India’s protesters beat Modi… for now
The nationalist’s development plans fail to face reality
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India’s supreme court on Tuesday halted a series of agricultural laws that prompted the largest strike in history and led hundreds of thousands of farmers to shut down roads around New Delhi for weeks.
The suspension is a setback to Prime Minister Narendra Modi, who -- as we noted in this week’s Rapid Round -- is facing India’s worst recession since 1952. The situation is worse than expected, with the world’s second-largest country facing a 7.7% drop in GDP for the fiscal year ending in March 2021.
It couldn’t come at a worse time. India’s far-right government has chosen a development path totally divorced from its desperate reality, and the Indian people are the ones paying the price.
Modi and the ruling Bharatiya Janata Party have embraced “self-reliance,” or atmanirbharta -- a Hindu nationalist take on domestic consumer-focused economic growth strategy. The play: reverse India’s trend during the last three decades away from gradually opening up, instead raising trade barriers and betting on domestic demand to drive growth. India has raised tariffs on around 2,500 goods with an average tariff increase of 4.5% since 2017. During the same time, India has signed no significant trade agreements unlike its neighbor, China.
This economic model rests on three assumptions.
That India’s domestic market is currently big enough to drive growth.
That its economy should not rely on boosting manufacturing exports to do so either.
That it will be harder and harder for India to get into the manufacturing export game as protectionism weakens global trade.
The first of these assumptions is flat wrong. India’s population is huge, but its consumer market is relatively small. India’s people suffer from widespread poverty and extreme inequality, and the country has one of the world’s most unequal divisions of labor between men and women particularly in the informal economy. Half the Indian population barely contributes to consumption at all, according to India’s former chief economic advisor Arvind Subramanian. India’s consumer market is a mere one-sixth the size of China’s.
“There are a lot of poor people with limited purchasing power and a few people with a lot of purchasing power who, however, save a lot,” Subramanian wrote. “Both of these reduce the market for consumption.”
The good news, historically, is that India’s manufacturing exports have grown steadily, averaging a 12% annual rate of growth between 1995 and 2019. That was the third-fastest rate in the world, behind Vietnam and China, and made up one-third of India’s total growth during that period. India’s share of global exports (.pdf) is much less than its share of the global labor pool (40% of India’s workforce is engaged in agriculture), which gives further room to grow in the even with reduced global demand in the years ahead.
Case in point -- exports slowed after the global financial crisis of 2008, but remained positive. India also excels at exporting services -- particularly IT and software services -- which will likely benefit from a shift toward remote work as a result of the pandemic.
Nevertheless, Covid has shocked the Indian economy more than almost any other in the world. Household incomes have collapsed, with women shouldering the heaviest burden, as companies protected profits by slashing payrolls. At the same time, India’s financial sector was in trouble even before the pandemic, due in part to overreliance on an overleveraged shadow banking system; commercial firms that lend outside official channels. The downturn has dried up their lending, and a liquidity crisis is now crushing Indian consumers.
The result is mounting defaults for some businesses, record profits for others, and nosediving consumption -- precisely during a time in which the Indian government has bet its economic future on rising domestic demand. Contrast that with China, which powered growth in 2020 as industries benefited from lockdowns elsewhere in the world.
One solution for India could be to push forward an industrial policy to encourage more export industries. But Modi has not done this. To make matters worse, the government has not provided substantial relief packages to the unemployed, and its farm laws sparked a national uproar. Farmers say that the laws will scale down publicly-owned depots which are allowed to purchase agricultural products at guaranteed prices, a subsidy supporting some of the most impoverished people in the country.
Why does Modi want this? To open the farming sector to international capital, helping big companies drive down prices, leaving farmers at the mercy of the market. This would consolidate farmland and -- in theory -- increase yields by industrializing agriculture. The cost is wiping out the livelihoods of millions of people, forcing them off their lands, and leading to waves of economic migrants flooding into sprawling urban slums without the jobs to support them.
“It is this combination of timidity vis-a-vis finance, callousness towards the people … that has made it into perhaps the most ultra-right government in the world,” economist Prabhat Patnaik wrote. The next chapter is seeing how the consequences will shape India’s future in 2021.
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