A long shadow of doubt has slowly started to creep across diverse segments of society over the ability of the Narendra Modi government to deliver on the lofty promises made to the electorate when the Bharatiya Janata Party stormed to power in May 2014. In recent weeks, it has become apparent that Modi has started to wear a crown of thorns and King Canute's bluster and arrogant rhetoric are not going to stop the welling tide of rage and frustration over the fact that the economy shows no signs of clambering out of a deep rut.
For close to three years, Modi has been able to head off criticism with some audacious policy moves and a steady stream of jibes against the previous United Progressive Alliance regime that a fawning audience gleefully lapped up. The leader could do no wrong. The iconoclast had started slowly: he wound up the Planning Commission but replaced it with a policy hut for right-wing economists, found virtues in the Aadhaar programme after dissing it when in the Opposition because it offered the scope for unprecedented levels of surveillance at the cost of privacy rights, peeled back subsidies and pushed for direct transfer of entitlements, and cranked up the Jan Dhan programme that aimed to give everyone a bank account into which his government would funnel some money.
But the most disruptive policy move was demonetization, an exercise that failed to achieve its original objective of shaking down black money from the darkest corners of the economy. In spite of the overwhelming evidence that this ill-conceived plan (conducted in stealth because of the way that the Reserve Bank of India furiously printed high-value notes that would be banned in November even though it started discussions with the government in February on the precipitate move) destroyed the cash-dependent informal sector and knocked 2 percentage points off the country's growth rate, the Modi government continues to shrug off the effects as transitory and a disagreeable necessity. Modi has a way of coating every capricious and draconian policy measure with a patina of morality, which means criticism of any kind invites the counter-charge that it must emanate from people who stand with the corrupt and support their shenanigans.
The strategy seemed to work: people were tolerant and lulled into the belief that they were allied with the government in support of a noble cause. Industry leaders who were still puzzling over the implications of the two biggest decisions he had taken - demonetization of high-value notes and the introduction of the goods and services tax in July that promised to unify the country into a gigantic common market - but were too frightened to speak out against a government that had no qualms about amending a law with retrospective effect that removed the only vestige of protection against indiscriminate tax raids. The change in Section 132 of the Income Tax Act - announced in this year's budget - meant that tax sleuths could raid assessees based on a rumour, canard, whim or unsubstantiated suspicion without having to disclose to anyone the source or basis of the information on which the operation was ordered. After the failure of two black money schemes, the government cracked down on so-called shell companies and deregistered two lakh firms and blacklisted their directors. No company that has any of these tainted directors can now file financial statements with the registrar of companies. The purge has begun in the boardrooms with the attendant problem of finding "good and fit" directors to replace them in a country notoriously short of qualified talent. A sullen Opposition, thrown into disarray by a string of electoral reverses, made just half-hearted protests.
But after three years in office, the Modi government has a very patchy record of performance that mocks the rhetoric about creating a New India. Growth in the first quarter (April-June) has slowed to 5.7 per cent, which is the lowest level in 13 quarters. Private investment has crumbled in the face of low demand for goods and services; government spending which was front loaded this year after an early budget has failed to pump prime the faltering economy. A fiscal slippage looms: the government does not have the headroom to spend because revenue patterns have been disrupted with the launch of the GST bringing with it a rash of claims for tax refunds in the months of July and August which clearly was not anticipated. If its gross borrowings exceed the budgeted amount of Rs 5.8 lakh crore, the government is at grave risk of breaching the fiscal deficit cap of 3.2 per cent - and breaking its promise to set its finances in order.
Manufacturing sector growth has sputtered with the resultant loss of jobs. The services sector is struggling to match the dizzying growth levels of earlier years - and is no longer the guarantor of job growth. Growth in bank credit has tumbled to 6.8 per cent, the lowest level in more than a decade. And retail inflation - which serves as the nominal anchor for the conduct of monetary policy - is projected to rise to a level anywhere between 4.2 and 4.6 per cent in the second half of the year. The RBI has a medium-term retail inflation target of 4 per cent by the end of this fiscal, which limits its ability to cut interest rates. The transmission of past policy rate reductions by the banks through lending rate cuts has been slow. As the RBI pointed out in its latest monetary policy report: "Since December 2014, the median base rate of banks has declined by only about 75 basis points as against the cumulative decline in the policy repo rate by 200 basis points, suggesting that faster transmission to the entire loan book after the introduction of marginal cost lending rate (MCLR) regime has not materialised." The overall situation has been worsened by the so-called twin balance sheet problem. Banks are saddled with huge bad loans on their books and companies are at risk of defaulting on their loans because the business environment has turned sticky, crimping their free cash flows.
Finally, the critics have now started crawling out of the BJP's own woodwork. After Yashwant Sinha, veteran BJP leader and former finance minister in the A.B. Vajpayee regime accused the Modi government - more specifically the finance minister, Arun Jaitley - of ruining the economy, the former disinvestment minister, Arun Shourie, called the current administration a cabal "of two and a half men". The Larsen and Toubro chieftain, A.M. Naik has already said he sees no sign of recovery in the next two years and has blamed the slowdown on demonetization. Rajiv Bajaj of Bajaj Auto went further, terming the whole idea of demonetization plain wrong. "If the idea is wrong... don't blame the execution. I think your idea itself is wrong," Bajaj said bluntly at the Nasscom Leadership Forum.
Brian Glanville, the sports writer turned author, once wrote a story about a stand-up comic who becomes a nervous wreck at the thought that one day the audience will stop laughing at his gags. His ambition is to play the Fool in King Lear. The Fools in Shakespeare's plays speak the plain truth to the King without worrying about the consequences when others dissemble and lie. Modi must find his Fool before it is too late - because his own gags and caprices no longer amuse.