Deepening economic crisis and policy paralysis: Why data isn't the ultimate marker of markets
The prime minister has come out in defence of the nation’s economic performance. He lambasted the critics of being always negative and said they have 'Shailya Vriti'. He said they get good sleep after being negative about everything and they create an environment of hatotsahit (gloom).
But are we not a democracy in which the role of the Opposition is to point out what is going wrong? Is the role of the intellectuals not to dispassionately analyse and bring out the truth – good or bad? The PM highlighted the achievement of the economy by comparing the present performance of the economy with that of the last few years of the UPA rule.
No doubt the situation is not what it was in 2012-13 when there was a macroeconomic crisis. But there is a crisis that has been triggered by two shocks to the economy – due to demonetisation and implementation of the GST.
This is a different macroeconomic crisis and is policy-induced and that is the most damaging part. The crisis during the UPA regime was largely triggered by international factors and by the time the NDA came to power, the economy was emerging strongly from the crisis.
The PM gave plenty of data to support his contention that the economy is strong. But that should have been the role of the finance minister. He should have given assurances of a responsive government that would look at the present crisis and find solutions to it.
The right (wrong) numbers
However, the data presented was selective and did not address the points highlighted by the critics. For instance, the decline in the growth rate, the rise in unemployment, rise in prices, fall in investment, fall in credit off take.
A total view cannot be that some sectors like sales of automobiles and air travel are growing rapidly. If they are growing fast in a slow economy then other sectors must be collapsing even faster.
The poor in the unorganised sectors do not buy automobiles or travel by air. It is these sections that have been hit hard by both demonetisation and GST. It is the impact on the unorganised sectors that have led to the decline in the rate of growth of the economy.
The Prime Minister has been stung by the criticism emanating from within his party. That rings alarm bells in a party that is run on a tight leash where criticism, till now, was not tolerated. Two former ministers of the previous NDA government have come out openly and criticised the economic policies. They also challenged the way decisions are made in the government, where a few decide everything. This again hurts.
Two former finance ministers spoke in quick succession last week about the looming crisis in the Indian economy. Both have identified demonetisation and the poorly executed GST as the cause. In a political twist, they have blamed the current finance minister.
Since both had pushed for GST during their times in power, they do not admit now that it is not suitable for India – but blame its implementation instead. The adverse impact of both demonetisation and GST on the unorganised sectors of the economy and the consequent crisis in the economy needs to be understood. The problem is not just of faulty implementation of GST but its inappropriate design.
A key problem facing the Indian economy for the last three years is that the data, on the basis of which policy is being made, does not reflect reality. Yashwant Sinha has alluded to it by saying that instead of the last quarter rate of growth being 5.7% it is 3.7%. In other words, the actual crisis is being hidden behind the smokescreen of data.
After all, if the rate of growth is 5.7%, it is nothing to sneeze at. This is a healthy rate of growth by international comparisons and also by India’s own historical yardstick. So, if true, no drastic steps need to be taken. A 0.5% of GDP increase in the fiscal deficit would be enough to raise the rate of growth to above 6%.
However, if the actual rate of growth of GDP is close to 1% and falling then this would not do and one would have to raise the fiscal deficit by a much larger percent to raise the rate of growth to 6%.
The purists suggest that this would dent private investment. That would have been true for an economy where credit off take was robust and the economy was running at full capacity.
The present situation in India is similar to the one witnessed during the global crisis of 2007-08 when the world economy went into a recession and was prevented from going into a depression by the major economies raising their fiscal deficits.
The US raised its fiscal deficit from 3% to 12%. China went in for a $600 billion package of expenditure on rural infrastructure. India escaped the recession and had a healthy rate of growth of 5% because of the large package of spending in rural areas based on a rapid increase in its fiscal deficit.
What is the evidence that the actual rate of growth is around 1% and not 5.7%? The quarterly rate of growth of the economy is estimated by resorting to data largely from the organised sectors of the economy.
The data for the unorganised sector constituting 45% of GDP, comes with a time lag based on surveys conducted periodically. Since no official survey has been done during the period of demonetisation or in the first few months of implementation of GST, the impact of these two on the unorganised sectors will never be captured in the official data.
According to all the private surveys done during the middle of demonetisation, the impact was found to be consistently dramatic, showing an impact of between 60 to 80% and an increase in unemployment. This is significant since 93% of the workforce is in this sector.
All this led to a drastic fall in demand. According to RBI, capacity utilisation in organised industry fell further. Even before demonetisation, capacity utilisation was hovering at between 70 and 75% – a low figure. This impacted investment adversely which slowed down the growth of the economy way beyond the immediate period of notes shortage. It is this slowdown that is manifesting itself in the economy.
Where is the busines?
The introduction of a faulty GST and its poor implementation has led to a deep adverse impact on the unorganised sector. The organised sector which was expected to gain from GST has also been hit hard for the same reasons.
Instead of 'Ease of doing business', business has become more difficult. There is utter confusion, massive increase in paper work and increase in compliance costs. This has adversely impacted the climate of investment and slowdown in the economy.
In short, data is inadequate to assess the actual performance of the economy. The government will keep claiming that things will improve on the basis of the limited data it has – as usual, the golden period is always ahead. The international agencies supporting the government’s contention of a high growth rate depend on government data so their assessment is not an independent view. It cannot be depended on.
One of the ministers has claimed that the Indian economy is so robust that it has become the engine of growth for the world economy. But the Indian economy is only about 3% of the world GDP!
Such statements are only an indication of the desperation given that hard data does not support the government’s contention that there is no crisis.
The drastic slowdown in the economy is also indicated by the collapse in credit off-take. Low credit off-take suggests that production and investment has slowed down. In October 2016, it was already at its lowest point in the last 50 years and it fell to its lowest level in 60 years after demonetisation was announced. Worse followed with negative growth in July and August 2017. This has never happened before in the Indian economy.
Interest rate cuts have been suggested as a panacea but this is not going to work when demand is short and capacity utilisation low. Will demand pick up with a cut in interest rates?
It is argued that the demand for white goods bought on loan (via EMI) can rise and so can the demand for housing. But these are discretionary purchases and will only be undertaken if the sense of crisis in the public is overcome.
In times of crisis, the public becomes cautious and does not increase its purchases or investment in these items. If people feel that their incomes are falling due to rising inflation or that their job is uncertain, they would not increase expenditures on discretionary items, in spite of lower EMI.
The investment climate has also been vitiated by the constant attack on businesses after demonetisation. There is an attempt to brand those who deposited money during demonetisation as black money holders. This is being done to claim the success of the failed demonetisation. GST has created uncertainty about input credit, paper work, e-way bill, etc. and this has vitiated the investment climate further. So, 'Ease of doing Business' is not visible.
The government itself senses the brewing crisis. It has revived the Economic Advisory Committee to the PM. This is a vote of no confidence in the Ministry of Finance which is primarily responsible for the economic policies.
But the key members of the Council are from the Niti Ayog and other think tanks already advising the government. So, what new can be expected from this Council? Its members have not questioned the data on which policy has been formulated and which is the cause of the problems.
The mood in the economy is increasingly one of a crisis in spite of the booming stock markets. The rate of growth of the economy has been dropping for the last six quarters and not just since the demonetisation was announced. The drop became steeper after demonetisation but data does not reflect that.
A reflection of the crisis is the agitation by farmers, youth, traders and other sections of society. This will not abate because the government does not seem to have a strategy to tackle the real crisis. Supply-side reforms will not deliver demand which is short due to the impact on the unorganized sectors.
The government has to stop being in denial about the nature of the current crisis in which output, prices, investment, and employment are all hit. After demonetisation was announced and the economic situation deteriorated, the government was in denial of the prevailing crisis let loose.
The economy is facing the consequences of that denial now. So, unless bold steps are taken because the crisis is deeper than the government is willing to admit, the situation can only get worse and that will have political repercussions later on.
The author is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences and also the author of Indian Economy since Independence: Persisting Colonial Disruption
Edited by Jhinuk Sen