Though it did not explain how taking Rs1,000 and Rs500 notes out of circulation would help the rich – after all they must be the ones with most such notes – the opposition kept harping on the idea that it was an ill-conceived move for which Modi would have to pay a heavy price politically. (Actually that should not be a bad thing from the opposition point of view because, after all, if it was going to cost Modi politically, the gains must naturally accrue to the opposition. So, I don’t know why it was criticising a “bad” move by Modi. Surely it could not have been because of its greater love for the country considering how it has been disrupting parliament all these three years.)
Anyway, the hoped-for political cost never materialised as Modi ran away with the assembly elections is most states in the aftermath of demonetisation. The victory in Uttar Pradesh was especially sweet for the prime minister as that is one state that all parties look up to in order to gauge which way the wind is blowing nationally.
Side by side with the political cost, the Congress Party and its stalwart economists were also predicting economic ruin of untold measure and misery. “We are going to be the laughing stock of the world,” was how one highly educated economist and minister in the previous government described demonetisation.
Whether the world was laughing or not, the Congress Party was finding it difficult to control its glee when Modi’s other major economic reform, the Goods and Services Tax (GST), started showing teething troubles in implementation and, therefore, was required to be amended several times.
But surprise, surprise, the world does not seem to have been bothered much with these naysayers. First World Bank President Jim Yong Kim lauded Modi for the “boldness” of the reforms saying, “we are very encouraged by this.”
Then International Monetary Fund (IMF) Managing Director Christine Lagarde expressed confidence that the structural changes like the GST and demonetisation have put the Indian economy on a “solid track”. “We believe that India is for the medium and long-term on a growth track that is much more solid as a result of the structural reforms that have been conducted in India in the last couple of years,” Lagarde said.
That was on October 12. A fortnight later, the world put its money, as it were, where its mouth was. The World Bank upgraded India’s ‘ease of doing business’ ranking by a whopping 30 notches. From 130 it became 100 and Modi said while he was happy he was not satisfied, his goal being 50 or thereabouts. Nevertheless the government went to town with it, no less than Finance Minister Arun Jaitley addressing a press conference to showcase the development.
But the naysayers were equally adept at clutching on to all the negative elements that prevented India from showing a still better performance. “Look what the World Bank has said,” they told everyone who would care to listen. “Starting a business in India is still difficult. In enforcing contracts we have a long way to go. And the less said about obtaining construction permits the better.” Indeed the Congress Party was right. These were the main hurdles in India’s way for it to move up the ladder for the ease of doing business. It was nobody’s case that the Congress, when it ruled for ten years on the trot, had these and other things under control.
Just when the government had stopped beating the ‘business ease’ drum and the Congress Party had started looking for other things to beat the government with comes another major thumps up from another international agency and the protagonists are at it all over again.
Moody’s Investor Services last week upgraded India sovereign bond ratings from Baa3 to Baa2. A Baa3 status meant Indian government bonds are just junk which means nobody should touch them. All through the 10-year Congress rule that was the case. But from Baa3 to Baa2, though in numerical terms just a difference of one, is a big jump. Suddenly the government bonds are being recommended and they have become things of value. Not just that, Moody’s gave a big push to India’s economic outlook from being ‘stable’ to ‘positive’.
Once again Jaitley called a press conference to celebrate the event and several government ministers gave expansive sound bytes to whichever television channels would bother to ask them a question. Congress spokespersons huddled together and came up with something that is usually Modi’s domain expertise – verbal jugglery.
They said: “Moody’s good for Modi but not for nation’s mood,” and went on to highlight the many plights that ordinary Indians are still going through. They cited joblessness, price of vegetables, etc to paint that picture of gloom that usually sits well with opposition press briefings. Somebody even went to the extent of suggesting the government had manipulated Moody’s to announce this upgrade ahead next months’ all-important Gujarat assembly elections. As if Gujaratis were waiting and watching what Moody’s would do before they decided who to vote for!
Swaminathan S Anklesaria Aiyar, one of the more respected columnists in the country, had this to say about Moody’s upgrade: “It is a minor event. It means nothing to voters, and will not help Modi win any elections. It does not mean much even to big corporations, which have been able to borrow more cheaply for months, since the markets have anticipated the formal upgrade. But it does provide comfort to long-haul investors that India most needs.”
If Moody’s has upgraded India, there are two other major international rating agencies – Standard & Poor’s and Fitch Ratings – that still see India in poor light. So, far from winning elections, the upgrade can just about boost some sectors of the economy which depend on foreign borrowings from certain quarters.
Rating agencies are not concerned about one-off events like demonetisation or even major tax reforms such as GST, leave alone prices of tomatoes and onions. They look at macro-economic indicators like fiscal deficit, gross national product (GDP), inflationary pressures, current account deficit, foreign exchange reserves and financial and banking reforms. On every one of these parameters India has been ticking the right boxes for the past three years except perhaps GDP but even here pundits agree India’s performance is better than most major economies. Even in GDP per capita terms, India has moved one place up to 126th in the world. So Moody’s upgrade is richly deserved.
At $60bn per annum India is already the world’s largest recipient of foreign direct investment (FDI). This upgrade could only help increase FDI inflows which, in turn, could boost overall economic activity and generate more jobs. These macro-economic movements cannot be reflected overnight but are discernible only over a longer period of time.
The government has promised more reforms and the budget coming up in less than three months’ time should be the one to watch out for. It will be the last full budget before parliamentary elections of 2019. By then GST must be on auto-pilot. Demonetisation would only be a distant memory. Modi must be hoping the overall impact of all this should help him through for a second term. From that sense the timing could not have been more perfect.