Modinomics vs Reaganomics – What has changed now?

P. Venkatesh

We cannot formally claim to have entered recession at the moment. However, the forecasted economic pain is quite clear. The Indian economy has been facing a slowdown for the past few years with the economy witnessing multiple quarters of slow growth. Incidentally, and not very surprisingly this financial scenario reminds me of the US economic recession crisis in 1981.

P. Venkatesh

Challenges faced by the US economy and how Reagan resolved those

When Ronald Reagan was sworn in as the 40th president of the United States in the year 1981, the nation was mired with the recession. To make things worse, the unemployment and inflation rates had scaled up to double digits (10.8%) and (13.5%) respectively[1].

To stem the steep decline, Reagan introduced his economic policies inspired by the ‘trickle-down theory’ – what is today known as “Reaganomics”. The foundation of Reaganomics was built on four pillars: reducing government spending on domestic programs; slashing taxes for individuals, businesses, and investments; reducing the burden of regulations on business; supporting slower money growth in the economy[2].

These economic reforms became one of the most successful policy implementations in history with recovery lasting for almost 8 years till 1990. During this time, nearly 20 million new jobs were created, and the unemployment rate fell to around 6%. At the end of Reagan’s second term in office, inflation was reduced to 4%, additionally, the US government’s tax revenues soared to $909 billion.

Comparing India’s current economic situation to the US’s 80s stagflation period

The Indian economy is currently going through a phase similar to what the US faced before the Reagan era. Our GDP growth has been slowing down over the last few years, from its peak of 13.3% in March 2010. Economic growth for the current fiscal is pegged at 5% by the National Statistical Office (NSO), the lowest in over a decade. According to the Centre for Monitoring Indian Economy (CMIE) data our current unemployment rate has reached nearly 9 percent, highest in the last 43 months[3].

Our inflation rate between 2010 and today has increased by 95.32 per cent with an average annual inflation rate of 6.28 per cent. The investment rate has also gone down significantly from 39.8% in FY11 to 28.8 % of its Nominal GDP in Dec 2019[4].

How are the policies adopted by the government so far to control the slowdown (pre-COVID-19)?

The government’s supply-side-focused economic policy (pre-COVID-19) greatly resembles Reagan’s program. Under the current regime, India is a brazen proponent of the free market. In the recent union budget, the government has implemented the principles of ‘trickle-down’ economics by removing dividend distribution tax on companies. They have also increased infrastructure spending, and myriad other strong regulatory reforms such as integration of PSUs, etc. Reaganomics, indeed!

Overall, the government understands the need for triggering the rate of consumption and tries acting upon it. Last year in August, the Government introduced a multi-sectoral policy stimulus to boost stability and growth. They also decided to infuse funds to revive stalled housing projects and gave much needed stimulus to the auto sector as well as the banks. For the middle-class, the government has introduced various tax benefits over the past two union budgets.

Also Read: COVID-19 and its impact on Indian economy

In my opinion, the reforms implemented are consolidating multiple facets of the economy and are redefining India’s economic journey. Modinomics seemed to be working for India until a completely unexpected deadly virus outbreak threatened the economy.

Lessons from history – taking cues from Reaganomics to control the slowdown

In future, the centre should continue to focus on economic revival, this will be possible by measures which can raise consumption demand while facilitating supplies and most importantly triggering investments.

In the long run we may have to take further inspiration from Reaganomics. Slashing tax burdens should be made to support small businesses, along with offering easy access to finance in the interest of continuity. Stepping up public infrastructure investment will be helpful in the long run. Providing public investment to complement private ones will help turn the economy towards a growth phase. To boost employment opportunities, the government can look at employment guarantee schemes. For the people who are dependent on agriculture, bank credit in the rural economy will help support them which in turn will boost the country’s economy as a whole.

Don’t miss the woods for the trees

There are of course cues Indian polity can take from various points in history, but a holistic development approach is needed to kick start long-term recovery mode for the economy.

Given the current exigent circumstances the world finds itself in, certain immediate steps need to be taken to prevent a complete collapse. However, impetus must be given to a measured recovery process that lasts for years to come. The bigger picture must be kept in mind, and it behoves us not to miss the woods for the trees.

Views expressed in this article are the personal opinion of P. Venkatesh, Co-founder, Maveric Systems.

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