Economy and Business

Modinomics rings hollow: Look beneath government hype, and signs of deep economic distress are evident

Three years of drought, that is the state of the nation. The monsoon of hope is a long way away. Yet the dream has not soured; a reflection perhaps on the nature of our Republic.

Jun 14, 2017
By Kapil Sibal
Three years of drought, that is the state of the nation. The monsoon of hope is a long way away. Yet the dream has not soured; a reflection perhaps on the nature of our Republic.
This government is in denial. It believes that black economy has been given a fatal blow. At 7.1% India continues to be the fastest growing economy in the world. Spurt in public investment has created jobs. FDI flows are evidence of investors’ confidence in the growth story of India. Reforms have led to ease of doing business.
Consensus on GST that eluded the previous government has been reached. This historic legislation will now be implemented from July 1. The Sensex has reached record levels. All this because Modi, as predicted by Nostradamus, will transform India.
Let us critically examine each of these claims.
On November 8, when the prime minister announced demonetisation of all 500 and 1,000 rupee notes freezing 86% of India’s economy, it was indeed a surgical strike at unaccounted cash in the economy. If this ill-thought decision was an attempt at eradicating unaccounted wealth then it failed miserably. Most cash is either invested in real estate, gold or is stashed abroad. Undisclosed cash in circulation represented only around 5% of unaccounted wealth.
Now that real estate is outside the GST net, cash will continue to be a factor in real estate transactions. What is alarming is that unaccounted cash entered the banking system and is slowly being withdrawn and reconverted into undisclosed cash.
Demonetisation was a godsend for dalals who earned a fat commission for depositing such cash in banks and then ensuring their withdrawal. Black money is back albeit at a slow pace. Its full flow will take time. The problem of black money remains. It’s the poor however who suffered. Claims that demonetisation will eliminate both fake notes and deal a fatal blow to terrorism have turned out to be hollow.
The claim of 7.1% growth is also suspect. The latest Q4 GDP results show a growth of 6.1%. This also reflects the adverse impact of demonetisation on the economy. Private investment, the engine of growth, has dried up. Rate of savings is below 30% of GDP, whereas during UPA regime it was over 35%.
Exports were in constant decline for 19 consecutive months till June 2016 and have now plateaued. The IT sector has to reinvent itself to remain competitive. Recent layoffs by four major IT companies are evidence of its health.
Bank NPAs at 11% of gross advances are a roadblock to lending. Low credit off-take, in the absence of demand, is worrisome. There are hardly any jobs for the 12 million who enter the workforce annually. Underemployment is rampant. Jobs created in 2015 and 2016 stood at a dismal 1.35 lakh and 2.31 lakh, respectively.
Yes, public sector investment has created some jobs but unless private sector investment is robust, the economy’s capacity to absorb the workforce will be suboptimal. FDI flows mainly in IT, electronics and defence – niche sectors of the economy – don’t cater to jobs in either agriculture, small and medium scale sector, or for that matter in manufacturing. The National Investment and Infrastructure Fund (NIIF) set up in December 2015 to catalyse core sector growth has so far not made a single investment in any project. So much for the confidence of foreign investors in our economy.
Modi believes in seducing foreign investors in digitising the economy, little realising that most of India earns less than Rs 10,000 a month and seldom accesses digital platforms for bank transactions.
Record levels of Sensex, we all know, do not reflect the true state of the economy. With real estate giving no returns and interest rates down, the only option for investors is in equities. This is risky because once the bubble bursts investors will be badly hurt.
As for ease of doing business, we are ranked 130 out of 190 countries evaluated by the World Bank. Is that the transformation Prime Minister Narendra Modi had promised in 2014? Unless the economy is rid of bureaucratic juggernauts and antiquated rules and regulations, the promised transformation will elude us.
In a regime which terrorises business and entrepreneurs, where the taxman is allowed to become an extortionist, where investigation agencies are hand in glove with government, business cannot hope to flourish. Business is already moving out of India. Big business now prefers to make investments abroad. This is the reality. Ease of doing business is a chimera. Reforms have been slow and incremental. Radical reforms were promised only to be forgotten.
GST is a ghost of what was originally conceived. Any consensus which compromises the core of the reform is not a cause for celebration. To exclude electricity and real estate from GST was a mistake. We were sold the dream ‘One Nation One Tax’ which is now ‘One Nation Eight Taxes’. Multiple rates will make for bureaucratic squabbles. Multiple registrations will break the back of the small and medium sector.
The trader is already complaining at the haste with which the finance minister is moving. They want GST implementation postponed. Some states also hold the same view. GST could have been a historic legislation. Its shortsighted compromises have taken away its sheen.
The economy is in distress. Maybe, the cheerleaders of Modi do not quite know what Nostradamus meant.
Times of India, June 14, 2017

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