In the sixth year of the Narendra Modi era, long
enough to move past the sins of governments past, the economy is moving in slow
motion. The government spent the first term blaming poor economic indicators,
especially the health of public sector banks, on the crony capitalist lending
practises the UPA fostered. Now it has no one but itself to blame for the 5 per
cent growth of the last quarter. Indications from RBI and analysis by
economists suggest little or no chance of revival in the current financial
year. The projected 6.9 per cent growth for 2019-20 looks wildly optimistic.
For the last four quarters India has witnessed a growth recession where, while
the economy does not contract, every quarter is slower than the preceding one.
Beyond the nationalist euphoria over Kashmir, the hatred of the “infiltrator” in Assam, and image-building mega events with the disapora, it is the spectre of a period of sustained low growth that should give everyone sleepless nights.
For an emerging economy like India, five per cent growth doesn’t cut it. A continued slowdown impacts wages and chips away at the per capita income of ₹10,534 per month. In fact, between 2013 and 2018, real wage growth for agricultural labour stood at 1.18 per cent. For non-agricultural labour it was 0.44 per cent—the slowest in five years. In the UPA years growth in real wages was around 5 per cent a year. The numbers point not just to agrarian distress but also to the collapse of rural demand, a fact reflected across sectors, from sales of tractors to fast moving consumer goods like shampoo sachets.
A structural slowdown, as this one seems to be, puts an entire generation’s prospects of moving out of poverty at risk. By the last count India has 211 million people below the poverty line. It also threatens to confine the country’s future to the lower end of the middle-income group; currently gross national income (GNI) per capita is $2,000 a year. Countries like Brazil and South Africa, which are firmly in the middle-income trap, have GNI of $8,650 and $5,730 respectively. The Prime Minister’s stated aim of a “$5 trillion” economy by 2024 makes for great headlines but it obscures the real issue. In nominal terms India will be a $4.7 trillion economy by 2024 in any case, so the Prime Minister has just beatified an inevitable milestone.
A private sector that doesn’t invest, an informal sector still to recover from demonetisation, high unemployment, and wages that are not rising have all come together in a perfect storm of sorts.
Finance minister Niramla Sitharaman has in four press
conferences since the budget tried to stoke the fires of the economy. The most
notable was the last one, where she cut the corporate tax rate to 22 per cent
for companies that don’t seek any exemptions, and also offered a reduced rate
of 15 per cent for new industries for three years. It is a move that sent the
Bombay Stock Exchange soaring to a decadal high in a day’s trading. In the
process the government sacrificed Rs 1.45 lakh crore in revenue, slipping
further on its commitment to keep the fiscal deficit at 3.3 per cent of GDP.
There have been doubts over the deficit numbers as well, the chapter of the budget which the finance minister did not see fit to read in Parliament. Rathim Roy, a member of the prime minister’s economic advisory committee has pointed out that the government is staring at a tax revenue shortfall of Rs 1.7 lakh crore—0.85 per cent of GDP—based on official data, chiefly on the back of low GST collections. The shortfall is expected to continue unless addressed through other measures, because GST in its current form is not revenue-neutral. A higher GST rate is not likely, given the political cost. One-time measures like RBI dividends are a palliative rather than a cure. Another feature of the Modi government is the decrease in the states’ share from the divisible pool of taxes, from the 14th Finance Commission mandated 42 paise to a rupee to 32 paise, further stretching their deficits and expenditure. This has been achieved by the various cesses—a temporary feature under the Constitution—the Centre has imposed, which it need not share with the states.
Banks burdened by bad loans, a government that can’t increase expenditure but still mops up most of the credit from the system, a private sector that doesn’t invest, an informal sector still to recover from demonetisation, high unemployment, and wages that are not rising have all come together in a perfect storm of sorts. It needs a firm hand at the helm, not a government busy applying one quick fix after the other.