The Gujarat model is bruised but not beaten

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There are two ways of viewing the results of the Gujarat elections. One of them is to point out that conditions could scarcely have been better this time for the Opposition and the Bharatiya Janata Party (BJP) won in spite of that. That is a remarkable feat.

As we all know, economic growth is at a low ebb. This is particularly true for the farm sector, with the rate of growth of agriculture being a mere 1.7% in the September quarter, according to the national accounts numbers. Small wonder then, that the ruling party fared badly in rural Gujarat.

The Reserve Bank of India (RBI) survey of consumer confidence had pointed to a surprising degree of pessimism about income and employment prospects. The construction sector, a big source of jobs for the masses, is in bad shape. Demonetization and the botched implementation of the Goods & Services Tax had hit small businesses and led to job losses. The election campaign had drawn attention to the flaws in the much-acclaimed Gujarat economic model, with the state lagging behind its peers on social indicators. Most importantly, there were opposition leaders in the state who were able to tap into the resentment and mobilize people. And yet, despite all that, the ruling party was able to stay in power. If this is the best the opposition can do despite these circumstances being in their favour, then it’s clear that in Gujarat, there’s no alternative to Modi.

Let’s take an alternative view—the one more popular among the opposition. This view says the election verdict is a rap across the knuckles for the BJP. After all, this is Gujarat, the BJP’s fortress and therefore the Congress’s showing has been more than satisfactory. Gujarat has been the laboratory for the ruling party’s Hindutva ideology. The fact that the BJP has got a bloody nose in its own stronghold is an achievement for the Congress.

This is all the more so because the ruling party has an army of workers at the ground level who are adept at bringing home the votes. The opposition, on the other hand, had no such organizational reach. Lastly, the fact remains that both the prime minister and BJP president Amit Shah are from Gujarat and this surely resonated with the electorate. That the opposition was able to do so well in spite of all this is therefore a boost to them.

There are also two responses the ruling party may have about the results of these elections. The first of them is relief that they have been able to pull it off. That they have done so at a time when the development plank was so shaky could well increase the regard with which their alternative plank—Hindutva—is held. They may then decide it’s time to ratchet up the rhetoric on that Plan B.

The problem with that approach is that Gujarat is a rather special case. The Hindutva plan may not work as well in the rest of the country as it does in Gujarat. That also means viewing the results with complacency and resting on their laurels will be the wrong approach.

In short, it’s time for the ruling party to turn its attention to the economy. Will the economy do well enough by early 2019 for the development electoral plank to be used to good effect? Well, GDP growth is certain to look up, according to experts. There is one niggling worry, though. Everybody knows that for the economy to boom, we need a pick-up in investment demand. According to the RBI’s Survey of Professional Forecasters, gross fixed capital formation in FY19 is expected to be 27.9% of GDP—for perspective, it was at 31.3% in 2013-14 and even higher in earlier years.

In any case, an improvement in the overall economy is not good enough. There are specific parts of the economy that are in deep trouble and it is these sectors that employ the most people. Agriculture is one of them and the other is construction.

The government must therefore act to help farmers. Minimum support prices will have to be raised. The problem here is that policymakers will have to walk a fine line between higher farm prices and higher inflation. Note also, that interest rates have already started moving up.

Similarly, the government must find ways and means of boosting construction. Its road-building programme is not enough and it has tried to push affordable housing, but unless private sector construction looks up, the industry will not revive.

And finally, it must act to alleviate some of the distress that recent policies have caused in the informal economy. True, the government is committed to fiscal conservatism, but resources can be found in an ambitious privatization programme, which has been sadly lacking so far. As professor Vijay Joshi pointed out in his L.K. Jha Memorial Lecture a few days ago, “One-third of the 244 non-financial central PSEs made losses in 2015-16; and of the 78 loss-makers, more than a half made losses for three years in a row.” It is time to get rid of these white elephants.

The much-vaunted Gujarat model has taken a bruising, but is still unbeaten, although some cracks are showing. The markets are great fans of the model, seen in the panic reaction on Monday morning when the BJP seemed, for a while, to be losing its grip. It is still perhaps the best blueprint for rapid capital accumulation.

But the Gujarat elections have showed that you cannot take people for granted. Circuses are all very well, but it turns out, rather shockingly for some, that they want bread as well.