The story of an economy in the ICU

Modi was posed with the challenge of recreating the Gujarat success. But his shock and awe approach is alienating the Indian janata.


WrittenBy:Meghnad S
Date:
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Our economy is in a shambles. It’s becoming worse and is likely to tank even further. If you don’t see it yet, I am afraid you are living in a land of fantasies and need to stop reading this. This piece is not going to praise the current government or justify what they did.

Three years have come and gone since ‘development man’ Narendra Modi’s party put up hoardings across the nation, put ads in newspapers and went on an overdrive that UPA ruined the economy and BJP, if elected to power, will fix it!

“Modiji knows his shit, OK? Look at Gujarat! Such development, much wow happened there!” was the general opinion. “Maunmohan does nothing except attend Parliament and sit silently. THEY caused a policy paralysis and, as a result, the economy is going down the drain.”

As weird as it may sound, not taking any decisions back then might have proven to be better for us than taking wrong decisions as is being done now. Let us, for arguments sake, accept that Modi has done quite a lot in Gujarat. He has indeed taken it to new heights when you take economic indicators into consideration. Socially… well… that’s a different story. But since “fix our economy” was a generally trending opinion pre-2014, not “fix our society”, Modi’s image fit and filled the void nicely.

Politics is always about being at the right place at the right time and saying the right things. If you’re in power, it is also about doing the right things. As a CM, Modi had way more power, way more on-ground control, a lot less diversity to deal with and, at the same time, a lot of time to implement his plan. But expecting him to replicate that same model and implementing it across the country is a bit… unreasonable to begin with, to put it mildly.

While there are still people who defend each and every move of this government by finding new angles, presenting it in a new PR package or just creating random Twitter trends using handles of Union Ministers, that crowd seems to be thinning. Reality is sinking in and no matter how much PR you do or unicorns the government tries to sell, people will stop buying it after a point.

Especially, the business community that was earlier ardently supporting Modi is slowly turning their backs and scrambling to fix their nearly destroyed businesses. Talk to any person running a small to medium scale trade and you’ll feel their sudden derision towards this government.

Let me attempt to tell you why people are angry by highlighting a few factors which have caused this economic downturn. As Dirk Gently from Dirk Gently’s Holistic Detective Agency said, “Everything is connected.”

Unemployment

Modi promised jobs. The whole plan was to improve manufacturing, work to improve ease-of-doing-business and make sure there is a job spike once the new government comes to power. That, unfortunately, didn’t pan out as planned.

The reason why Modi made jobs one of his major poll promises is obvious: It is the biggest problem India faced back then and continues to face right now.

Every year, a population more or less equivalent to Jammu & Kashmir’s total strength is added to the Indian workforce, seeking jobs. Almost 1.3 crore young people set out with the hopes of starting a new life, only to be disappointed by the limited number of jobs which are actually available. Under the current government, only 3.4 lakh jobs are being created each year. So in a decade, while there will be 13 crore jobless young people out there, only 34 lakh of them will be able to find jobs going by the current rate.

That is a big problem. Joblessness leads to frustration, frustration leads to a lot of irritated young people high on youthful energy, roaming around the streets. Massive migration from villages to urban areas happens followed by an outburst of anger.

Nobody wants to be around when that outburst happens. Nobody. Or when the day comes where everyone screams: “Janta maaf nahi karegi.”


Ease of doing business

The only way to truly save our economy is to decrease our dependence on products and goods from foreign countries. At the same time, it would be quite nice if we make other foreign countries dependent on us for their goods and services. Going by this simple logic, a brave idea was born and a valiant attempt was made early on to encourage local manufacturing: Make in India.

Encourage Indian industries to manufacture more in India, encourage them to export more, attract more foreign companies to set up manufacturing units here so that we rake in all the $$$. In turn, because of the industry expansion, there would be many new jobs!

Did it work? Well, not so much.

Gross Domestic Product Growth = Down

Manufacturing Index = Down

Industry Growth = Down

But there’s a reason for all of this: Raghuram Rajan.

Ok maybe not him personally but he did initiate a sequence of events that put this government in an uncomfortable cringeworthy position. This grand plan of Make In India requires one vital thing: Capital.

Without extra paisa no industry can honestly be expected to grow, increase manufacturing and add more jobs. This extra capital comes in the form of loans. Loans which banks are unwilling to provide at the moment.

This April, credit growth (meaning, rate of giving out new loans) plunged to a 60-year low. Why? Because back in the UPA fun times, a bunch of large business people took high-value loans from public sector banks and have been unable to pay it back. Some are willful defaulters while others are suffering due to bad business performance. These bad loans kept growing and growing at an insane pace ever since Raghuram Rajan ordered a bank cleanup.

Rajan said to the banks, “No excuses. Clean up your balance-sheets.”

Banks, at present, seem to be worried that skeletons will tumble out of the closet about how these loans were given in the first place. So they aren’t risking giving out new ones. A deadly combination of these two factors and a virtually stagnant banking sector is leading to the current economic slowdown.

On top of this, demonetisation happened. Followed shortly by Goods & Service Tax implementation.

Shocking the system = #EpicFail

Back in April 2015, our PM said that he’s an Economics ‘novice’.

During his campaign, people often remarked how he ran Gujarat like a business when he was the CM. He created a friendly environment for businessmen to setup their shop in his state (Gujju-style). His whole, ‘I will give you Vikaas’ campaign was based on the way he handled things in Gujarat and how it worked.

But being a PM and recreating the same across the country is a difficult task. This is evident from how, on November 8, 2016, Modi declared, “I’m taking away most of your currency, OK? It’s for your own good, OK? OK.”

Society doesn’t react well to shocks. Only people undergoing major psychiatric therapy are given shock treatments as a form of cure. Even that practice is now becoming outdated. One way to look at this would be that Modi assumed everyone, everyone, is crazy corrupt and needs this shock treatment. Right from the gold-laden Bappi Lahiri-types to the farmer who is struggling to make ends meet and contemplating suicide. In one swooping motion initiated in November, 2016 they became suspects in the eyes of the government.

“Everyone is guilty until proven otherwise.”

Our prime minister and his government are good at one thing though: Selling. They sold the idea as if it was a cure for everything from cancer to the annoying Airtel 4G girl ads.

A lot of people bought his pitch too and continue to buy it. But the nation’s economy can’t be run like a business. It needs long-term planning. It needs the proposed ideas to be debated and deliberated and views need to be sought from stakeholders who get affected by these policy decisions the most.

Businesses can afford trial-and-error but when a government tries to do that there are very real human costs to pay. As predicted by experts-who-think-long-term (Uhh… Economists?), our GDP growth rate tanked after demonetisation. 99 per cent of the demonetised currency came back.

Now demonetisation is being sold as a way to increase the tax base and for the government to catch those people who weren’t paying taxes. “We have a lot of data on these crooks now,” says the Gormint. “We are coming after them and making sure they pay their taxes.”

Sure. Good move. Government needs more money at any given point of time. But this whole tax collection scene depends on the assessment of incomes of various people, a process which might take years to bear fruit. As it is, the Income Tax department is severely understaffed to handle this workload.

Speaking of increasing the tax base, Goods and Service Tax is supposed to do exactly that. In fact, it would be more effective than something like demonetisation because:

(a) It’s been thought through and gone through a lot of consultation over the last decade.

(b) The assessment would be aided and completely handled by its tech backbone – GST-Network; and,

(c) Unlike Income Tax, everyone has to pay GST because it’s an indirect tax.

But the timing and manner of implementation is completely messing things up. Even before the business folk could recover from the demonetisation shock, GST was implemented messing things up even further. On top of that, the GST-N has a tonne of glitches and can’t handle the load of a large number of people filing returns at once. Our finance minister is now asking people to not be lazy and file their returns earlier.

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GST is going to cause a lot of short-term pain. It might lead to good things in the future when the bugs get sorted and the technicalities are smoothened out. But till then, prepare for the worst.

The market bubble

For more than a year, many observers of the market have been scratching their heads about why Sensex and NIFTY have been showing major upticks when the economy is clearly suffering due to these back to back shocks.

Say what you will about the market, one thing is certain: It’s not going to go up forever. It’s going to come down crashing someday, one day and, perhaps, really soon. That is the natural way of things. In 2008, we saw how the market suddenly went belly up due to the misadventures and shadiness of a few banks in the USA. It caused a global ripple effect but India was more or less unaffected.

Why? Because most of our economy was based on the informal sector. Cash saved us.

That was 9 years ago. Now, the picture has completely changed. While demonetisation has practically destroyed a large part of our unorganised sector, GST was a move to promote the organised sector more. The effect of this is we, as a country, are getting more and more entangled in global markets.

Mark my words: If the crash comes, when the crash comes, it would be a scary scenario. I just really hope it doesn’t happen anytime soon because at this point our economy is already ducking down in the trenches and shooting blindly at the approaching self-created monsters.

So what do we do now? Is there any way out of this quandary? Maybe there is.

First thing is to clean up the bad loans as fast as possible and then restart the investment cycle domestically. That, unfortunately, is an extremely complicated process. After that is done, all the government can hope for is our industries will resume growing at a rapid pace and continue adding more jobs. But for that to happen, we need time. We also need to keep hoping that the government doesn’t make any more shocking moves in the near future, probably till the time GST stabilises and becomes a part of our lives.

I don’t think that’s too much to hope for. Is it?

(This post is inspired by Puja Mehra who wrote “Crash-landing the Indian Economy”. Do give that a read too.)

The author can be contacted on Twitter @Memeghnad.

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