India's economic woes piercing Narendra Modi's aura of invulnerability

The immense popularity of Narendra Modi, India’s most dynamic prime minister in decades, has always rested on two legs: Hindu nationalism and his tantalising promises to build on the country’s go-go economy. That second leg is now looking a little shaky.

In the last two years, India’s consumer confidence has plummeted, construction has slowed, the fixed investment rate has fallen, many factories have shut down and unemployment has gone up.

Fingers are pointing at Modi. Just about all economists agree that two of the prime minister’s biggest policy gambles — abruptly voiding most of the nation’s currency and then, less than a year later, imposing a sweeping new sales tax — have slowed India’s meteoric growth.

“Things have been worsening, worsening, worsening,” said Himanshu, an economics professor at Jawaharlal Nehru University in New Delhi, who uses only one name.

Still, the economy here is far from failing. The stock market continues to soar, major rail, road and port projects are unfolding across the country, and foreign investors poured $25.4 billion into India from April to September, up 17 per cent from the period in 2016.

The government on Friday predicted that the country’s gross domestic product would grow by 6.5 per cent in the 2017-18 financial year. While that is the lowest number the country has seen in four years, India’s economy is one that most countries would love to have.

But it does not feel that way to the huge number of Indians negatively affected by Modi’s policies, and the grumbles are growing. So are social tensions, especially those that divide Hindus from Muslims, and upper caste from lower caste. The fear is that Modi is already beginning to lean more heavily on that first leg of his, Hindu nationalism, now that his economic strategy is losing some of its sheen. Even in Gujarat, the state considered the strongest of Modi’s strongholds, where people have been cheering his rise for the past 20 years and line up in dusty fields by the thousands just to catch a glimpse of his saffron scarf and groomed white beard, many feel betrayed.

The output from the textile industry, a huge employer here and once a healthy exporter, has been cut nearly in half, prompting layoffs and despair. In December Gujarat Assembly polls, Modi’s party maintained its majority but lost 16 seats. The message was clear: Modi’s party was still No. 1, but the man himself was no longer bulletproof. “Modi hurt our business, and we want to show him that we can hurt him, too,” said Manish Patel, whose once clackety cloth factory is now completely empty, another Gujarati business that has gone under. So for the first time in his life, Patel voted for the Congress, not for the BJP.

In Surat, a Gujarati metropolis with hundreds of years of storied mercantile history, Modi’s currency policy hit like a sledgehammer. Manish Patel and his older brother, Dilip, who run the family’s cloth business, found themselves scurrying into line at the bank and waiting hours each day, trying to get money. It was never enough, and when the brothers could not pay their loom operators, many walked off. Hundreds of factories had the same problem. The Surat textile traders association said production in this area dropped to 25 million meters a day now from 40 million metres two years ago.

It’s hard to overstate how central cash is to Gujarat, and India in general. Most laborers, whether they operate looms, drive trucks, wash clothes or haul bricks, are paid in stacks of soft rupee notes. Even large real estate deals will be done partly in blocks of rupees, to keep profits off the books.

This was what motivated Modi, who has made fighting corruption a big plank in his platform. He said that by making people turn in old bank notes, he would capture billions of rupees of so-called black money. It has never been made clear how much black money he actually captured.

Unlike many of the other big economies that turn on exports — such as China’s, Japan’s or Germany’s — India is not nearly as industrialised. Modi has vowed to change this, launching a Make in India campaign to attract foreign investors. But analysts say that India’s labor laws are still too restrictive, which discourages businesses from thinking big. “A manufacturing revolution is nowhere in sight,” one commentator recently said.

In July 2017, before people had a chance to recover from the currency chaos — which had also hampered consumption, because many Indians simply didn’t have any spare cash in their pockets — Modi moved ahead on another front: the new goods and services tax, or GST.

It was the most sweeping tax overhaul India had ever tried, and probably overdue. But many economists and business people questioned Modi’s timing on this as well. Suddenly, with the economy softening, all but the smallest businesses had to file dozens of returns each year, online, paying taxes on everything from yarn to mixed nuts, often at confusing rates.

Business owners said they had no idea how to file. Many small businesses began to suffer from something they did not understand.

Politics are shaped by expectation, and many Indians said they expected more from Modi. About one million Indians enter the work force every month, and job creation is one of the country’s most urgent political priorities. Modi has come nowhere near his promise of creating 10 million jobs a year.

For every Gujarati business owner who wants to send Modi an angry message, many others are still with him.

Kailash Dhoot, a textile exporter, said that Modi’s recent policies had wounded his business but that Modi’s party was still his first choice. When asked why, Dhoot was quick, and curt, with an answer. “Hindutva,” he said. And he closed his mouth firmly, signaling the discussion was over.

Analysts fear that if the economy continues to come up short of expectations, Modi might turn more to what are termed “communal issues,” subjects that divide communities based on religion or caste.

“If economic maneuverability is limited,” said Ashutosh Varshney, a political-science professor and India specialist at Brown University, “then the communal card, the Hindu-Muslim card, is a massive political temptation.”