Demonetisation continues to haunt the Indian economy even after 34 months of that fateful evening in November 2016. And the Demon-tsunami’s ripples continue to be felt to this day. The latest casualty is the GDP growth rate, which was down to 5% for the quarter ending June 30, the lowest in 23 quarters. Most economists would say that the Indian economy is amidst a recession, but the clueless ruling dispensation continues to claim that all is hunky-dory.
With shifting goalposts, it was never clear what demonetisation set out to achieve. What is known is the aftermath. The informal sector or the cash economy, accounting for about 80% of jobs in the Indian economy, completely collapsed owing to the severe liquidity crunch, resulting in a decline in the GDP growth rate by 1.5% to 2%, as predicted by former Prime Minister Manmohan Singh. The enterprising Indian businessman managed to get on his feet after six months, once the currency situation normalised.
We do not know if it was spite, but the mandarins in power unleashed the ill-conceived and unprepared GST underneath the midnight sun to starry-eyed Indians as a panacea for all financial ailments, as if to show off their decisiveness and shore up their economic credentials. Since its implementation, we have had more than a hundred revisions, and revenue collection is far lower than the projections. The inherently complex GST ecosystem, policy opacity, lack of redressal mechanisms and cost, have forced small businesses to scale down their operations till such time ‘things’ stabilise. This has led to job losses and even the government now admits that the unemployment rate is at 6.1%. This not only means that unemployment is on the rise, but also at an all-time high.
One will not be off the mark to conclude that the liquidity crunch following demonetisation led to the scaling down of business operations, which led to an all-time high unemployment rate, and all of these have manifested in the current GDP figures. A layman might suggest that the liquidity crunch can be addressed by extending credit. But things are not so simple. There is a skeleton in the closet called non-performing assets or loans whose principal or interest payments remained overdue for a period of 90 days. For public sector banks, NPAs have ballooned despite the issue being flagged by Reserve Bank of India. Lending— who to lend to, how much to lend and who can lend—by banks and non-banking financial companies is governed by strict RBI norms. The problem with NPAs is further compounded by the collapse of Infrastructure Leasing & Financial Services, a mammoth NBFC, owing to debt default which in turn led to the downfall of shadow banking system run by NBFCs.
RBI has since revised its February 12 circular on classification of NPAs and also lending norms for banks to stressed NBFCs to stimulate credit liquidity. However, latest reports show that credit off-take from NBFCs declined 28% in the June 2019 quarter compared to the March 2019 quarter. The impact of RBI’s interventions on the economy will be evident in the quarter ending December 19.
The focus of the NDA government in its previous and current term is headline management. Key policy decisions lack application of mind, and once things start going awry, the goalposts are shifted. Steady growth requires a stable long-term and supportive environment, where policy decisions impacting people and the economy are thought through. Nobody knows what happened to Smart Cities, Digital India or Make in India. In the first 100 days of the second term of the Modi government, we have “100 lakh crore infrastructure development” and “$5 trillion economy” without any clue about the source of funds, or how these targets will be achieved. Surcharge on FPI capital gains and its rollback or the letter from the Prime Minister’s Office to National Highways Authority of India does not instil business confidence. It is no coincidence, that capital investment in new projects has plunged to a 15-year low—June 2019 figures are 81% lower than March 2019 and 87% lower than June 2018.
Credible action is required to kick-start the economy and unleash animal spirits. The following interventions could go a long way in improving business sentiment: Policies easing investments in the infrastructure development sector may revive sectors dependent on infrastructure, ensuring job creation; rationalisation of GST across the industry into two slabs, with minimal paperwork; implementation of the Direct Tax Code to simplify taxes, thereby easing implementation woes and reducing evasion.
The first step towards resolving a problem is admitting that there is one. All indices say so. Will the Union government speak up? Your guess is as good as mine.
(Views expressed are personal)
Gourav Vallabh
National Spokesperson, AICC
Email: gourav.vallabh@gmail.com