Barring a few misses, overall the Modi Government has taken several bold moves to revive the economy which have helped improve productivity dynamics and laid the foundation for sustainable growth
From May 26, 2014, the day Narendra Modi took oath as the Prime Minister, BSE Sensex rose 53 per cent, from 24,716 to 37,869, and market capitalisation surged 73 per cent from Rs 84 lakh crore in May 2014 to Rs 145 lakh crore in May this year. As a result, India became the third best performing market among the BRICS nations after China and Brazil during the first four years of the Modi Government.
The Indian stock market beat that of the UK, Germany and France and is now just lagging behind the US and Japan during this period. This is particularly impressive as the first two-and-a- half years were dull and markets were on a slide in December 2016 due to concerns over demonetisation and the surprise victory of Donald Trump in the US presidential elections.
Stock markets, that are viewed as indicators or predictors of the economy, often hold the key for the Government’s performance. It is a known that large decreases in stock prices are reflective of a future recession; whereas large increases in stock prices suggest future economic growth. This because stock prices reflect on expectations about profitability which is directly linked to economic activity. On the other hand, fluctuations in stock prices lead the direction of the economy. Since the underlying fundamentals are what drive the longer-term trends in any stock market, and not the daily emotions of individual investors, one can look at the performance of stock markets and relate it with expectations of the domestic retail investor about the present Government’s performance.
Unlike the stock market surge during the previous UPA Government on the back of strong Foreign Institutional Investors (FII) inflows to the tune of Rs 4.8 lakh crore cumulatively, the present stock market rally is fuelled by strong structural reforms. Under the leadership of Modi, India witnessed the boldest ever reforms since independence. Having first introduced by the Vajpayee Government in 2000, the Modi Government had the courage to implement the Goods and Services Tax (GST), without further dilly-dallying. GST, passed in Parliament on March 29, 2017, is a comprehensive indirect tax on the manufacture, sale and consumption of goods and services throughout the country, making it one indirect tax for the entire nation. It has replaced at least 17 State and Central taxes and brought them under a single unified tax structure. Despite its initial glitches, GST is on its way to altering the Indian economic landscape positively. Since its implementation, as many as 4.5 million new entities, which could have been a part of the informal, cash-driven economy, entered the formal tax system, leading to an increase in both direct and indirect tax collections. The Government is confident of average monthly collections to the tune of Rs 110,000 crore, which can reduce the fiscal concerns of State and Central Governments and encourage policy-makers to further rationalise the GST structure.
Besides GST, Prime Minister Modi also launched a multi-pronged war on corruption and black money. On November 8, 2016, he took an unprecedented move by scrapping old Rs 500 and Rs 1,000 notes. This was a bold step in eliminating black money and fake currency in the system and to bring unaccounted money back to the banking system. Although the move could not achieve desired results — it could not completely root out fake currencies — it showed the will and the intent of the Government to fight corruption and black money. The Government collated information of about 5,800 shell companies whose near zero-balance accounts saw closely Rs 4,574 crore of deposits post currency ban and Rs 4,552 crore withdrawal thereafter.
In yet another move to curb black money in the real estate sector, the Modi Government amended the 28-year old Benami Transaction (Prohibition) Act, 1988 and gave it more teeth to ensure that all transactions are conducted in the name of actual owners. The Act has been used to attach 240 properties worth about Rs 600 crore, a small but steady start. This has brought down corruption and unfair trade practices in the industry with a rise transparency in real estate dealings.
Demonetisation has also proved to be the seed for digitisation of financial services in our country. It is on the course to increase the number of people in the formal channel with digitised financial transactions and
transform India from a data poor to a data rich country. This in turn can make it more difficult for people to be outside the system, thereby ultimately reducing black money in the system. In addition, the linking of Aadhaar to PAN is another crucial move to weed out tax evasion. People are increasingly finding it difficult to hide their untaxed income.
Another important reform was the amendments to the Insolvency and Bankruptcy Code (IBC), aimed at providing resolution to small bankrupt firms and at the same time, take stringent action against big bankrupt businesses. It took just six months for the law to take shape. The move is already making the necessary impact with as many as 2,100 firms repaying Rs 83,000 crore rather than lose control of their business. In addition, speedy resolution of simple cases has been set under National Company law Appellate Tribunal (NClAT), saving both time and money. The average time to resolve a matter has come down from three years to one year and the average cost has come down to one per cent from nine per cent.
Additionally, to boost the financial sector and revive the Indian economy, the Government created a massive Rs 2.11-lakh crore two-year road map to strengthen NPA-hit public sector banks (PSBs), which includes recapitalisation bonds, budgetary support and equity dilution and has pumped in more than Rs 51,000 crore capital in public sector banks.
All efforts made by the Modi Government, however, did not bear fruit. It failed to create enough jobs for the youth. Several key initiatives started by the Prime Minister, like Start-up India and Skill India did not live up to expectations. FII inflows were also not encouraging during the first four years due to the lack of strong earnings growth by large companies due to two main reasons: Worldwide deflationary pressures and structural issues like US visa issues affecting the IT sector; aggressive quality requirements of US FDA affecting the Indian pharma sector, NPAs affecting the banking sector; fierce competitive battles affecting the telecom sector; and higher real estate prices affecting the cement and infrastructure sector.
On the other hand, the Government’s attempt to revive the sluggish manufacturing sector through Make in India was able to attract 42 per cent more FDI inflows than the previous Government. Stock markets witnessed a rally in small and mid-cap stocks instead. Therefore, during the period of May 2014 to January 2018, when BSE Sensex, which represents 50 large-cap stocks, grew by 43 per cent, the overall market cap of BSE stocks, including small and mid cap stocks, surged a whopping 87 per cent.
In contrast to the UPA-II Government, that was able to add 78 per cent to the stock markets at the end of their full-term on the back of robust FII inflows and corporate earnings, under Modi Government, stock markets have risen due to strong interest by domestic investors on the back of robust structural reforms. This is the evidence that the Government’s measures are in the right direction. Despite slow take-off, the push to the ongoing structural reforms, including enabling the implementation of GST, adoption of inflation targeting, new bankruptcy code, financial inclusion, liberalisation of foreign direct investment, measures to curb black money and encouraging digitalisation, have helped improve productivity dynamics and will lay the foundation for sustainable growth.
The structural reforms undertaken by the Modi Government need political courage. It has brought about a disruptive change in the way businesses are now being run. But this change and more importantly the courage and intention to implement these reforms and changes are the need of the hour if India is to put corruption behind and embark on the journey to become an economic superpower. The stock market has taken these reforms positively. But the recent knee-jerk and downside reaction of the stock markets following the results of Karnataka elections shows the shape of things to come if Modi loses the elections in 2019.
(The writer is Assistant Professor, Amity University)
