Political boom drowns out the economic gloom

Do you feel bad for Sri Sri Ravi Shankar who has gone from being the famous-guru-of-the-very-rich to becoming a mere punchline on Twitter (or X) every time the rupee touches a new low?

No? Me neither.

 

Gurudev (yes that is really his Twitter handle) earned this notoriety when he tweeted “It is refreshing to know that the rupee will get stronger at Rs.40/- per dollar if Modi comes to power” a few months before Narendra Modi actually came to power and the rupee began its free fall.

 

   As far as I know the Holy One has never admitted that his all-seeing eye and far-reaching vision betrayed him in this instance. The best he has come up with is to say he had heard about how the rupee would ascend along with Modi and posted his gloriously optimistic (if somewhat nonsensical) tweet entirely on that basis.

 

   But why pick only on Double Sri? In the last days of the UPA it had become fashionable for celebrities - all the way from Ritiesh Deshmukh to Amitabh Bachchan - to focus on the declining value of the rupee in their posts.

 

   Of course there are no tweets on that subject now from those celebrities.

 

   In the long run, the celebrity tweeters did Narendra Modi a disservice because their tweets suggested that the value of the rupee was the true measure of the health of the economy. In fact it is much more complicated than that and even when the economy was generally regarded to be doing okay under PM Modi the rupee continued to descend.

 

   But as the rupee’s decline continues nobody is pretending that the economy is doing well any longer. The Prime Minister captured the nation’s attention when he called, during an address in Hyderabad, for a climate of austerity. He asked people not to buy gold, to stop organising weddings abroad, to cut down on foreign travel and even, to work from home.

 

   Much of what he asked Indians to do in the name of ‘economic patriotism’ was sensible. It’s better to put money into productive resources than to hoard gold. There is no real need to host big flashy weddings (here or abroad).

 

   But that’s not the only message that went out from the Hyderabad address. Most Indians came to the obvious conclusion: nobody makes a speech like that in good times. This is the sort of speech you make when a crisis is looming on the horizon.

 

   The collapsing rupee is now part of the problem. Presumably the Prime Minister wanted us to avoid expenditures in foreign currency to put less pressure on the rupee and strengthen our reserves. But as the rupee has continued to slide, foreign travel (let alone a foreign wedding) has become so expensive anyway that many Indians are treating the declining rupee as an effective cess on foreign travel and are rethinking travelling abroad.

 

"The primary reason why our economy is not growing as fast as it could is because Indians are not investing either."

   There is a deeper problem caused by the sinking rupee. Any foreigner who invests in India will get a lower return (in dollar terms) because he will earn in fast declining rupees on a hard currency investment.

 

   That is one of the reasons why foreign direct investment (FDI) in India has dried up. At present we have a negative level of FDI; more money is going out than is coming in.

 

   Nor has the government done very much to make foreign investment more attractive: apart from the red tape, corruption and bureaucracy there have been changes in the law governing foreign investment (Bilateral Investment Treaties began to stall after 2017) that have further deterred investors. At the stock market, experts had warned that changes in capital gains taxation would put off foreign investors. The government did not listen and the market has languished.

 

   It’s not difficult to set much of this right. It would certainly be more effective than asking people not to get married abroad. But so far, these policy changes and others that have been recommended by so many economists, have not been implemented.

 

   And it’s not foreign investment alone. The primary reason why our economy is not growing as fast as it could is because Indians are not investing either. Despite repeated entreaties from the government the private sector is refusing to invest.

 

   Economists tell us that investment decisions depend on many factors but one of the most important is confidence. People will invest if they believe good times lie ahead. If they are not optimistic about the future of the economy then they will not put their money into creating new capacity, more production and therefore, more jobs.

 

   It is the same with the stock market. If people think the market will boom and deliver returns they will buy shares. If not then they will look for safer investment avenues.

 

   At present we are in a dismal situation where foreign and domestic investment are falling in both, productive assets and in shares.

 

   And yet it doesn’t always seem that way. In times of economic gloom, people usually blame the government and turn against it. The opposite seems to have happened in India. At the most recent round of assembly elections the BJP won big in Assam and recorded a historic victory in Bengal. It is not true that these victories were entirely due to the party’s willingness to offer freebies to voters or because of its alliance with Gyanesh Kumar. Judging by the response the Prime Minister got in both states he has maintained his popularity.

 

   Nevertheless there are rumblings among the middle class and especially within the business community. The middle class was once the strongest pillar of BJP support. Its members believed that India was on its way to becoming an economic superpower on par with China, that incomes would keep growing, that the stock market was now permanently in a state of boom, that corruption was on the decline, that Pakistan shivered when confronted with India’s military might and that Indian industry would flourish globally. This view was echoed by industrialists and businessmen who wanted to enjoy the promised never-ending boom.

 

   So great was the euphoria that even the old middle class aversion to direct transfers to the poor (so vocally displayed two decades ago when NREGA was introduced) was toned down. The prevailing view became: if it’s necessary to buy people off to maintain the boom then that’s a price worth paying.

 

   All of those assumptions are now fading or, at the very least, being re-examined. Very few people now believe that the good times are here or that they are coming. The optimism about the future has been crippled.

 

   Which is not to say that middle class support for the BJP is necessarily drying up. Many affluent voters still take the line that there is no alternative. And perhaps, from their point of view, there isn’t. The Congress has chosen to distance itself from its old characterisation as the party of liberalisation. Its image now is that of a party of the left more concerned with the poor and minorities than with the middle class or business people. At a personal level many educated people may like Rahul Gandhi. But they are still not sure that he likes them back. He has certainly not gone out of his way to take their concerns into account.

 

   Which leaves the field clear for the BJP. And with the recent election victories the party is now more confident than it has been for a long time. The problem with this is that it may not even see the need to introduce the reforms required for the Indian economy to recover. The political boom drowns out the economic gloom.

 

   And by the time the government realises that speeches about working from home and austerity stunts staged by ministers for the media are not enough and that there is a need for urgent action it might be too late.