As I had mentioned in a recent blog post, Maitreesh Ghatak and his coauthors painted a picture of solid economic performance in April 2014 – a month before national elections in India. That passed neither the credibity test nor the acceptance test by voters. In March 2019, he published another piece of research titled, ‘The Mirage of Modinomics’. He did it two months before the vote unlike last time. But, Modi’s margin of victory has increased.
It is ok for him to be biased against Modi and it is ok to present charts that buttress his bias. But, he has to keep in mind his credibility. There, he fails.
What is the theoretical basis of Figures 1 and 7? Global growth and global inflation are not like ‘risk-free rates’ in CAPM to present ‘excess growth’ and ‘excess inflation’. What is the point? That is the classic example of baseless empiricism and data mining.
India’s growth rate in comparison to growth rates in major emerging economies between 2014 and 2018 has been rather good, even if one were to make allowance for the fact that official growth numbers might be overstating economic growth.
Second, Figure 6 shows poor export growth and that explains, partially, Figure 1. India basked under global growth boom between 2003 and 2008 with 40% to 60% export growth rates.
Figures 4 and 5 cannot be read in isolation of the NPA crisis which was made in UPA! The decline in capital formation in recent years is entirely due to overinvestment and malinvestment in earlier years.
That is a bit like fund managers touting returns without disclosing the risks they took or leverage that they deployed.
Indeed, India’s growth performance between 2004 and 2014 came with a banking crisis, a big current account deficit and a rupee crash. The Indian economy is still hurting from the first of the three.
As for agricultural production, NDA 1 and 2 had worse luck with monsoon, intra-monsoon variability than UPA 1 and 2.
As for the tax regime, India is still settling down with GST rates. On direct taxes, the tax buoyancy has been much higher under NDA II than it had been in UPA 1 and UPA 2. Direct tax buoyancy was below 1 for the four years from 2008 to 2012 and barely above it in the next two years. In 2017-18, it reached 1.81 – highest in a decade. See here.
From a press release of the Indian Income Tax Department in October 2018:
The total number of taxpayers (including corporates, firms, HUFs, etc.) showing income of above Rs. 1 crore has also registered sharp increase over the three-year horizon. While 88,649 taxpayers disclosed income above Rs. 1 crore in AY 2014-15, the figure was 1,40,139 for AY 2017-18 (growth of about 60%).
Similarly, the number of individual taxpayers disclosing income above Rs. 1 crore increased during the period under reference from 48,416 to 81,344, which translates into a growth of 68%.
The average tax paid by corporate taxpayers has increased from Rs.32.28 lakh in AY 2014-15 to Rs.49.95 lakh in AY 2017-18 (growth of 55%).
There is also an increase of 26% in the average tax paid by individual taxpayers from Rs.46,377/- in AY 2014-15 to Rs.58,576/- in AY 2017-18.
During the three-year period under reference, the number of salaried taxpayers has increased from 1.70 crore for AY 2014-15 to 2.33 crore for AY 2017-18 (up by 37%). The average income declared by the salaried taxpayers has gone up by 19% from Rs.5.76 lakh to Rs.6.84 lakh.
During the same period, there has also been a growth of 19% in the number of non-salaried individual taxpayers from 1.95 crore to 2.33 crore and the average non-salary income declared has increased by 27% from Rs. 4.11 lakh in AY 2014-15 to Rs. 5.23 lakh in AY 2017-18.
He (and his coauthor) concludes with, what he thought, a killer punch:
So here is what we have after four and a half years: job growth at multi-year lows, a farm crisis, a crippled unorganised sector, currency value at near all-time lows, a soaring current account deficit, high interest rates, a half-frozen banking system, a sputtering tax regime, a struggling corporate sector, sinking exports and a GDP growth rate that, for all the constant revisions and data controversies associated with it, does not stand out compared to the earlier decade.
Farm crisis? Modi does not make monsoons. Monsoons are not necessarily made in India and global food prices are not determined in India. Soil cards and national e-markets are a start as was crop insurance. But, much more needs to be done.
Currency value at all-time lows? That happened in 2013. Nominal value of 69 or 71 is not how one determines if currencies are near the floor or at the ceiling. Both are undesirable. Inflation performance matters and on that, the contribution of UPA II to the crash in the Indian rupee is a tough act to emulate.
A soaring current account deficit? Did he check the numbers? That happened in 2012 and in 2013.
High interest rates? The 10-year government bond yield has declined since 2013 but not by enough.
Half-frozen banking system? Well, it was put in the deep freezer by UPA II and their cronies. Now, it is thawing and half-frozen.
A struggling corporate sector? – over-optimism, overinvestment and mishandling and sub-optimal allocation of national and natural resources.
Sinking GDP growth? Best to have slow and steady growth than stoke unsustainable booms. Statistics needs to be fixed, however. India is not growing at or above 7%, in my view.
The truth, as always, lies between extreme partisan views.
I wrote in my note, ‘Was NDA II an economic failure?’:
There is excessive scrutiny of the government matched by a spectacular underappreciation of the contribution of other institutions and other factors to India’s economic underperformance and uncertainties.
Commentators also fail to appreciate that governments have asymmetric impact. Governments’ ability to damage is far higher their ability to help. We saw that with UPA II. Making good things happen is a lot harder for the government.
Unfortunately, there is no election for commentators and so-called experts.
The biggest failure of this government is not that it hurt the economy (demonetisation did, for sure) but it did not help the economy enough because it did not understand what it was up against – locally and globally. When one is an incumbent and creates high expectations, then the failure to help the economy can be deemed a failure. Difficult to argue against that because NDA II was voted to office to help rescue the economy and the country hurt by UPA II policies.
In trying to paint Modinomics as a mirage, Maitreesh and his co-authors have been trapped in a maze of innuendoes. The risk is that their intellectual credibility is a mirage.
[Postscript: If you wish to read a thoughtful piece of writing by Maitreesh Ghatak, I recommend this.]