The last few weeks have caused a few ripples in India’s political and economic landscape, reflecting the various shades of problems that our governance system is currently facing.
From the economic point of view, the government, acknowledging a state of crisis, announced yet another set of sector-specific measures. This time it was a Rs 10,000 crore relief package in the form of a ‘special window fund’ to revive India’s real estate industry, one of the worst affected sectors by the current slowdown.
There is little doubt that the real estate sector, which was once responsible for creating a massive number of jobs, is now witnessing an enduring liquidity-crunch. Some of this is likely due to the shock delivered by demonetisation. Nevertheless, the liquidity crunch has seriously impacted job creation in the construction sector, especially in the segments of residential and affordable housing.
The real estate’s poor performance over the past few years has also added to the deteriorating asset quality of India’s NBFCs, which has exacerbated the NPA problem. At the same time, due to a fall in demand for mid-income and affordable housing, credit demand for loans by property investors also dropped, resulting in a twin balance sheet problem for the banks.
A worsening bank crisis, evident in the collapse of IL&FS and PMC, has to some extent sparked fear amongst people who occupy the low and middle-income categories. This, in turn, brings down deposit holdings and limits the banking system’s credit creation powers.
With banks affected by a crisis of confidence, a problem that will involve some recovery time, it remains unclear how effective a supply-side measure like a special window fund can do to revive the real estate sector completely on its own. Especially considering this special measure is, by one estimate, likely to help less than 10% of the country’s stalled real estate projects. A wholesome, full-time solution requires a more constant credit-channel from India’s banks.
On the political side, in Maharashtra, we are seeing the Shiv Sena-BJP pre-poll alliance in almost on the verge of collapse. While the former was exploring an alternative political combination i.e. with NCP and Congress, to form a state government, president’s rule was imposed in the state. In Haryana too, the BJP’s vote share, to its own surprise, significantly declined due to the lacklustre economic conditions – massive job loss and agrarian distress – in the state.
Police stand at a PMC bank branch in Mumbai. Photo: The Wire
The Ayodhya judgment
Amidst all these scenarios came the long overdue Ayodhya judgment by the Supreme Court which settled the 2.77 acre disputed land title case in favor of Ram Lalla and the Hindus to construct a temple there, while granting Muslims a 5 acre land allocated by the UP government for a mosque to be constructed elsewhere.
The judgment, even though decided and announced by India’s Supreme Court, needs to be viewed as a major ‘political event’ that is principally aligned with the current ruling party’s vision to have a Ram temple constructed in Ayodhya at all costs. For Hindu fundamentalists, the judgment brings an actualisation of a major historical struggle for establishing religious precedence. It is hard not to see this in the larger context of the apex court announcing this at a time when its own credibility remains in serious doubt (we still haven’t had one hearing on the constitutionality of the Indian government’s action in Kashmir).
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For now, in terms of its outlined manifesto goals, the BJP has so far emerged successful in achieving two of its three vital national objectives: the dilution of Article 370; having a Ram temple constructed at the disputed site in Ayodhya, with the third goal now, of creating a Uniform Civil Code (UCC), left to fulfil.
In the international scenario, India’s trade negotiations cohort (led by the prime minister himself), in an eleventh-hour decision, pulled out of joining the Regional and Comprehensive Economic Partnership (RCEP), citing its discontent with the nature of underlying trade agreement that failed to accommodate India’s principal concerns. This move was observed as a surprise by many commentators, considering how the minister of commerce and other members of the trade negotiators expressed a strong desire for India to be part of the plurilateral trade forum in the months leading up to the official meet in Bangkok.
New Zealand’s PM Jacinda Ardern, Narendra Modi, Chinese Premier Li Keqiang and Thai PM Prayuth Chan-Ocha shake hands at the 3rd RCEP summit. Photo: Reuters/Athit Perawongmetha
A common underlying link
But, what seems to be a common underlying link emerging across some of these political and economic events in India’s recent past?
On a certain level, as Pratap Bhanu Mehta pointed recently, despite “the pantomime optimism” that the government and the media are trying to display, it is gradually “becoming impossible to disguise the sense of gloom surrounding the Indian economy”. The growth numbers and estimates at this point reflect exercises of statistical-fudging that mislead facts and fail to represent or forecast an authentic picture for India’s growth trajectory.
The connecting link, on a deeper level, points towards the fact that we are at a crossroads as with regard to the Indian government’s ability to lead the nation towards a progressive economic future. The political economic landscape, especially in the last five to six years has institutionalised this crisis of ‘confidence’ where institutional credibility remains seriously doubted, whether of the RBI or the Supreme Court, as each action seems aligned with the propagandist agenda of the state or guided entirely by political goals rather than democratic or market principles.
A state election (like in Maharashtra) happens with two parties clearly declaring a pre-poll alliance but then parting ways right after the election. This event, of course, isn’t new in the history of Indian politics. Parties do break up after an election cycle. However, a culture of political inconsistency combined with normalisation of eroding voter-faith is almost becoming a norm, which will have serious impediments on how people vote (or don’t vote) in elections down the road.
On a larger international plank too, India’s own position and foreign image, as Ram Guha recently argued, has significantly been damaged post-New Delhi’s act to downgrade Jammu and Kashmir’s status into two Union Territories and read down Article 370. This damage can be assessed in terms of India’s weakening democratic credentials – a point echoed across US Congressional meetings, its presidential election announcements and in the foreign press.
The last-minute decision to pull out of the RCEP too doesn’t augur well with India’s diplomatic and economic policy push towards an Act East outlook. And, without a suitable alternative, this decision warrants a closer assessment in terms of India’s weakening trade competitiveness levels and diplomatic ability to negotiate agreements based on mutually beneficial market principles (after all this trade negotiation process was on for almost six years).
A crisis of confidence
In the context of the domestic economy too, a crisis of confidence is clear by observing levels of business and investor confidence. In fact, a recent data point indicates how there has been an increase in outward foreign direct investment levels from the private sector at a time when domestic demand remains dismally low along with the consumption demand. A higher outward FDI level in a weak domestic demand scenario simply indicates that the private sector players trust their investment abroad more than they do within India.
There is substantial economic evidence that argues how an atmosphere of systemic mistrust combined with a lack of confidence can adversely impact an economy’s growth rates by negatively impacting investment levels and business cycles. The logic is simple, as echoed by the Nobel Laureate Robert Shiller, who argues: “An atmosphere generated by a steady flow and variety of lies is like a dark cloud over the facts. Businesses can’t plan effectively when they don’t know who or what can be trusted.”
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Mistrust in political functioning or leadership isn’t only affecting India but even countries like the US. In a recent article for the New York Times, Shiller explains how conditions of a persistent threat to American press amalgamated with the political dangers surfacing from a culture of lying under President Donald Trump, who feels free to attack all press against him as “fake news”.
In India’s political landscape, a deep social polarisation on political action or events is a mirror reflection of this phenomenon. Being on the receiving side on this, I have personally observed a clear pattern of this, emerging from the “anti-national” labelling of anyone with contrarian views or opinions to state-policy. This was even more explicit with all the chatter created right after New Delhi’s action on Kashmir. Some of the reactions on social media platform presented deeply troubling and resentful views not only against the Kashmiris but against anyone who advocated for the rights of Kashmiris.
BJP workers celebrate the government’s decision to revoke Article 370, in Amritsar, August 5, 2019. Photo: PTI
Entrenched mistrust
Mistrust is further entrenched in society (and normalised) when the leadership promotes it. An illustration would be to recollect the demonetisation speech by the PM in November of 2016, and how right after, in another speech he passionately remarked: “I have asked the country for just 50 days. If after December 30, there are shortcomings in my work or there are mistakes or a bad intention found in my work, I will be prepared for the punishment that the country decides for me.” With the shock-move clearly failing and choking India’s growth engine, there hasn’t been any apology or official word on this since then.
At the same time, a form of violent verbal attitude – shaped by a rhetorical axis of ‘for or against’, ‘us vs them’ – is seen dividing a citizenry on key social, economic and political issues that have ramifications for the nation as a whole. And this has serious consequences for India’s own future and its credentials as a large democratic, market economy. It was ‘trust’ in these very credentials which provided greater clarity and consistency to business communities – within and outside India, to invest in India’s market (as do so in a severely authoritarian regime like China).
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Trust and confidence are factors that are extremely difficult to measure or quantify. They have a social multiplier effect that drives an entire citizenry to work towards collective progress or regress. One needs to closely study and understand this effect: how a rise in mistrust or lack of confidence levels which is multiplying as a social phenomenon across countries like India, the US (to name a few) is affecting the citizenry at large?
There are deeper questions involved here about the political and economic psyche of an average citizen and how vulnerable she can be made when a strong state, as a matter of policy or law, pursues a polarising political agenda.
At the same time, from purely an economic lens, a fragile confidence in a political system will cause economic growth to fall. This is something that we perhaps are already seeing in India.
Deepanshu Mohan is Associate Professor of Economics at O.P. Jindal Global University. He is a Visiting Professor to the Department of Economics at Carleton University (Ottawa).