Economic Challenges that Modi 2.0 will have to tackle

The people have spoken and how! The stock market may rejoice at the results of Lok Sabha 2019, but the new government has its work cut out. Modi 2.0 faces many economic challenges,  perhaps because of their own doing: demonetization.

Read about any sector, be it agriculture, auto, consumption, exports, banking, airlines etc, the one word that pops with worrying regularity is “slow down” and naturally this is evident in the GDP growth too.

One worrying doubt is, was the GDP growth in the last two decades driven by a segment of the then middle class whose income grew significantly thanks to liberalization?  And we are now a facing a saturation from this segment while waiting for next strata of society to earn more and consume more?

In other words, a chunk of the middle class has moved to the upper middle class, but the wheel is moving a lot more slowly now for the next batch to move up. If that is the case, then the manufacturing sector requires a huge push, in term of credit and employment and better infrastructure. This is the only way all sections of the society can continuously strive for regular employment, higher income and higher consumption.

The standard of living for a blue-collar Indian worker has improved in the last two decades but an economic slow down might seal off a generations ability to live better and also reduces chances of a better life for the next gen.

On the other hand, Indian agriculture has natural challenges like global warming and man-made challenges like infrastructural expansion. As we want the business that we invest in to beat inflation, we often do not recognize that they do so by destroying biodiversity and our own ability to feed the population.

Stability and possible growth in the agricultural sector is a natural priority of any government. However, it also must balance this with manufacturing growth.  If this new government can trigger growth in both sectors in its first 2-3 years, we can get out of a slump. Can Modi 2.0 do this? I hope so.

Unless India becomes a manufacturing giant in the next 10 years or so, we can forget about dreams of making big returns from the equity market. All types of investors may be keen to add money and drive up stock prices today, but their patience will run out soon.

One the one hand we have the poor electorate who, more than subsidies or freebies, want a steady chance to improve their livelihood and on the other hand, have the big businessmen who have the money and influence to change legislation.

Politicians have conventionally used rhetoric for the former group and appeasement for the latter. It is time to do the opposite.

Reference: Centre for Monitoring Indian Economy