Modi@8 State of the economy cheat sheet: GDP, inflation, fiscal deficit
Premium- Eight years after Modi took over, the country faces the same economic challenges that it faced back then: high inflation, slowing growth, and an elevated fiscal deficit.
Eight years ago when Narendra Modi took charge as the 14th prime minister of India, the country’s economy was in a fragile state, thanks to the disruptions caused by the global financial crisis, record high crude oil prices, and taper tantrums, among others. Inflation was constantly in double digits, fiscal deficit was elevated, and the phase of reform-led high growth had come to an end, with private investments showing signs of a structural slowdown.
The win by the Modi-led Bharatiya Janata Party, which promised inclusive development of the country, initially led to hopes of higher growth, greater investments and more jobs. In the very first year (FY15), the growth rate jumped to 7.4% from 6.4%, inflation cooled to 5.83% from 9.38%, and a fiscal consolidation roadmap was laid down to bring the fiscal deficit down to 3.0%. As crude oil prices slumped, external pressures on inflation, current account deficit, and rupee eased, helping the government in managing the economy better.
India remained on high-growth track for the next couple of years, growing at over 8% annual rate, the formation of an inflation-targeting regime in late 2016 kept inflation under control, and the government largely tried to stick to the fiscal consolidation roadmap, even though it redrew it several times over the years. However, the surprise announcement of demonetisation in November 2016 disrupted the economy, especially the informal sector, the effect of which clearly reflected in GDP growth. Between FY17 and FY20, GDP growth averaged just 5.7%. During the same period, the switch to the goods and services tax regime brought its own teething challenges, as businesses struggled to adapt to frequent changes.
Even as inflation remained largely in control, growth had already slowed down to a worrying level of 3.8% in FY20 and measures announced by the government like corporate tax cut had hit the coffers, with fiscal deficit rising back to 4.7% of GDP in FY20, 20 basis points higher than 4.5% in FY14. The situation took a turn for worse, and the outbreak of the Covid-19 pandemic in early 2020 then brought unprecedented economic challenges, with nationwide lockdown sending the country in a technical recession, inflation seeing a sudden spike, and fiscal deficit under severe pressure. However, as infections receded, there was a rapid recovery in economic activity, while the pandemic-related disruptions justified high fiscal deficit for a few years. Inflation, on the other hand, remained a major pain point, even as the Reserve Bank of India chose to be dovish until recently. From a low of 3.4% in FY19, inflation had been on an uninterrupted rise to 4.8% in FY20, 6.2% in FY21, before easing mildly to 5.5% in FY22. However, now the Modi government is facing the same challenges that the UPA government faced eight years ago: crude oil prices above ₹100 per barrel is putting pressure on inflation, current account deficit and the rupee.
In a bid to control inflation, the RBI announced a surprise repo rate hike, while the government announced a series of measures from tax cuts on fuel to more fertilizer and cooking gas subsidies to ease price pressures, at the risk of stretched fiscal deficit. Inflation may still rise to 6.5-6.7% in FY23, the highest annual print under the Modi government, while the economy may not grow as fast as it was expected before the Russia-Ukraine war.
Ahead of the 2024 general elections, the economic challenges for the Modi government remain the same: high inflation, slowing growth, and an elevated fiscal deficit.