“Don’t blame God for creating the tiger, but thank him for not giving it wings. “One wonders if ancestral Indian wisdom has not again struck. And this time, Narendra Modi, having triumphed in power in 2014, a succession of electoral setbacks in 2018 shows that he is no longer assured of automatic re-election in the 2019 general election.

Paradoxically, the reversal of the political cycle is largely due to a reversal of the economic cycle where Narendra Modi’s failure was least expected. Both his reform programme and his determination had given him the confidence of local and foreign business circles and of an Indian youth plagued by underemployment.

The modinomics was fundamentally based on a strong commitment to the country’s two bottlenecks: extremely poor infrastructure for both energy and roads in particular, and an equally poor business environment as India had fallen into 142nd place in the Doing Business ranking out of 189 countries, far behind China in 90th place. In both these areas, Narendra Modi promised a kind of shock therapy where the old reformer Manmohan Singh had adopted a balanced social-democratic type of gradualism when he returned to power in 2004.

Finally, the markets were ready to accept the Hindu nationalist rhetoric of the BJP (Hindutva) as Narendra Modi showed a liberal and generous economic rhetoric this time for foreign investors, such as the annual Vibrant Gujarat summits that attracted the best of the world’s leading companies. Moreover, the appointment of a Liberal finance minister, business lawyer Arun Jaitley, was supported by the arrival of a team of liberal economists made in USA at the head of the country’s main institutions, beyond Raghuram Rajan from the University of Chicago already head of the Central Bank (RBI).

Everything seemed to be going normally during the first two years of a golden age with a steadily rising stock market index and record capital inflows. Until the fatal sequence of regional elections in May 2017 in Uttar Pradesh, the largest Indian state and therefore the largest number of seats in both federal chambers. On the one hand, the major economic mistake of the surprise demonetization of 80% of the currency in November 2016, aimed at cutting off funding to opposition parties. On the other hand, the shift from the economic agenda to the Hindutva’s ideological agenda, which started to increasingly irritate Indians as economic promises fade.

The monetary shock – equivalent to 2 points of GDP – was all the more unfortunate as the classic V-shaped recovery in historical experiments of this type has been severely disrupted by a second shock: the chaotic introduction of the GST in July 2017. No one disputes its validity, but the compromise reached was at the cost of an appalling complexity of rates and situations. Not to mention a technical unpreparedness that deeply hit the business communities – especially SMEs that create jobs – and tax collection itself. Hence a third shock, fiscal one, with a budgetary crisis such that data from the famous CMIE for the last quarter of 2018 show a one-third drop in new investment projects and their return to the level of… 2004.

In fact, this contraction, which is well known to economists, the reversal of the accelerator effect, is fundamentally due to one last mistake by Narendra Modi: the refusal to consider as a priority the consolidation of the bad debts accumulated since the 2008 crisis, whose cunny tongues say that they are largely held by the large Indian conglomerates behind his 2014 victory. This specially led to a formidable battle with the RBI and the de facto resignation of two governors in three years, never before seen in the most stable emerging country in history. As for the last pillar of modinomics, FDI, the latest restrictive measures affecting foreign online companies, of which Walmart, which had just put $16 billion on the table, triggered a new round of distrust against India.

Despite any systemic risk ruled out thanks to the persistent vigilance of the RBI, the growing mistrust vis-a-vis banks and non-bank financial institutions (NBFI) solvency is now reflected in a sharp credit contraction whose impact on activity and banks themselves will most likely mark the end of the five-year Modi period. Especially since the global economic situation is bound to worsen. Nothing is probably lost for the “Lion of Gujarat” who is a formidable political animal. Except for its reputation as the possible hero of India’s takeoff, whose GDP gap with China is now almost 1 to 5.

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