How the Modi Government's Economic Policies Are Impacting the Indian Economy
The Indian government's approach to managing the economy under Prime Minister Narendra Modi has been the subject of considerable debate. Critics argue that while the government has undertaken numerous micro-level initiatives aimed at infrastructure development, welfare programs, and other localized benefits, the broader macroeconomic impact has been unsatisfactory.
Micro vs. Macro Economic Management
In the context of economic management, there are two main dimensions to consider: micro and macroeconomic activities. Micro-level initiatives focus on specific, localized actions such as constructing houses, building bridges, and improving railway lines, all of which contribute to the welfare of the society and create direct positive impacts. However, what really matters for long-term economic growth is macroeconomic management, which involves policies that affect the economy as a whole and create significant and lasting benefits.
Effective macroeconomic management includes designing and implementing policies that stimulate overall economic growth, create a favorable environment for trade and business, empower consumers to make more choices and pay for goods, and ultimately lead to increased private consumption and investment. Such policies can create a positive economic cycle, fostering employment and sustainable development.
Challenges in Macro Economic Management
The Indian economy has historically been heavily reliant on a cash-based system, with small and medium enterprises (SMEs) and informal sectors contributing significantly to GDP, exports, and growth. In November 2016, the government took a drastic step by demonetizing high-value banknotes, an initiative aimed at curbing black money and corruption. However, this decision had severe unintended consequences, disrupting the cash-based economy and leading to a continuous decline in GDP growth, job losses, and a demand crunch.
The government's failure to acknowledge and address these challenges promptly resulted in a situation where the economy struggled to recover. The imposition of the Goods and Services Tax (GST) in 2017 was a transformative move aimed at simplifying the tax structure and facilitating interstate trade. However, the design of the GST was not sufficiently examined for a nationwide rollout, leading to widespread implementation issues and failings in generating the anticipated benefits.
Key Policy Initiatives and Their Impact
Throughout the intervening period, the government attempted to revive the economy through various measures. The first quarter of 2017 saw an initial GDP growth rate of 8.2%, which fell in subsequent quarters, reaching just 3.1% by March 2020. This represented a decline of over five percentage points, or approximately 2 lakh crores (trillion rupees) from the aggregate value of the economy.
Recognizing the severity of the situation, the Reserve Bank of India (RBI) stepped in, transferring Rs 1.76 lakh crores from its reserves to the government. The government, in a significant move, granted tax benefits to corporate companies, amounting to Rs 1.45 lakh crores annually, with the hope that these companies would reinvest the savings in their businesses. Additionally, the government abolished the Dividend Distribution Tax, saving Rs 45000 crores annually.
The RBI conducted a study to assess the impact of these tax benefits on corporate investment. The findings were disappointing, as many companies used the funds to settle debts or build reserves rather than reinvesting in their operations. Despite the government's intentions, the expected increase in private investment through supply-side interventions did not materialize.
Conclusion
The Indian economy has faced significant challenges under the Modi government, with both micro and macroeconomic policies falling short of their intended goals. While micro-level initiatives have been successful in providing localized benefits, macroeconomic management remains a critical area where the government needs to act to ensure sustainable and inclusive economic growth. Addressing these challenges will require a more holistic and centrally planned approach that takes into account the broader economic landscape and the needs of all sectors.