Where is FDI, Mr Modi?

The Government of India's official, routine Mid-Year Economic Analysis has just been published - and a more damning indictment of Modi's economic policies would be hard to find. Not only has there been little development, all his energies seem to be directed at clandestinely pushing the extremists in his ranks to redouble with vigour their not-so-well-hidden agenda of precipitately pushing the country down the abyss of Hindutva.

GDP growth is negligible - all of Modi's rhetoric has pushed up the rate by no more than an unimpressive 0.6 per cent. Even that is the consequence of the last gasp of the previous government whose efforts were just beginning to take effect when the Government changed and Modi was able to ride the tail wind. Gross value added in agriculture and allied activities is actually down - by an entire percentage point; the index of industrial production has gone up by a mere 2.8 per cent; and exports have collapsed from a growth rate of 15.2 per cent to a dreadful 6.7 per cent. The exchange rate vis-a-vis the US dollar is today the lowest ever in the history of our benighted country.

The Sensex may have soared to heights never before attained but that is principally on account of two factors: one, the Modi government having given up its efforts to bring back black money (thus reneging on a core election commitment) and winking at the perennial round-tripping of fresh black money through the Mauritius route, thus making speculation on the stock market the main engine of "growth " in our country. So, Foreign Institutional Investment (FII) floods in, mostly from Mauritius, but it is unreliable "hot money" that enters or exits the economy at the press of a computer button. The real McCoy, FDI, which is a genuine growth engine, shies away from India because real investors know that Modi's claims are bogus and the economy will stagnate under him at 5-6 per cent, no more, perhaps less.

The Economic Analysis tells us that over the six-year period 2005-2011, the average growth rate of GDP was nearly 9 per cent annum. It fell thereafter to below 6 per cent, but Jaitley has his work cut out for him to restore the UPA-I growth rate. Recovery had already begun in the latter phase of UPA-II, but all Modi has been able to do is not fall below. There are no signs of the economy accelerating towards the growth rates with which Dr. Manmohan Singh had wowed the world.

What then is there to celebrate? Inflation, certainly. But that has nothing to do with the exertions of Arun Jaitley. International oil prices have plunged thanks to a combination of four factors: low to negative growth rates in the developed West; bear sentiment in the New York Metals Exchange; the steep rise in domestic shale oil and shale gas production in the US that has reduced their petroleum imports to virtually nil; and sanctions against the Russian Federation for the people of Crimea having had the temerity to vote in favour of leaving the Ukraine to rejoin Russia. Plus, of course, OPEC's decision to keep their oil output at pre-crash levels instead of attempting to keep oil prices higher by cutting back on production. And El Nino having at the last minute decided to bypass India. So, the silver lining has everything to do with the global sun peeking out from behind the black cloud and almost nothing to do with the black cloud backing off from the Indian economic horizon.

Indeed, the Mid-Year Economic Analysis confirms that UPA-II was punished for its economic woes just as its Herculean efforts to arrest the downslide were coming to fruition. While Modi has received extended applause for his "Make in India" slogan, that is all it has remained - a slogan. No one is making in India, not domestic investors, not foreign investors. No one explains this better than the Mid-Year Economic Analysis that deserves quotation in full:

"Growth in real capital formation was around 15 per cent and private corporate investment surged, East Asia-style, over a very short period from 6.5 per cent in 2003-04 to 17.3 per cent in 2007-08, amounting to an increase of nearly 11 percentage points of GDP. Investment was based largely on the perception that growth rates of 8.5 per cent would continue indefinitely and banks, especially public sector banks, could lend to private sector investors in infrastructure." (para 1.43)

So, what is Modi doing? Weakening our institutions even further! Ordinances galore are weakening Parliamentary institutions that are the very foundation of our democracy.

The Government is clearly clueless about how to tackle the fundamental malaise that afflicts the economy - the inability of the private corporate sector to rise above governmental sops to display some entrepreneurial spirit. What our businessmen are good at is leveraging their influence with those whom they helped with monetary donations to elect to power. They use this influence to squeeze more and more concessions out of government so that, through rent-seeking rather than 'animal spirits', they are able to salt away their gains. Yet, it is on the backs of this private sector that Modi hopes to play out his take on Margaret Thatcher. His chances of success are exactly the same as those of a snow-drop in the furnace.

By: Mani Shankar Aiyar