What the falling stock market is telling us: It's the economy, stupid!

In May 2014, when the Bharatiya Janata Party won a majority in the general elections, the stock market surged(move suddenly upward). The Nifty rose to 7275 as the election results came through. The optimism continued until March 2015, when the index hit an all-time high of 9119. The Nifty is now back to 7300-7400 levels again.

The stock market is not necessarily a great barometer of economic health. But every industry-specific market index has lost ground in the past year. No industry has delivered a standout performance in terms of better profits or higher revenues. The breadth of the downturn suggests that the stock market is indeed indicating serious problems within the Indian economy.

This government is not even halfway through its term and so, it has time to pull economic reform out of its hat. India has been lucky in that international crude prices have collapsed and that has helped keep government finances more or less in order.

But the Modi government hasn’t found ways to use that windfall to accelerate growth. It has opted for gradual improvement rather than big bang reforms. This incremental policy may not be optimal given an economy beset with massive structural problems, red tape and inefficiencies. Nor does this gradualist approach gel with the high-profile promises made in 2014.

No foreign returns

The Modi Sarkar cannot be accused of inactivity. There has been a great deal of highly visible activity. What has been largely invisible is returns on the ground.

Narendra Modi has logged umpteen foreign trips in the past 20 months. India has also hosted a large number of world leaders at his behest. Loads of bilateral agreements have been signed, some of them over a year ago. This should have led to a flood of trade activity and of projects funded by Foreign Direct Investment, surely?

Despite all this baradari, India has seen her exports falling for 14 months in a row. Her position has arguably, worsened in terms of engagement with the global economy. India is not part of the Trans-Pacific Partnership. India also scuttled a potential World Trade Organisation agreement in 2014 citing its need to subsidise farm produce in the interests of food security. (The WTO agreement proposed to give India some time to do this but the Indian government wanted more). Negotiations continue on this issue. Observers say India won no concessions at the most recent Nairobi WTO meet in December.

The US has raised H1 and L1 visa fees, which affects the Indian Information Technology sector. This is despite the apparently warm personal relationship between Barrack Obama and Narendra Modi.

The rupee has dropped. The United States Dollar was trading at Rs 59.205 on May 31, 2014. It is now at Rs 67.707. This may not be altogether a bad thing since it helps to make exports competitive and protects the domestic economy against imports. But Modi had promised to strengthen the rupee and he patently hasn’t managed to do that.

Apparently the BJP also wasn’t too serious about its commitment to repatriate black money from abroad. The claims that Rs 15 lakh per capita of black money could be repatriated from abroad was just a “jumla” designed to offer election traction.

Policy failures

On the diplomatic front, the relationship with Nepal has become much worse. India is alleged to be blockading the border and preventing goods from entering Nepal because it dislikes the new Nepali constitution. As a result, the Chinese have gained diplomatic leverage. On the Western border, the Pathankot terror attack may have put paid to hopes of thrashing out a deal with Pakistan.

When it comes to the domestic economy, the BJP government is due to come up with its third Budget. The first two efforts have been uninspired.

There has been no headway on key legislative issues. There has been no Goods & Services Tax, which would help unify the country by reducing inter-state economic frictions and removing inter-state barriers. As of now, it is easier to move goods from Poland to the United Kingdom, than from Noida in Uttar Pradesh to Delhi.

There has been no central legislation rationalising labour laws (Rajasthan has fiddled with its state laws) and this makes potential employers very hesitant to undertake labour-intensive projects. The attempt to tweak land acquisition laws turned into a fiasco with the government passing multiple ordinances, which all eventually lapsed. So an entire array of structural issues involving land, taxation and labour mobility have not been dealt with, and probably won’t be.

Despite assurances to the contrary, the income tax department continues to make unreasonable demands. Among other things, this has induced Nokia to shut down its Chennai plant and also led to long-standing disputes with Vodafone and Cairns. Net gains to the exchequer: nil. Apart from loss of employment, this has induced caution among investors. It’s impossible to calculate opportunity costs of investments that have not happened. This is the sort of thing that turns slogans like “Maximum Governance, Minimum Government” into a joke in bad taste.

Multiple infrastructure projects, which had stalled during the United Progressive Alliance regime, due to some combination of land acquisition, environmental and other statutory clearances, financial problems, contractual disputes and litigation, continue to remain stalled. The pace of work continues to be slow on this key front.

Elusive good times

Economic growth has not accelerated. The economy is growing at just about the same rate as it was when the BJP took charge. The methodology of Gross Domestic Product or GDP calculation has changed, which causes some confusion. But once that is adjusted, growth seems about the same as it was in 2013-14.

The ultimate jumla might be on the employment front. A large proportion of the BJP’s vote in 2014 came from young men and women who needed employment. Roughly a million Indians enter the workforce every month – so, about 20 million have entered the workforce since the BJP was sworn in. It’s hard to tell in the absence of concrete data but it’s unlikely that enough employment opportunities have been created to take care of that 20 million.

On the campaign trail in 2014, the BJP promised to bring Achhe Din to a nation tired of high-profile scams and of several years of lacklustre growth. Some 20 months down the line, the eagerly-awaited good times seem to have receded into some dim mythical future.

-scroll.in