Modi 3.0 - Goldilocks for India?

A coalition government can complete BJP's imperfections

This blog is neither politically driven nor investment advice. Plain facts and opinions ahead with multiple source links. Happy reading!

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PM Modi is a reformist. From his speeches during the election campaign to the results day and the coalition formation with BJP’s alliance parties of the NDA, one focus area mentioned in all his speeches was the promise of continued reforms. More than reforms, Modi is known for drastic measures. Whether it was fearlessly bombing the territory of our nuclear-armed neighbor within 13 days of the Pulwama attack, or making significant economic decisions such as implementing the long-awaited Goods & Services Tax (GST) reforms in 2017, which were first formally introduced by P. Chidambaram in his 2006 budget speech with April 1, 2010, as the original deadline.

In the thrust to accelerate decision-making on big aspects, some measures did not achieve their intended outcomes but had a drastic impact on our economy. One such measure that affected every common man in the nation was ‘Demonetization’.

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Demonetization - Intense yet modest

After becoming the single largest party to come to power in 2014 with a majority of seats, the BJP had full control over decision-making in the country. They had no obligation to consult their NDA alliance parties when making any drastic decisions or reforms as there was no dependency on their support to continue to be in power. One such decision was taken on the 8th of November 2016, when PM Modi sprang a huge surprise on everyone. At 8:00 pm that day, he announced that 86% of the money in circulation, amounting to Rs 15.44 lakh crore, was no longer valid for transactions.

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The reason cited for this decision was to dismantle the parallel black economy. One of the news article reported that top finance ministry officials in November 2016 expected at least 10-15% of the total banned currency would be permanently removed from circulation. In fact, one of the RSS ideologues, who was nominated as a member of the RBI Board, predicted that as much as 20-40% of the demonetized cash would not return to the RBI.

The reality was far from expected. In the end, 99.3% of the total banned cash returned to the RBI through the banking system. The attempt to break the parallel black/cash economy did not succeed. In fact, cash in circulation has more than doubled since then. The currency in circulation increased from Rs 13.35 lakh crore in March 2017 to Rs 35.15 lakh crore in end March 2024. This jump of 2.63X in currency is higher than the 1.93X increase of Nominal GDP which grew from INR 152 Lakh Crore to INR 295 Lakh Crore from financial year 2017 to 2024. Such a drastic increase in cash usage has happened at a time when the digital ecSuch a drastic increase in cash usage has occurred despite a significant rise in digital transactions through the UPI payment model. According to the Reserve Bank of India (RBI), the number of digital transactions in India grew from 280,000 in November 2016 to 4,010,000 in November 2020, an increase of over 1400%. While the government successfully used the event to boost its digital economy initiative, it could not make a major dent in the black economy over the medium to long term. An RBI paper on ‘Decoding the Currency Demand Paradox’ can be found here for a more detailed view.

For me it is tough to comment on how successful the act of demonetization was, but I can say that the move caused significant hardship to the common man in India which left a mark on their lives forever. It was later found that demonetization resulted in the loss of jobs, especially in the informal sector. The Centre for Monitoring Indian Economy (CMIE) estimated that 1.5 million jobs were lost during January-April 2017 (CMIE website link). This move tarnished PM Modi’s image, which was indirectly reflected in the state election results for assembly elections in key states like Chhattisgarh, Madhya Pradesh, and Rajasthan in 2018, where the BJP performed poorly.

But now, since Modi 3.0 is a coalition government with the BJP holding 240 seats, it is dependent on its allies to retain power by crossing the 272-seat threshold. Drastic decisions cannot be taken solely by the BJP and Modi. The power dynamics necessitate getting feedback from all key alliance parties before making any high-impact decisions that affect every Indian but yield limited results. If the BJP had been in a coalition back in 2016, the demonetization decision might never have taken place, as parties like Janata Dal (United) would likely not have approved it. Bihar, their state, suffered the most job losses and had the lowest access to banking and high dependence on cash. Similarly, any future drastic decisions impacting the masses, including labor laws, will have to undergo several rounds of checks and confirmations. This process can prevent the BJP from making decisions that tarnish its image before crucial state elections, as happened in 2018, and help it stay in power longer. This long term stability is positive for equity markets, considering the BJP's capitalist stance.

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PM Modi - Experienced yet ‘Work In Progress’

The general consensus in the capital market is that the BJP government focuses less on social measures and freebies, prioritizing instead infrastructure spending, which is seen as structurally positive for the nation in the long term. However, this spending must be executed effectively, which has not always been the case. We will now delve into a case where, despite having the right intent and experience, Modi couldn’t deliver the desired/planned results.

In 2009, during his tenure as Chief Minister of Gujarat, Modi launched India’s first Solar Power Policy — an initiative that most states wouldn’t have even considered at that time. Gujarat entered into Power Purchase Agreements (PPAs) with over 80 companies to generate 960 MW of solar power. The state not only found innovative ways, such as leveraging Gujarat's extensive canal network for installing solar panels, but also introduced courses such as 'MTech and Ph.D. in Solar Energy' at universities to nurture the right talent.

In 2014, when Modi became Prime Minister, he expanded his solar energy plans to the national level and launched an ambitious initiative for 'Solar Rooftop' (SRT), aiming for a capacity of 40 gigawatts (GW) by 2022. With his extensive experience and deep understanding of the industry, one might have expected a high success rate for these plans. However, as of December 2023, we've only achieved 11 gigawatts (GW) of solar rooftop setup, with residential spaces contributing a mere 2.7 GW, while the majority of setups are in non-residential spaces. This means we've only met 26% of the target.

Another solar scheme that faced a similar fate is the PM KUSUM scheme, launched in 2019 with the aim of achieving a total solar power pump capacity addition of 34.8 GW by March 2026. This scheme, with a total outlay of Rs. 34,422 Crores, included three target components. Let's examine the progress made till December 2023 as per government records:

1. Component 1: Against target of 10,000 MW installation, 141 MW has been installed, implying a 1.41% progress till date

2. Component 2: Against target of 14 lakh solar pumps, 2.78 lakh solar pumps have been installed, implying a 20% progress till date

3. Component 3: Against target of solarization of 35 lakh existing pumps, just 4,594 pumps have been solarized, implying a mere 0.13% progress till date.

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The noteworthy aspect to consider is that despite the inability to meet targets in previous schemes, it has not deterred Modi's determination to shift focus away from solar energy. Instead, he has now decided to elevate it to the next level by relaunching an improved version of the solar rooftop scheme as 'PM Surya Ghar Muft Bijli Yojana'. The aim is now to benefit over 1 crore households by installing solar panels on their rooftops.

My intention is not to suggest that the BJP was ineffective in implementing their ambitious plans, but rather to highlight that the gaps in implementation have not deterred Modi's big-picture thinking on important reforms. When you have a new set of politicians working in your cabinet, accountability tends to improve. This is especially true with leaders like Chandrababu Naidu from the Telugu Desam Party, now the largest alliance party for the BJP with 16 seats, who is known as a reformist and pro-growth leader. The cabinet group might stand to benefit as a whole with improved effectiveness. Naidu even once persuaded business leaders like Bill Gates to establish Microsoft’s largest office outside Seattle in his former capital, Hyderabad, bringing significant prosperity to the region.

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To End

While some may believe that a single majority mandate with a firm intent for development is beneficial for long-term structural growth, it's important to recognize the risks associated with the concentration of power. Over time, this concentration can lead to a deterioration in the quality of decisions as checks and balances diminish with the same people in power.

A single majority mandate indeed offers decisive leadership and stability in government policies. However, it may result in decisions being made without proper scrutiny, raising the risk of poor or biased policy choices and the gradual emergence of authoritarian tendencies. Furthermore, it could stifle innovation due to a lack of diverse opinions and debate, potentially leading to groupthink, where decision-makers are not adequately challenged. That’s exactly what a coalition can address.

That’s it for today, I hope you enjoyed it. Let me know your view in the comments below. If you are reading till here, you may consider supporting me below and helping grow faster with improved content.

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Disclaimers- 

I am not a SEBI registered advisor; personal investment/interest in the shares exists for the company mentioned above; this isn’t investment advice but my personal thought process; DYOR (do your own research) is recommended; Investing & trading are subject to market risk; the decision maker is responsible for any outcome.