India's Modi Feels the Jitters As Economy Flags

This article first appeared on Riding the Elephant.

Narendra Modi's BJP government is looking defensive and rattled, even jittery.

For the first time since it swept to power in 2014 it has lost some the bombast and razzmatazz with which Modi has trumpeted countless development schemes with overly-ambitious targets, party president Amit Shah has allowed the extremes of Hindu nationalism to cause extensive controversy, and finance minister Arun Jaitley has blandly insisted with all the confidence of a leading lawyer that all is well with the economy.

Twice in recent weeks all three politicians, accompanied by other BJP leaders, have grossly over-reacted with media blitzes to what they saw as potential political setbacks.

The first was last month after Rahul Gandhi, who is widely expected to become president of the Congress Party within a few weeks, had an unusually good reception for speeches he gave in the US.

The second was after Yashwant Sinha, who was a BJP finance minister at the turn of the century, wrote a newspaper article sharply criticising the government and blaming Jaitley for creating a "mess".

Yesterday a new potential embarrassment emerged with a story on a prominent news website about the business dealings since the BJP was elected of Jay Amitbhai Shah, Amit Shah's son.

Indicating what could become a challenge to Modi's claim of running a clean government, Kapil Sibal, a senior lawyer and Congress Party politician, accused those involved of "crony capitalism." Jay Shah denied the accusations and said he is suing the website, wire.in, for Rs100 crores ($15.3m).

Concern about the economy has arisen because growth has slowed progressively from an annual rate of 7-8 percent or more during the last Congress government to 5.7 percent in the quarter that ended on June 30.

That is still high compared to many developed economies' lower growth rates, but it is not sufficient to tackle India's poverty and other problems, and it does not fit with Modi's election promises for the economy. It is the slowest since he was elected, though the Reserve Bank of India does expect it to improve in the coming months.

There are widespread reports of industries contracting and of companies shedding jobs, and of a failure to generate employment for the one million monthly entrants to the job market. An exporters' organisation estimates that 40 percent of 100,000 small and medium sized exporters are facing difficulties.

This has led to the government is being criticised from within its ranks, and not just by Yashwant Sinha, whose article a less sensitive government could have virtually ignored (as could have happened on Rahul Gandhi's US speech).

Mohan Bhagwat, sarsanghchalak (chief) of the Rashtriya Swayamsevak Sangh (RSS), the BJP's extreme right wing umbrella body, has warned that "small, medium and handicraft industries, retail or small self-employed businesses, the co-operative sector, and agro and agro-allied sectors should feel the minimum heat" from economic change.

The RSS has an extensive grass roots organisation, so its criticisms show its concern about the impact on the key BJP vote bank of small traders and other often tiny businesses such as textiles.

Their first hit came from Modi's sudden demonetisation last November which, without warning, removed 86 percent of banknotes from circulation. This was followed on July 1 by a new Goods & Services Tax (GST) that was planned by successive governments for many years to unify the country.

But Jaitley allowed his finance ministry to introduce it with five complicated tiers ranging from a 0 percent-28 percent, which were applied to even the smallest one-man businesses that had previously been outside the tax net.

The demonetisation project was praised by the poor who saw it as an attack on the rich and corrupt (which it did not become). The economic slowdown it generated because of a lack of cash, plus the mishandled GST, is now hitting what is called the unorganised sector that accounts for 90 percent of employment.

The basic problem is that Modi is expecting India's slow-moving economy to adapt to new practices faster than is possible and, in so doing, is doing unnecessary harm to those who run their businesses without paperwork, formal reports, and taxation,

"My reckoning is that for a substantial number of SMEs, their margin was tax evasion," Saurabh Mukherjea, chief executive of Mumbai-based Ambit Capital, told the Financial Times.

"As the government steps up forcing people to comply with GST, a lot of small businesses that managed to stay in the shadows will find themselves sucked into the tax net. Either their profitability will be vastly diminished – or it will go away completely."

Modi's "early Diwali"

That led at the end of last week to a series of moves on the economy, notably easing of the GST tax levels and regulations, following an emergency meeting between Modi, Shah and Jaitley. The finance minister looked less than happy when he made the announcements, but Modi declared triumphantly that Diwali had "come early" – the annual Hindu festival of lights and present-giving is on October 19.

Inevitably major reforms such as GST cause economic disruption, and Modi has shown both with the tax and demonetisation that he does not shy away from such risks.

Ironically, at the same time he is being criticised for only tinkering with the economy in other areas such as state-owned banks and their bad loans, the inefficient and overmanned public sector – and for allowing his ministers to follow his own practice of issuing unrealistic completion targets on reforms such as housing for all, electricity for all, and now railway electrification.

Ministers and bureaucrats are also trying to obfuscate about the economic problems by talking unrealistically about young entrepreneurs and the role of the digital economy.

Piyush Goyal, who recently moved from being minister of power to railways, even tried last week to rebut concerns about job cuts by saying "the youth of tomorrow is not looking to be a job seeker alone – he wants to be a job creator".

None of this necessarily upsets the BJP's expected victory at the next general election in 18 months' time. It is however causing some concern for state assembly elections before then which include Modi's home state of Gujarat before the end of the year – though opinion polls indicate that the BJP will win there comfortably.

The BJP has been progressively extending its reach across the country with state election victories plus new link ups, for example in Bihar. This puts it in a powerful position when it comes to organising arrangements for the general election.

It is now targeting southern India, where Shah has been embroiled in a battle in Kerala with the CPIM, India's main communist party, that spilled over into street protests in Delhi today.

It is seeking alliances in Tamil Nadu and hopes to win Karnataka from Congress in the middle of next year, as well as holding onto power at the end of next year in Madhya Pradesh and Rajasthan. It is also campaigning to win the small northern state of Himachal Pradesh from Congress at the same time as the Gujarat election.

But nothing is certain in politics and Modi and Shah urgently need to stem the currently growing evidence that the prime minister has not delivered on his 2014 election promises to create jobs with economic growth while transforming the way the country operates.

John Elliott writes from New Delhi. His latest book is Implosion: India's Tryst With Reality (HarperCollins).