Politics as Usual in India Again

(Bloomberg Opinion) -- India's Prime Minister Narendra Modi is in a spot of trouble. He has to face reelection in a few months amid growing dissatisfaction with his government's performance; he's likely to use every lever available to eke out a win. One such lever, unfortunately, was the interim federal budget that his lame-duck government presented last week, to keep official machinery running till the next government can come in with a mandate and make decisions about taxation and spending. As many of us feared, Modi broke with bipartisan convention: He used the occasion essentially to launch his election appeal to India's voters. And, unfortunately, it's one that they have heard before.

The big news in the interim budget was that Modi intended to give smallholders a small annual income to supplement their earnings. Many other countries support their farmers similarly; India, in fact, uses a complex system of agricultural subsidies that is both inefficient and, arguably, breaches World Trade Organization rules. But Modi's intent in introducing the scheme at the very last moment — in fact, past the very last moment — isn't to reform agricultural policy; he's clearly hoping to address his rising unpopularity in rural areas. To some degree, his hand was forced: The main opposition Congress Party had announced plans for a minimum income guarantee just a few days earlier.

Modi didn't stop there; he had a bunch of other goodies in the budget to throw to undecided voters, including a tax cut for low earners. As a consequence, the government won't make its fiscal deficit target for the financial year and shifted its target for the next year by an even greater margin. The worst part is that there isn't really any great crisis that would justify breaching fiscal rules, only electoral considerations.

Those who supported Modi prior to his election in 2014 imagining that he would lead India away from populist economics must be kicking themselves now that's he turned out to be an arch-populist himself. The question is: Why? Why did a politician who during his campaign and his first days in office insisted that he would transform India's economy return instead to the old vote-buying formula he had once mocked?

Perhaps because, when judged by his own promises, Modi's term has been a failure. The government may claim that India's economy is growing faster than it ever has, but there isn't exactly a lot of optimism on the ground. Worst of all, his political foot-soldiers, the underemployed young men who fill India's northern states, haven't seen their lives change appreciably.

Just a couple of days before the budget, India got convincing proof of this failure. The government had long argued that unemployment wasn't a problem. There wasn't any data in the public domain to settle the question one way or another. But it turned out that India's most comprehensive jobs survey had indeed been completed and signed off on by the country's highest statistical body. After the government tried to bury the data, the statisticians resigned — and the data leaked anyway, revealing that unemployment was at a 45-year high. It was worst for young people: The unemployment rate for rural males between 15 and 29 soared from 5 percent in 2011-12 to 17.4 percent in 2017-18. Rather than curing India's jobs problem, Modi's government had made it worse than ever.

That's why the new giveaways were both necessary and revealing. Modi's promise of a new political economy — one oriented around the private sector, productivity and growth — was illusory. Now India is faced with the choice of one giant welfare scheme or another in this year's elections — alongside a treasury that will struggle to finance politicians' demands. This is a familiar position for India's voters, but one that many of us had hoped we had left behind.

And the worst part, perhaps, is that Modi's giveaways show that he's learned nothing from his mistakes. The reason farmers need support is that there are so many of them that land-holdings are too small and they struggle to make a living. The reason that there are so many of them is that there are no other places to work. If you want India's farmers to prosper, you need to focus on creating a more vibrant industrial sector. But in the budget there was little talk of manufacturing. Modi's government began its tenure promising to reduce corporate taxation to Southeast Asian levels so as to render Indian industry competitive globally. There wasn't a peep about that in this last budget. Modi seems to have given up on his plan to transform India.

Nor was there anything to help India's army of unemployed. But why should there be? The government had, after all, just spent months trying to cover up their existence.

To contact the editor responsible for this story: Nisid Hajari at nhajari@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mihir Sharma is a Bloomberg Opinion columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of “Restart: The Last Chance for the Indian Economy.”