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Anatomy of a decline
Posted:Sep 29, 2017
 
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By Kapil Sibal
 
 
The economy is in deep trouble. Growth indicators have been in constant decline. In the April-June quarter, growth plummeted to a dismal 5.7 per cent. In all likelihood, growth for fiscal 2017-18 will be below 7 per cent. This will not give the finance minister elbow room to increase allocations in sectors starved of funds. We cannot expect increased allocations in education, health, agriculture, rural development, transportation, women and child welfare when the finance minister presents his next budget. Reduced allocations in MGNREGA will further hurt the poor, after having been made victims of ill thought out, knee-jerk economic decisions of this government. The PM in attempting to usher in the era of a cashless society, has rendered poor people cashless. This broke the back of the aam aadmi already overburdened with the pain of poverty.
 
 
Demonetisation was followed by the ill-timed imposition of a flawed GST. This has had a lethal effect on the informal sector. MSMEs are ill prepared for compliance issues. Glitches in the GSTN network have further hurt businesses. Those surviving on job work have lost out. Beneficiaries of downstream procurement now require registration. Without that businesses will seek alternatives and procure from those already registered. This has caused unexpected business disruptions.
 
 
While the business community will continue to grapple with the challenges of an uncertain economic environment, the government has very little space to manoeuvre and reverse the downward spiralling of the economy. After 19 months of declining exports, they first plateaued, and now we see some signs of recovery. For the economy to grow at a constant 7 per cent, exports must pace upward of 15 per cent annually. Our exports are just not competitive unless interest rates come down and the rupee declines substantially. I don’t see that happening. Even if it does, the ecosystem of an export-oriented market economy is not in place. The textile sector awaits modernisation and with cow-vigilantism the leather sector is unlikely to recover in the near future. Our pharmaceutical pricing policy has dampened prospects of investments. Absence of robust exports means a slowdown in manufacturing which in turn impacts employment.
 
 
Farmer suicides, around 12,000 in 2015 alone, are the result of the crisis bedevilling agriculture. Nearly 70 per cent of those occupied in agriculture have holdings of 1 hectare and less, not enough to sustain families. Most are marginal farmers entirely dependent on the vagaries of the weather. Drought and floods play havoc and the consequent dependence on moneylenders entangles them in a vicious debt cycle. In good times, even with bumper yields, prices crash and the farmer loses. The real problem is the absence of a ready market when the crop is harvested. Absence of cold chains to preserve fruits and vegetables makes for a buyers’ market. What is needed is a shift to horticulture and commercial cropping to increase farmers’ income. Loan waivers may give a temporary reprieve but that is not a solution. To deal with other ailments we must think out of the box. To sustain high growth, agriculture must grow at 4 per cent per annum.
 
 
The index of industrial production has been slipping. Manufacturing has suffered and bank credit growth, as low as 5.1 per cent in 2016-17, was the lowest since 1963 according to the RBI. This is evidence of the drying up of private sector investment. The conditions for private enterprise to flourish are non-existent. Ease of doing business is replaced with many ceasing to do business. Big industry is investing abroad rather than at home. The taxman is breathing down everyone’s neck and investigating agencies are not far behind. They blackmail and exploit, spreading fear. With a downturn in manufacturing, job opportunities have dried up. Industry, too, is downsizing its workforce. Even in the IT sector, thousands have been laid off. The demographic dividend might turn out to be a demographic nightmare. The time bomb is ticking as society is being torn asunder. The PM, unfazed, inaugurates the bullet train from Ahmedabad to Mumbai.
 
 
The telecom sector is undergoing consolidation. Auction of spectrum at Rs 56,000 crore for 5 megahertz has crippled the industry. It is under debt of around Rs 4 lakh crore. It has to spend Rs 1.25 for every rupee earned. This is unsustainable. Telenor has already said goodbye to India and Vodafone is merging with Idea. Sistema is ready to be taken over. Jio is the new disruptive player. Competitors are crying foul. Discoms in the power sector are reeling under debt. The politics behind subsidised power is the villain. Lack of demand for power is evidence of industrial slowdown. There are no takers for coal blocks put up for auction. Those auctioned are in trouble. Major players in the steel sector are facing insolvency. Mining is at a standstill, with court orders strangulating it with their vice-like grip. Core sector growth is, therefore, tepid.
 
 
Real estate is in a mess. Homebuyers are up in arms and major players will soon face insolvency. I am afraid court orders, instead of helping matters, will exacerbate the troubles the sector faces. Courts cannot and are also unwilling to comprehend the economic consequences of judicial diktats. Slowdown in construction activity impacts not only jobs but also impacts the demand for steel, cement, sanitary ware and other inputs which are an integral part of construction activity.
 
 
To top it all, bank NPAs have risen to Rs 8,80,000 crore. Government has no surplus funds to bail them out. There are no easy solutions. Economists have warned against attempts to merge banks to reduce NPAs. There is talk of increasing public expenditure with a stimulus package, in an attempt to revive demand.
 
 
Three and a half years have gone by. The economic situation is getting messier by the day. Let us await what New India has in store for us since the PM no longer talks of achhe din.
 
 
 
 
 
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