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Pop Goes The Economy

Pop Goes The Economy

We are certainly living in interesting times. Interesting as we are seeing the kind of politics we never witnessed before. We are seeing propaganda camouflaged as fact. We are seeing politicians talk of change and development when all they are doing is divisive in nature designed to break an otherwise secular and inclusive nation into warring partners. We are seeing how ideology is flying out of the window to be replaced by a lust for power and control. We are seeing how history is being changed. We are seeing Congress stalwarts like Sardar Patel becoming icons of the Bharatiya Janata Party. We are seeing lop sided priorities like ultra-expensive bullet trains being pushed while basic infrastructure in transport is crying for attention.

As the next parliamentary elections are not too far away, there will be comparisons drawn between what the UPA did and what the NDA managed to do. And that will be interesting as a lot of propaganda will finally look hollow. The smoke-screens cannot be kept alive for ever.

We are already seeing the effects of demonetisation and the shoddy implementation of the Goods and Services Tax. So many small businesses have shut down and so many are struggling. Cash transactions are still the favourite as systems have not been worked out to catch those who are trying to escape tax.  

When the RBI figures came out, it was clear that demonetisation had not reined in black money as Prime Minister Narendra Modi  promised . Why is it that old demonetised currency is still being seized in such huge numbers? How it is being exchanged?    Did demonetisation suddenly cripple political parties like the Samajwadi Party and the Bahujan Samaj Party as it happened just before the Uttar Pradesh assembly elections? It is common knowledge that both these regional parties dealt with huge amounts of cash to contest elections. Has black money transactions stopped because of demonetisation?    Too many disturbing questions. No credible answers.

If you compare the fiscal growth in India between January to March 2017 and the period between January-March 2016, you will realise that former prime minister Manmohan Singh was right when he predicted that demonetisation would shave off two percent of points of India’s GDP.   

Singh who was earlier also a Finance Minister and the Governor of the Reserve Bank, had said so two weeks after demonetisation while speaking in parliament. Mincing no words, he labelled it as a monumental mismanagement, organised loot and legalised plunder. Demonetisation, he said, would lead to massive job losses and result in an economic slowdown. Look back and you will realise that India had a highly respected renowned economist as its Prime Minister. Modi cannot hold a candle to him as far as economic analysis, interpretation or understanding is concerned.

Singh’s prediction was bang on. Let us look at figures. The GDP grew by nine percent between January-March 2016. It plummeted to 6.1 percent between January-March this year. A fall of three percent is not a small fall. But government propaganda and eloquent speeches by Modi were designed to show how demonetisation was one of the biggest fiscal strategies any government had dared to do.

The Modi government scrapped the Rs. 500 and Rs, 1,000 current notes on November 8, 2016, saying he was doing it to eradicate black money, fake currency and corruption. All three, as we can all see, are thriving.

Addressing an election rally before the Uttar Pradesh elections in Deoria, Modi had ridiculed Harvard educated economists who were vocal against demonetisation saying that building an economy was tougher than being at Harvard. He also mocked Manmohan Singh saying that what he was saying was a lie.

Was it? In the fourth quarter of 2016, the GDP fell to 6.1 percent. In the previous year, it was 8 percent. Manufacturing was one of the sectors that had taken a beating. It was nearly 12 percent before demonetisation and had fallen to 5.3 in the first quarter of 2017. Also down was the gross fixed capital formation figures showing how investment activity fell to a negative 2.1 percent towards the end of 2016.

Finance Minister Arun Jaitley has tried to defend demonetisation saying that the note ban should not be linked to the economic slowdown. To deflect public attention from the mess that ensued and the loss to enterprises, he and Modi often talked about terrorism coming down, fake currency circulation falling and corruption coming down. Sitaram Yechury, the general secretary of the CPI (M), points out that the Indian Statistical Institute had said that the counterfeit currency floating around was just 0.028 percent. Fake notes of Rs. 2000 denomination  were found weeks after demonetisation, he said. Rubbishing the claims that black money had been reined in, he said that it not only failed to control black money, it had in fact legitimised it. Ninety-nine percent of demonetised currency had come back to the RBI. Demonetisation shattered the informal economy in India which generates 80 percent of employment, he pointed out.  

Rating agency Crisil’s data clearly indicated how demonetisation was responsible for the economic slowdown. Numerous economists like Amartya Sen have linked the collapse to the ban. Laughing at them does not help hide the truth.

In October this year, the International Monetary Fund lowered India’s growth projection to 6.7 percent in 2017 directly attributing it to demonetisation and the introduction of GST. This was 0.5 percentage points lower than its two previous forecasts. It also lowered the projection for 2018 which was 0.3 percent less than what it previously projected.

The Paris based think tank, Organisation for Economic Co-operation and Development (OECD) has also forecasted India’s growth outlook at 7.2 percent after demonetisation and introduction of GST. It’s earlier forecast was higher by 0.5 percent. “The transitory effects of demonetisation and the implementation of GST have led to a downward revision in 2017,” OECD said.

Finally, industry captains are speaking out. Rahul Bajaj, the Bajaj Auto chairman wondered one would get to see the gains of demonetisation. In August this year, Larsen and Toubro group executive chairman A M Naik said that both demonetisation and GST were responsible for India’s lacklustre growth and it could have gone beyond  5.7 percent growth had both not happened.

In rural areas, demonetisation and GST has hurt trade as the Fast Moving Consumer Goods (FMCG) market slided from double digit to single digit growth. In normal times, consumption in  rural India was always greater in the FMCG space, but fell down after demonetisation.

But all these facts and comments do not make any sense to the government. Jaitley in fact called demonetisation as a watershed moment in the history of the Indian economy. He has also defended GST saying that it is one of the biggest reforms. One may not argue with that but what has hurt traders and businessmen is the shoddy implementation and the changes that keep coming month after month.

Former Finance Minister Yashwant Sinha openly criticised demonetisation calling it an unmitigated economic disaster and said that GST was badly conceived and poorly implemented. Jaitley hit back saying that Sinha was looking for a job at 80 eluding that be was bitter at not being inducted into the cabinet.

2013-14 was hardly a great year for the UPA as it was battling incumbency and an overly aggressive BJP in the run up to the elections. There was palpable despondency. The economy was not doing well. The BJP rode on this fact drumming it in at every election meeting giving birth to the slogan, “ Ab ache din aane wale hai”, if the BJP was voted to power. As soon as he took over, Jaitley said that the economy had bottomed out and would now start rising. Three years have flown past and the GDP growth for 2016-17 will be among the worst years of economic growth if compared to the performance of the UPA-thanks to demonetisation and GST’s shoddy implementation.

GST should have been better thought of so that implementation could have been smoothly ushered and not as it is like today with numerous changes, shifts and back pedalling. Had there been intelligent rationalising, it would not have led to so much chaos and anger. Business leader Kiran Mazumdar Shaw remarked that the 28 percent of GST on air-conditioned hospitals showed the low priority India gave to health care.

Even small businesses have operations in different states. But now, if that is the case, the businessman will have to generate a GST code in every state. Smaller units supplying goods to bigger units have to wait for three to six months to get paid. Now, they have to find money to pay the tax before they get paid. No wonder many small enterprises are finding it difficult to stay alive. Kolkata based Development expert Rita Dey told Indian Currents that she is not against Modi or against GST but she is seeing so many small businesspersons struggling to stay alive today as the GST system is so complicated and irrational without taking into account the realities on the ground or in the typical Indian marketplace. “If you raise an invoice today, you have to pay GST right away irrespective of the reality that in the manufacturing sector, payments for goods come   after three to six months. But since you have to pay the tax right away, many are finding that they just cannot sustain the business as they also need money to pay for raw material and labour,” she said.

Log on to YouTube and watch videos of how Modi slammed GST when the UPA was trying to bring it in. And then listen to what he said in parliament before it was tabled to be passed. Suddenly, it became one of the most historic events in India in his perception. Doublespeak has been one of his amusing traits.

As Chief Minister of Gujarat, Modi had vehemently attacked GST saying that the state would incur losses of over Rs. 14,000 crore every year if it was implemented. His government hen had labelled it as retrograde in nature and said it was completely against the tenets of fiscal federalism. He said GST could not be successful. He said it cannot be rolled out unless there was a proper IT network established all over the country. Right. Why was it not established before it was rolled out when he was in charge?

We have seen numerous changes that the government has made since GST was rolled out. Even this month, the Finance Minister was saying that there would be more changes and concessions. This was expected as crucial polls in Gujarat which has lakhs of traders and businessmen.

Look at the employment scenario. Thousands have lost jobs. We are hearing about it everyday. When Amit Shah was asked about unemployment, he tamely said that Indians must now look at self-employment using their skills. This may not be a bad idea at all. But the reality is that the unorganised sector which employs 480 million are mostly unskilled. The reality of jobless growth, rising unemployment and resultant poverty is something no amount of government propaganda can whitewash.

2019 is not far away. Voters are going to weigh their options before they vote. The eagerness of the ruling party to polarise society and divide it on religious lines is a sign of growing insecurity. Otherwise, they could just have showcased their work that showed their ability to take India to a place that others had not done before.

(Published on 20th November 2017, Volume XXIX, Issue 47)