, maximum governance” that led his Bharatiya Janata Party (BJP) to a sweeping general election victory in 2014 and followed that with a landslide re-election in 2019. In the year 2014 when Modi- led government came into power, the Indian economy was around $1.71 Trillion. During the year 2014-2019 i.e. the First tenure of Modi government, Indian economy grew by an average of 7.5% every year and became 6th largest economy in 2017 by surpassing France, and 3rd in terms of purchasing power parity (PPP) in the world.

Indian economy is considered as mixed economy where price of goods and services are controlled by government as well as private sector. The economy of India is characterised as a developing market economy. Promoting growth of the economy has always been the utmost priority of the Government. The Government is continuously taking steps to facilitate production and GDP growth of the economy.

In the opening gambit of Modi 1.0 era, it implemented a range of schemes and programmes to revive India’s economic growth, ensure employment to crores, eliminate cross border terrorism, curb corruption and black money flowing in the Indian economy among others. Key initiatives taken by the government during the first term under the leadership of PM Narendra Modi are hereby discussed.

  • ‘Make in India’, ‘Start-up India’ initiative and ‘Ease of Doing Business’ under which thrust sectors have been identified to provide a push to manufacturing in India,. The Government aimed at creating a conducive environment by streamlining the existing regulations and processes and eliminating unnecessary requirements and procedures.
  • Further, Foreign Direct Investment (FDI) policy and procedures have been simplified and liberalized progressively. Foreign investment is a key source of economic growth as well as non-debt finance for the country.
  • The government introduced “Hydrocarbon Exploration and Licensing Policy” to reduce the micromanagement of company expenses, which in turn lowers the regulatory burden and administrative discretion.
  • On 26 March 2016, the Modi government has strengthened and institutionalised Aadhaar. Today, Aadhaar has become India’s most credible identity currency, and is used while filing taxes, and buying financial products like mutual funds.
  • “The Insolvency and Bankruptcy Code (IBC)” was also introduced during the first tenure of Modi-Government. It aims to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons. It promotes entrepreneurship, availability of credit and balance the interests of all the stakeholders. In a line this law allows easy exit from a failing business.
  • It is very well known that India is in a long war against unaccounted-for and tax-evaded money has been regulated through what is known as ‘Benami’ transactions through the purchase of property in one person’s name but financed by another, who also controls it. The Modi government saw a tightening of a law against black money in property and amended the 1988 Benami Property Transactions Act. The Benami Transactions (Prohibition) Amendment Act, in force since 1 November ,2016, empowers authorities to provisionally attach and eventually confiscate Benami properties.
  • The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act were enacted in 2015 providing a one-time window for declaring undisclosed foreign assets. Around 650 people declared money worth Rs 4,100 crore deposited in foreign banks.
  • Two more compliance windows were provided by the Modi government i.e. the Income Declaration Scheme (IDS) and Pradhan Mantri Garib Kalyan Yojana (PMGKY) in 2016.The government has been able to recover black money of Rs 69,350 crore under the Income Declaration Scheme and Black Money and Imposition of Tax Act. Another Rs 5,000 crore was recovered under the Pradhan Mantri Garib Kalyan Yojana (PMGKY).
  • Furthermore, the government also brought in what is arguably the most controversial, disruptive and critiqued policy so far — “Demonetisation”. By tuning into corruption at high places and the widespread black money in the economy was articulated. It forced unaccounted-for money to flow into the banking sector and boosting the formal sector up. An additional objective of this scheme was to curb fake currency and terror financing from across the border.
  • Thenceforth the introduction of the Goods and Services Tax (GST) on July 1, 2017 has provided a significant opportunity to improve growth momentum by reducing barriers to trade, business and related economic activities. The reforms adopted by Modi-led government are evidently necessary and much needed for the economy of India. However, the need for change arose many repercussions which were unfavourable for the economy.

The reforms and developments introduced in the Modi 1.0 era are expected to be strengthened in Modi 2.0 era. Prior to the Lok Sabha elections held in 2019, the government announced, the target $5 Trillion Economy by 2024 i.e. upcoming five to six years. The Centre has brought in the Taxation Laws (Amendment) Ordinance 2019 to make certain amendments in the Income-tax Act 1961 and the Finance (No. 2) Act 2019 to sustenance the intent shown by the government. The government has slashed basic corporate tax rate to 22% from 30%, Effective Tax Rate 25.17% inclusive of all surcharges and cess for such domestic companies and also for new manufacturing companies it has been cut down to 15% from 25%, the effective tax rate after surcharges and cess will be 17%. However, the decision made the government to lose 1.45 Lakh crore during the year.
The biggest question that arises was why this decision has been taken by government & how will it absorb these tax cut. The rationale was for India to target US FDI amidst in trade war with China to achieve its $ 5 Trillion Economy milestones. China has been growing rapidly in last few decades and has become economy super power. Consequently, US started imposing massive Trade tariff sanction on imported goods from China. As a result of which US based companies left China. The US tariffs on China have made other players more competitive in the US market and led to a trade diversion effect. During this time period India was expecting that more and more US companies who will leave china will prefer to come to India but businesses in India faced some challenges, including the need for land and labour reforms, as well as the lack of infrastructure.

India lagged its development and compromised the opportunity that could have been achieved. It could be due to various reasons. It hasn’t yet attained world class infrastructure to aid the FDI. However, the Finance Minister herewith announced the investment of ₹ 100Lakh Crores (approx. USD 1.5 Trillion) in Infrastructure development in the coming five years. Apart from this, domestic agitations turned out to be a huge problem for India. Further mass demonstrations by citizens creating a chaotic situation frame a negative impact. India – Japan Guwahati Summit was likely to hold in December 2019 in Assam. It was very crucial for North- East Development as it widens our scope for the $ 5 Trillion Economy and encourages the advancement of each and every part of the country. The Japanese investors were also interested to sign the deal even though it was opposed by China. However, it got cancelled due to CAA demonstrations in Assam.
The dream of $5 Trillion Economy by FY 2024-25 can be within attainable limits if the average growth is maintained at 9%. However, the current scenarios reflect that Indian economy is going through an economic slowdown by drastic fall in the GDP growth rate. India’s economic growth rate slipped at a much lower rate of 4.7% in October-December quarter of 2019, its lowest level insix years. The major concern that arises is whether it could be able to make up the downfall to reach the objective of $5 Trillion Economy. Comparatively, china, which is a much larger economy than India, had recorded a GDP growth of 6% during the third quarter of the FY 2019-20. With the subsequent decline in GDP growth, India has fallen further behind its neighbour in terms of economic growth.
There are multiple reasons because of which it is happening in India. First of all, there is a Domestic consumption slowdown. The decision taken by Modi-Led government in November 8,2016 for the demonetisation is said to be the major culprit for such a problem. During the past decades the market was divided into organised sector and unorganised sector. However due to demonetisation unorganised sector suffered because it consisted its most of the transaction in cash. Thus the demand was fulfilled majorly by organised sector and there was a sudden boost in the GDP growth rate. However, it was just a short term boost and in the longer run there was an increase in unemployment rate and market demand fell down due to the cash crunch in the hands of the people. Recently our GDP Growth rate reached below 5%, due to various reasons, one among of them is decreasing demand in FMCG (Fast Moving Consumer Goods) in rural areas. An argument can be made that the government has been stumbled in its attempts to push market reforms because of its traditional belief in swadeshi, or national economic self-reliance.
However, the challenges might seem to affect the country but as one of the fastest-growing economies with a vision to expand rapidly and reach to $ 5 Trillion Economy, India can tackle the slowdown in a constructive way and reduce the impact of it. Some of the possible solutions are discussed ahead which can aid India to overcome the economic slowdown.
The slowdown in the economy has forced the government to take steps towards announcing many fiscal stimuli which may adversely affect the country’s macroeconomic indicators by the end of the fiscal year. However, to flip the negative sentiment built in the industry, the economy and investors, the government is looking at the need of the hour.
There is a need to take aggressive measure to improve exports to generate and increase the global market share. The government should provide some immediate GST relaxations or subsidies to make the trade easy. It would help India become an immediate choice over other massive manufacturing hubs attracting international orders, pouring in some additional external funds. Thus, some focus to improve exports would be one smart way equate the slowdown. Consequently, it is also required to increase the infrastructural structure to support the increased production. Problem over here is that production must happen in excess of domestic demand which is only possible when the contribution of Micro, Small and Medium Enterprises (MSME) is increased. The proportion of import v/s export plays a vital role in supporting the finance of the country. MSME boost would help us nourish domestic trading and being self-dependent to manage the commerce for domestic supply and demand, without many external interferences.
Another way that can be counted as one of the most productive way to reduce the slowdown is by preventing it from becoming a cyclic process. The government can attain it by increasing its expenditure and letting the money flow into the economy. The recent Budget- 2020 suggested that the Finance minister is moving forward towards this step. By introducing the new tax slabs in the hands of individuals, which can be opted by forgoing many deductions, is a step that shall provide more liquidity in the hands of the people. Thus resulting in increase in consumption by the people. As a consequence of which demand shall increase and production will be increased accordingly. This change might thrive the economy in the coming years, However, in the longer run it will significantly affect the individuals as their practice of investing has been discouraged.
In addition, another major component of India’s GDP is investment, induced by both private and government sectors. It has been a key driver of growth since the liberalisation of 1991.The slackening of investment lowers the level of infrastructure development, causes hesitation in creating small businesses, stop entrepreneurs from investing in research and development, and thus stagnates technological development.
The vision of our Prime Minister is to achieve $ 5 Trillion Economy. For the economy to revive in 2020, one of the most important things would be the strength of the financial sector. Both consumers and investors require bank loans. And, the ease with which they can get loans and the interest rates they have to pay determine the scale of their borrowings. Thus unless the banking sector is brought back to health, one cannot expect a reversal of the economic slowdown this year. The big borrowers are still able to borrow, but the MSMEs are being squeezed of loans for not being viable in the eyes of bankers.
Even as the aftershocks of demonetisation were being felt, the government introduced GST in such a haste that it delivered another huge blow to the economy. The alleged faulty implementation of GST regime has supposedly triggered the economic slowdown. Modi government must radically simplify and rationalise the GST regime, even if it means a loss of revenue in the short term. A smart way to collect consumption tax is needed so that it is not unduly complicated and is also a business friendly solution that also prevents tax theft.
The GDP growth rate of the economy has slipped to 5 per cent in the first quarter of FY20, the lowest in over six years. We are entering a different kind of crisis now, a prolonged economic slowdown that is both structural and cyclical. This is an indication of tougher times ahead. The first step in a crisis is to acknowledge that we are facing one. Recession can
be short-lived if corrective actions are taken immediately, failure of which can have a prolonged effect on the health of an economy. It’s high time to act consciously in the direction of curbing the slowdown effect. The government should certainly revive major job generating sectors such as textile, auto, electronics and subsidised housing. Moreover, easy loans need to be provided for this purpose, especially to MSMEs. New export markets should be identified amidst the ongoing war between US and China
India cannot grow at high rates without gender parity. In India, only 26% of the women work whereas the worldwide average is 48%. If such a major chunk of the population is not working and we consciously don’t put women into positions of power, it will be very difficult for India to grow.
Henceforth, its high time to take the radical measures and move towards the right direction to help the economy to stabilize and overcome the economic slowdown. It also aids us in achieving the vision of making India a $ 5 trillion Economy. The target appears exceptionally daunting, if not impossible, going by the record of the current decade. A $5 Trillion Economy will make India a global economic powerhouse moving us from the 6th to 3rd position in terms of current dollar exchange rate with the right intentions and significant measures, the country will prosper well and head to the path of growth and collective development and success.

CA Gopal Kumar Kedia
Chartered Accountant 9810131451

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