It is disconcerting to see India and Pakistan skipping grave economic and governance issues to quarrel over Kashmir which can, any time, lead them to a destructive war.
For all this, both Prime Minister Narendra Modi and his Pakistani counterpart Imran Khan, were swept to power on the promise of prosperity and happiness. It was the promise of Achche Din (Good Days) in the case of Modi, and Naya Pakistan (New Pakistan) in the case of Imran.
But both have failed to deliver on their promise. Modi promised jobs and rapid industrial growth with FDI pouring in under the catchy slogan “Make in India”. As it turned out, these goals were not achieved. Instead, industrial growth was stunted and the job market shrunk. In Pakistan, “Naya Pakistan” remains a distant dream with the economy steeped in debt, tax collection dismal, and the overall investment climate as poor as before.
Both countries are now distracted by a destructive obsession – Jammu and Kashmir (J & K).
Economy sacrificed at Hindutwa altar
On coming back to power with a bang on the basis of his muscular response to an allegedly Pakistan-inspired terrorist attack in Kashmir, Modi reiterated his pledge to fulfill his five-year-old economic promises and turn India into a US$ 5 trillion economy by 2025.
But in actuality, Modi chose to implement his communal Hindutwa-based nationalist agenda in place of the economic agenda. The abolition of Art 370 and 35A of the Indian constitution, which had given political autonomy and special economic privileges to the Muslim-majority State of J&K, is but a part of the Hindutwa agenda of cutting the Muslims down to size in as many ways as possible.
But the economic tasks ahead for the two governments are onerous. Nikkei points out how small businesses and manufacturers are unable to expand because of the laws against laying off unwanted workers. Small businesses are also hamstrung by a shortage of funds for which banks charge an unaffordable 15% interest.
“In a Gallup poll in April 2019, just ahead of the parliamentary elections, less than half of those surveyed said that they felt that the economy is improving; among urban citizens, that figure was down to 43%, a dramatic fall from 68% just two years before. The most recent economic survey from the Reserve Bank of India, in early August, showed that Indian consumers are trimming their discretionary spending and preparing for a weaker jobs market. That has translated into poorer business sentiment, the RBI found,” Nikkei noted.
There is a crisis in the nonbank lending sector. Big companies are showing fall in sales. TATA Motors posted a larger-than-expected loss in the quarter to June 2019; Maruti Suzuki saw an 18% slump in sales. Pawan Goenka, managing director of Mahindra and Mahindra told Nikkei: “Roughly 10% to 15% of those who would have got loans are not getting loans.”
GDP growth in the first quarter of 2019 was just 5.8%, down from 6.6% in the last quarter of 2018.
The basic problem in the Indian economy is an unfavorable business environment. But fixing the business environment would require Modi to reform the tangled mass of regulations. According to the legal and regulatory database company Avantis, there are more than 1,000 laws that cover business activities. And companies can face up to 2,962 different filing requirements. No wonder, India is 168th, in the list of countries made on the basis of ease of doing business.
Nikkei points out that labor laws change depending on how many employees a company has. For example, companies with seven or more employees are governed by the Trade Unions Act. A manufacturer with 100 employees comes under the Industrial Disputes Act which disallows sacking an employee without the prior approval of the government. So, companies either do not recruit or farm out functions to other companies. In other words, they don’t grow.Then there is the “control-obsessed civil service” to contend with.
Modi’s “Make in India” aimed to create 100 million new jobs and to expand the manufacturing sector to account for 25% of GDP by 2022. FDI flows did increase from US$28 billion in 2013 to more than $44 billion in 2015. But it has platitude since FDI is hampered by political pressure to stick to protectionism.
The pressure to conform comes from Modi’s own party. Modi is known to be a strong leader, but he shows his strength only in areas which will earn him votes, as in the case of his action in J&K, not in modernizing the economy which could alienate his core constituency of traders.
Domestic industry is not doing well either. “Manufacturing’s share of India’s GDP actually fell in 2016 and 2017, chilled by demonetization and the introduction of the general sales tax, and now sits at just under 15%,” Nikkei said.
According to focus.economic.com, industrial production in Pakistan declined while merchandise exports fell sharply throughout fourth quarter of the financial year 2019.The IMF bailout and additional multilateral lending to the tune of US$ 39 billion over the next three years should bolster the economy, but it will only cover a portion of Pakistan’s exorbitant external financing requirements.
Elevated inflation and tighter monetary conditions will likely dampen private consumption and investment. Exposure to external shocks, substantial financing needs and a further deterioration in relations with India represent key risks to the outlook.
Writing in New York Times Mohammad Hanif says that Imran’s passionate appeals to Pakistanis to pay their taxes don’t seem to be working. The tax-to-gross domestic product ratio is the lowest in five years.
Having pledged to support the Muslims of Kashmir, Imran will have to spend more on the military to face any retaliatory action by India, a none-too-good investment destination anyway.