Po lit ical R epercu s s io ns fo r t he BJP India' s Eco...

India's Economic Distress and Political Repercussions for the BJP

INDIA'S ECONOMIC DISTRESS AND ITS POLITICAL REPERCUSSIONS FOR THE BJP

TABLE OF CONTENTS

Executive Summary 1

State Debt and Struggling Growth 2

7

10

2017: A Flashback of the Indian Economy in 2002

Is Unemployment India’s Biggest Economic Issue or not?

GST: Was India Prepared?

4

Demonetization: A Failure! 12

Revival of the Economy: A Two Year Period

Bolstered Economic Numbers, a Necessity in the near term for Political Consolidation

Political Implications of Demonetization, GST and the corresponding State of the Economy

14

16

18

BJP's Mission 350 Agenda 21

INDIA'S ECONOMIC DISTRESS AND POLITICAL REPERCUSSIONS FOR THE BJP

EXECUTIVE SUMMARY

1

According to estimates released by the Central Statistics Office, India’s economy measured on basis of Gross

Domestic Product (GDP) grew by 5.7 percent in the first quarter of the 2017-18. India’s GDP had grown by 7.9

percent in the first quarter of 2016-17. Economic growth slipped for the fifth consecutive quarter with

significant dips in the last two-quarters (from 7 percent to 6.1 percent and 6.1 percent to 5.7 percent). Further,

the Gross Value Added (GVA) in the economy (In national accounts GVA is output minus intermediate

consumption; it is a balancing item of the national accounts' production account) remained stagnant at 5.6

percent between April-June 2017. Notably, the GVA in the same quarter in 2016-2017 had been

approximately 7.6 percent. Keeping the abovementioned figures in mind, what did actually go wrong? This

report provides a general understanding of the factors that led to the slow and steady downfall of the Indian

economy under the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government.

Further, the report provides specific data that points out to the supposed failure of the Demonetization

economic policy and the ill-effects of the landmark tax reform in the form of the Goods and Services Tax (GST)

on traders, domestic businesses and the economy on the whole. This report also underscores the sectors that

have been hit hard the most by the failing economy and the reaction of domestic and international businesses

to this downward trend. Furthermore, it also maps the major upcoming projects and prospective investment

ventures that might prove beneficial in uplifting the lacking economic growth under the Narendra Modi

government. Lastly, the report discusses the various political implications the BJP and its centre ruling coalition

government might face before the 2019 elections, in the case that there is no expedited economic recovery or

the government is unable to garner enough foreign and domestic investment that remains essential in

providing political breathing space for the right-wing party.


STATE DEBT & STRUGGLING GROWTH

2

Two major economic reforms introduced by the Modi administration, namely Demonetization and the crucial

Goods and Services Tax (GST) are known to have been heavily criticised for being implemented at a time when

India’s economy was projected to grow at an exponential rate. These reforms, especially Demonetization,

which was bound to lead to severe ill-effects on the economy coupled with hardships for the general populace

have acted to increase the disaffection against the Modi government. Further, the implementation of the

pivotal GST reform on July 1, 2017, is known to have been met with a sense of confusion, leaving several

traders and service-providers perplexed in relation to the tax rates and filing. While strategic reforms have

burdened the Indian economy, corporate debt is known to have increased and remains one of the most

alarming factors for economists studying India. As per a Thomson Reuters report on annual earnings, India’s

corporate debt rose to a seven-year high in March 2017. Further, according to the report, several large

companies were not able to pay interest on their loans while the rate at which new loans were taken fell to a

historic low (lowest in six decades). What seems to be concerning businesses is the fact that bad loans have in

effect negated the possibilities for commercial establishments to receive rate cuts from the central bank.

Notably, the Reserve Bank of India (RBI) had cut policy rates by 200 basis points or two percentage points.

Expected GDP Comparison of Asian Countries in 2016


3

New loans for companies have been increasingly cumbersome to acquire with RBI’s data showing bank

credit growth falling to a quarterly record low in April-June 2017. New loans acquired have similarly fallen

to the lowest since the end of the fiscal year in March 1954. There has also been a proportional impact on

GDP data, with the gross capital formation (measurement of private investment) falling to 30 percent of the

GDP in June 2017 from 31 percent in June 2016. On the other hand, fearing a backlash due to rising

consumer inflation, the RBI has been cautious with respect to cutting rates drastically. According to sources

in the RBI, investment is liable to increase in the case lending rates come down. Moreover, the RBI expects

the Union government to generate bolstered funds for state-lenders to raise the capital required. Non-

performing assets (NPA’s) have been the biggest liability for successive governments and continue to hinder

the banking sector’s capacity to begin lending activities.


2017: A FLASHBACK OF INDIAN ECONOMY IN 2002

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The economic situation in 2002 during the rule of the Atal Bihari Vajpayee-led National Democratic

Alliance (NDA) presents stark similarities to the current economic conditions in 2017 under the Modi

government. As mentioned in the infographic above, economic growth was coming down, demands for a

fiscal expansion were doing the rounds as the government insisted on deficit control. New investment was

minimal as bad loans had phenomenally increased as the RBI was under pressure to contain interest rates.

While India’s economy rebounded riding on a strong savings rate as a proportion of gross GDP, fiscal

consolidation, and improvements in corporate funds. A significant increase in savings led to larger

investments sourced from domestic players. As in 2017, investments and government spending provided

negligible contribution as net exports provided minimal respite.

PM Modi giving his iconic Demonetization speech in November 2016


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According to a report released by the United Nations International Labor Organization (ILO) in January

2017, unemployment in India is projected to witness a marginal increase between 2017-18, indicating that

the job creation in India is stagnating. As per the report, unemployment in India is expected to increase from

17.7 million in 2016 to 17.8 million in 2017 and is projected to rise to 18 million in 2018. The unemployment

rate is likely to remain at 3.4 percent in 2017-18.

IS UNEMPLOYMENT INDIA'S BIGGEST ECONOMIC ISSUE OR NOT?

The BJP and incumbent PM Modi, had promised the generation of around 10 million jobs during the general

election campaign of 2014. As per the Fifth Annual Employment-Unemployment Survey (2015-16)

conducted by the Union Labor Ministry, unemployment had remained at 5 percent, while in comparison the

figure was marginally lower at 4.9 percent in 2013-14. Important sectors such as manufacturing, trade,

construction, education, health, information technology, transport and the accommodation & restaurant

created approximately 641, 000 jobs between January 2016-March 2016 as compared to 1.28 million jobs

generated between July 2011-December 2013. Another disconcerting factor is the rising number of

temporarily employed individuals (contract or casual employment). The below-mentioned charts provide a

general understanding of the percentage of workers working in the formal sectors of the economy.

However, these charts do not highlight the statistics for those working in units employing less than 10

individuals or those employed in the informal sector that amounts to around 90 percent of the total jobs

provided. Importantly, the total number of jobs generated by the Modi administration between 2014-17 in

the eight major sectors of the economy fell approximately by 39 percent as compared to the three previous

years under the Manmohan Singh government.

Source: Ministry of Labor & Employment


8

In the formal sector, layoffs by large employment generators such as Wipro, Infosys, Cognizant, HDFC Bank

and others led to several educated professionals losing their jobs. If rumors are to be believed another phase

of layoffs may be around the corner, specifically in the IT sector.

Source: Ministry of Labor & Employment


9

While India, despite slowing economic growth is expected of regaining the title of the fastest growing

economies in the world, its high unemployment rate might direct the country into an economic crisis.

Okun's law states that a one-point increase in the cyclical unemployment rate is associated with two

percentage points of negative growth in real GDP. The relationship varies depending on the country and

time period under consideration. Further, the law states that no government in the world can manage

unemployment-comprising growth for a relatively long period of time. The jobless nature of the Indian

economy is liable to have extreme effects on the voter sentiment and may lead to a relative loss of

confidence in the BJP-led NDA coalition in power at the center.


GST: WAS INDIA PREPARED?

10

The Goods and Services Tax (GST) was hailed as one of the most iconic economic reforms ever to be

implemented in India. Its midnight rollout on July 1, 2017, received adulation from economists and the

general public but the subsequent tedious process and development of a general understanding with

respect to the filing of GST returns have led to multiple apprehensions and unforeseen problems, specifically

for small, medium traders and firms. In the run-up to the GST rollout, the allegedly unplanned nature of the

economic cum political move was evident, with the government bringing in several changes in the tax slabs

and other modalities of the tax reform. Compared to GST rates in Canada, Malaysia and Singapore that

stand at 5, 7 and 6 percent respectively, the division of tax rates deemed considerably high between 5, 12,

18 and 28 percent, as well as an additional cess, has led to more complications rather than simplifying the tax

regime. Compliance costs, following strict procedures, stringent tax collection measures, and court

proceedings in case of non-compliance have inadvertently led to several difficulties for firms and traders

under the ambit of the tax reform. Many economists have accused the government of generating revenue

for their political campaigns and populist initiatives through the tax collected under GST.

TRADERS FACE THE BRUNT OF THE NEW TAX REGIMESmall and medium traders, a major component of the BJP’s voter-base, are known to have faced major

difficulties, specifically due to the technical and operational problems with respect to filing GST returns and

the allegedly exorbitant tax rates on certain commodities. Traders in semi-urban and rural areas have been

at the receiving end due to several infrastructural drawbacks such as illiteracy and power outages, which

have hindered the filing procedure. Internet availability has also been a matter of contention for several

traders located in remote areas around the country. Failure to file GST returns leads to a daily fine along

with interest on tax liability. Several traders forums and organizations have demanded the government to

act on the grievances of the trader community and have even threatened to conduct nationwide strikes, in

the case the government ignores the issues faced by the traders. On the brighter side, a panel under the

chairmanship of Bihar Deputy Chief Minister (CM) Sushil Modi, comprising of finance ministers from several

states was formed to address the problems faced by various entities with respect to the GST-Network (GST-

N). As reported on September 16, 2017, the panel has assured a complete resolution of 80 percent of the

problems faced by businesses by the end of October 2017. Notably, the assurance was given by the Bihar

Deputy CM following consultations with officials from Infosys Ltd. who built the GST-N IT network.


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DEMONETIZATION: A FAILURE!

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Demonetization, a move that was supposedly destined to weed out black (unaccounted) money across the

country can be dubbed as a major failure following the announcement by the RBI that 98.8 percent of the

demonetized currency came back to the central bank. Notably, accounted money amounting to 160 billion

still remains legitimate. The perception that the black economy might be eradicated if an abrupt targeting of

the cash reserves of the country was implemented can be blamed for the failed move. The government’s

denial of accepting the economic debacle that led to several hardships for the general populace has made

voters of the center-ruling BJP have second thoughts on the economic and political promises made by the

right-wing party, which came to power on promises of inclusive growth and transparency. The

government’s changing stands on Demonetization, from calling it a solution for the black economy thriving

in India to terming the move as a means for implementation of cashless transactions and establishment of a

cashless economy, to further branding the economic reform as one of the steps in the removal of black

money has acted to embarrass the Modi administration, which has been firefighting repeated attacks on the

economic reform. The political opposition led by the INC and supported in principle by eminent economists

including former RBI Governor Raghuram Rajan, has continued to accuse the government of implementing

the move to gain political mileage, specifically before the crucial elections for the most populous state in the

country, Uttar Pradesh.

Queues outside a bank during the demonetization drive


REVIVAL OF THE ECONOMY: A TWO YEAR PERIOD!

14

While economic growth remains at a six-year low and with inflation doubling since June, the Indian

economy and the incumbent government faces serious challenges in the coming days and years. The alleged

inability of the government in dealing with rising unemployment, the abovementioned current account

deficit among other factors have raised investor concerns. Having said that, the central government has

continued to finance and manage the current account deficit with strong capital inflows. Further, several

economists have appreciated the government-RBI resolve with regards to monetary tightening, in relation

to not directly providing the benefits of slumping oil prices to the consumers.

Taking into account the fact that most commercial entities indulged in inventory destocking in anticipation

of the GST reform, the move is known to have had a direct impact on the economy and GDP in the current

quarter. As macroeconomic growth has been considerably sustained by the government with its stringent

monetary policies and GST is likely to lead to an enhanced generation of revenue through taxes by the

central treasury, the economy might be able to recover over a six-month period after effects financial

shocks such as Demonetization and GST begin waning. Statements made by Finance Minister Arun Jaitley,

RBI Governor Urjit Patel and Chief Economic Advisor (CEA) Arvind Subramanian, have indicated that the

government might be heading towards declaring certain measures to mitigate the effects of the failing

economy. These aggressive moves are likely to include:

1.Garnering domestic and international investment

2.Utilization of taxes collected through the GST reform for creating an investment-friendly fiscal space

3.While a cyclic recovery can be predicted in the coming months, sustaining this economic recovery will

be essential for the Finance Ministry and the economic advisers. Again, sustenance will be achieved

through higher investment in relevant sectors.

4.A greater allocation for public investment projects and a focus on implementing people and economy-

friendly policies and schemes. Populist measures in the coming days are liable to burden the economy

even more.


15


BOLSTERED ECONOMIC NUMBERS, A NECESSITY IN THE NEAR TERM FOR POLITICAL CONSOLIDATION

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The BJP remains in the political driver’s seat as evidenced by successive BJP victories in state elections

across the country. This has led to the perception that the right-wing party led by the charismatic PM, might

be heading for another general election victory in 2019. The weakened opposition in the country led by the

Indian National Congress (INC) and several regional parties who have not aligned themselves with the NDA

have not been able to project a united front, as several opposition leaders have deserted their parties to join

the BJP and its allies in the government. Further, the lack of leadership in Delhi for the national opposition

has raised concerns whether the INC or any other political outfit will ever be able to dislodge the BJP from

the seat of power. The current economic situation, however, has provided the opposition a golden

opportunity to corner the BJP and its government at the center. While the BJP is unlikely to lose the

upcoming elections in 2019, the INC and other political parties will be looking at bettering their dismal

performances in the 2014 elections that were swept by the BJP and its allies. Notably, the NDA coalition

had won approximately 42 percent of the votes. The BJP had fought the election on the premise of ‘Sabka

Saath Sabka Vikas’ (Support of All, Development for All). Reported instances of communal politics, cow-

vigilantism, and religion-based policy decisions have allegedly tarnished the ‘Support of All’ part of the

slogan, while in the case, a supreme revival with expedited results is not achieved, the second part of the

slogan might also fall flat on its face in the near future. Thus, economic development remains pivotal for the

BJP in securing a thumping majority in the upcoming elections.

Corporate funding has

remained a crucial factor for

any political campaign in the

recent past. A study

conducted by the Association

for Democratic Reform (ADR),

a Delhi-based NGO, indicated

the amount of funding

received by almost every

political party.


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The corporate funding received by the BJP is mentioned in the abovementioned infographic. Corporate

funding from even known sources remains a significant part of the campaign funds received by every

political party. Businesses usually adhere to the policy of using the electoral trusts route to fund political

parties and their campaigns. Given that parties remain out of the jurisdiction of the Right to Information Act

(RTI), disclosures made the outfits remain only a small part of the overall donations received. The political

mood and a certain party’s chances in upcoming elections also determine the amount of funding that is

liable to be received by that particular party. Notably, all national and regional parties need to furnish

details of donations received that are above ₹ 20,000.

Economic conditions which were spiraling before the 2014 general elections and that eventually led to the

downfall of the UPA government, led to more corporate donations for the BJP in the run-up to the elections.

Therefore, it can be assumed that corporates do not remain loyal to a certain political and usually provide

funds for a political outfit that is likely to provide dividends, economic growth, personal favors and its

overall winnability. Keeping the above mentioned in mind, in the case, the BJP-led government fails in its

endeavors to resurrect the economy from its current standing, the corporates might speculate investing in

other political players across the nation. While a sudden corporate shift remains unlikely at this point in

time, taking into consideration that corporate houses usually have taken long-term decisions with a focus

on reaping dividends from political parties, if and when they assume the seat of power, a gradual shift can be

expected. This is again, only in the case, the BJP is not able to mend the economy and stick to its pre-poll

promises.

Members of the INC protest against rising fuel prices in Delhi


POLITICAL IMPLICATIONS OF DEMONETIZATION, GST AND CORRESPONDING STATE OF THE ECONOMY

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The Demonetization move faced heavy criticism from a certain section of the Indian society while was

hailed as an important step in taking on the black economy in the country by certain sections, specifically,

supporters of the BJP and its political allies. However, following reports from the RBI indicating that the

move was a complete failure, with hardly any black money being uncovered through the reform, even

dedicated voters of the right-wing center-ruling party have allegedly begun contemplating their respective

political choices in the 2014 elections. The long queues outside ATM’s and banks associated with the cash

crunch in 2016 and the denial of the government in accepting the failure of Demonetization can be cited as

the primary reasons for a relative loss of confidence in the BJP.

The fact that demonetization was aimed at hurting the affluent (people who possessed black money)

and benefit the poor, remains ambiguous, given that the most affected remained the poor and

downtrodden. That said, a few positives came out of voiding the legitimacy of ₹ 500 and ₹ 1,000

currency notes. The government under demonetization managed to bring in around 9.1 million people

under the tax-umbrella in 2016-17, an 80 percent increase from 2015-16. Moreover, a secondary goal

of Demonetization, which was embracing a ‘Digital Economy’ received relative participation,

specifically in urban centers of the country, where people had access to smartphones. However, these

benefits of Demonetization have their own shortcomings. The increased tax collection had begun well

before the Demonetization move, with the announcement of the Income Disclosure Scheme (IDS), that

added an estimated 4.5 billion USD to the collected taxable income. Furthermore, the lack of

technology in rural India is known to have caused several difficulties for villagers, some of whom, do not

even have access to the internet and electricity.


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The implementation of GST on July 1, 2017, had a direct effect on the ruling BJP’s core constituency of

traders, locally known as ‘Baniyas’. Given that the BJP has for decades been identified as a ‘Brahmin-Baniya’

(Upper Caste-Trader) party, the ramifications of the GST move might be more profound than earlier

expected. Most small and medium traders have been opposed to the idea of GST, given that most traders,

especially those involved in the textile trade, have never had taxes levied on their products. The need for

employing the services of an accountant has further complicated the whole affair, with the trader losing his

autonomy over his business while significantly having to pay more for the accountant’s services. Moreover,

discontent seems to have grown against the BJP government given that it had earlier opposed the GST

reform, when it was in the opposition, citing the drawbacks of GST on its fundamental constituency, the

small and medium traders. Further, accusations have surfaced about the fact that the government did not

consult the traders when it took the decision and decided tax slabs. This sizable population of informal,

small and medium traders is expected to be highly discontent with the current state of affairs.

The working-class population which will amount to approximately 64 percent of the population by 2020,

when the average age of India will be 29, was one of the foremost endorsers of Narendra Modi and his

progressive vision for the country. Growing unemployment was directly related to the support garnered by

the BJP from the youth of the country, and pre-poll promises indicating the government’s intention of

pumping jobs in the world’s fastest-growing economy are known to have lured youths to entrust their

futures in the hands of the right-wing party. Keeping in mind the nationwide statistics with respect to

unemployment, sections of the vote-base are liable to be disaffected. While the youth does not see another

alternative to the current central dispensation, in the future if the job market continues to remain

stagnated, the support of the youth might diminish in the coming years.


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BJP President Amit Shah met party office-bearers and senior Ministers in the Union Cabinet to finalize a

strategy for the right-wing party in the run-up to 2019 general elections. Termed ‘Mission 350’, the plan

includes garnering around 350 seats for the BJP alone, in an effort to better its tally of 275 seats, it won in

the 2014 elections. The ‘Mission 350’ agenda comprises of identifying seats that the BJP narrowly lost in

2014 and strengthen the party base in such constituencies before the 2019 elections. Amit Shah had

reportedly identified 150 seats nationwide where the BJP stood second or received a higher vote share

despite the fact that it did not possess any traditional vote-base in the respective constituency. The

organizational expansion undertaken by the BJP President includes frequent visits by top-level party

functionaries to the targeted locations while adhering to austerity and a person to person contact with local

party workers. Further, the agenda includes providing details of government initiatives and schemes that

have been implemented or are in the pipeline.

BJP'S MISSION 350 AGENDA

With such agendas, the BJP has begun its political

ground-building activities two years prior to the

election. Further, Amit Shah’s strategies have until

now aided the efforts of the BJP in increasing the

party’s footprint in states where the BJP did not have

any political backing. The electoral victories in Uttar

Pradesh, Assam, Uttarakhand, Manipur and the

political maneuvering in Bihar to bring back the

Janata Dal-United (JDU) into the fold of the NDA give

credence to this argument. Moreover, defections

from the INC and other opposition parties have

helped gain political intelligence about the inner

workings of these parties while diverting a sizable

political base to the right-wing party. Notably, the

BJP has a government on its own or in an alliance in

16 out of the 29 states in India. Further, while the

economic conditions might concern voters and lead

to anti-incumbency before the general elections in

2019, the lack of an alternative is liable to make

Narendra Modi and the BJP, the only viable option.

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