The bimonthly statement of the Reserve Bank’s Monetary Policy Committee, released on Wednesday afternoon is upbeat about the strength of economic recovery among the world’s wealthiest nations:

“Since the MPC’s [Monetary Policy Committee] meeting in August 2017, global economic activity has strengthened further and become broad-based. Among advanced economies (AEs), the US has continued to expand with revised Q2 GDP [gross domestic product] growing at its strongest pace in more than two years, supported by robust consumer spending and business fixed investment. “In the Euro area, the economic recovery gained further traction and spread, underpinned by domestic demand. While private consumption benefited from employment gains, investment rose on the back of favourable financing conditions. The Euro area purchasing managers’ index (PMI) for manufacturing soared to its highest reading in more than six years. The Japanese economy continued on a path of healthy expansion…”

The Monetary Policy Committee statement points to similar buoyancy within the cohort of nations frequently grouped with India:

“Among the major emerging market economies (EMEs), strong growth in Q2 in China was powered by retail sales, and imports grew at a rapid pace, suggesting robust domestic demand; investment activity, however, slowed down. The Brazilian economy expanded for two consecutive quarters in Q2 on improving terms of trade, even as the impact of recession persists on the labour market. Economic activity in Russia recovered further, supported by strengthening global demand, firming up of oil prices and accommodative monetary policy.”

When it comes to a reading of India’s economy, though, relatively little seems to be going right:

“On the domestic front, real gross value added (GVA) growth slowed significantly in Q1 of 2017-18…GVA growth in agriculture and allied activities slackened quarter-on-quarter in the usual first quarter moderation, partly reflecting deceleration in the growth of livestock products, forestry and fisheries. Industrial sector GVA growth fell sequentially as well as on a y-o-y [year-on-year] basis. The manufacturing sector – the dominant component of industrial GVA – grew by 1.2 per cent, the lowest in the last 20 quarters. The mining sector, which showed signs of improvement in the second half of 2016-17, entered into contraction mode again in Q1 of 2017-18, on account of a decline in coal production and subdued crude oil production… “The uneven spatial distribution of the monsoon was reflected in the first advance estimates of kharif production by the Ministry of Agriculture, which were below the level of the previous year… “India’s export growth continued to be lower than that of other emerging economies such as Brazil, Indonesia, South Korea, Turkey and Vietnam, some of which have benefited from the global commodity price rebound. Import growth remained in double-digits for the eighth successive month in August and was fairly broad-based…Consumer confidence of households polled in the Reserve Bank’s survey has weakened in terms of the outlook on employment, income, prices faced and spending incurred.”

This is a terrible catalogue of problems, and represents the first true crisis for the Narendra Modi government. Over the past weeks, it has endured an unprecedented torrent of questions and doubts expressed not only by ideological opponents and disgruntled party members, but by neutral analysts and concerned supporters. Thus far, it has stuck to its policy of never admitting lapses or failures. But unless things get better quickly, it might find itself on a slippery slope similar to the one faced by Manmohan Singh’s administration in 2010. That’s when the last sharp slowdown in India’s growth commenced as, having weathered the most serious global financial crisis in generations, the economy unexpectedly slackened. “Policy paralysis” became a popular descriptor of the state of a government beset by corruption scandals, unable to rein in runaway deficits and persistently high inflation. The Congress-led United Progressive Alliance administration was, no doubt, culpable on a number of grounds. However, it is worth remembering that all its peers faced a significant slowdown in that period. An article in The Economist in 2013 catalogued the widespread downturn:

“The emerging economies’ share of output is no longer rising as fast as it did in the 2000s. In 2009 the year-on-year increase in that share was almost one and a half percentage points. Now it is back below one percentage point. This tallies with a striking slowdown in BRIC growth rates. In 2007 China’s economy expanded by an eye-popping 14.2%. India managed 10.1% growth, Russia 8.5%, and Brazil 6.1%. The IMF [International Monetary Fund] now reckons China will grow by just 7.8% in 2013, India by 5.6%, and Russia and Brazil by 2.5%.”

This time round, there is divergence rather than congruence between India and its peers, an unusual state in which India is doing worse even as the world does better. Ruchir Sharma of Morgan Stanley, among the experts to have continually highlighted the global corollaries of national accelerations and decelerations, published a blunt article in the Times of India on Wednesday morning underlining this fact:

“The global economy is enjoying its best year of the decade, with a worldwide pick up in GDP [gross domestic product] and jobs growth, and very few economies have been left behind. India is one of the outliers, with GDP growth slowing and unemployment rising.”

Having considered high interest rates and an overvalued rupee as possible explanations for India’s underperformance, Sharma concluded that these have been less important than the two signature initiatives of the government: demonetisation and the Goods and Services Tax.

Farce followed by tragedy

After the farce of the note swap, the government needed to do everything in its power to prevent the GST rollout from turning into a tragedy. Demonetisation was a one-off hit, but the compliance burden of GST is a chronic condition.

Standing in long ATM queues was bad, but filling in cumbersome forms each week for years must count as worse. The government should have understood, based on the experience of countries that have instituted a Goods and Services Tax, that its benefits would accrue disproportionately to large firms, while the compliance burden would be borne disproportionately by small businesses. This study of GST in Australia, which implemented its tax reform in 2000, calculated that, “As well as internal costs in terms of time and distraction, small businesses are outlaying on average an additional $2,433 each year for bookkeepers and accountants to help them administer the compliance costs of tax.” The study concluded that, for small businesses, the costs of compliance with GST outweigh benefits.

Australia, like India, has a revenue threshold above which it becomes mandatory for businesses to register for GST and file regular returns. But Australia has a single GST rate of 10% for taxable goods and services. India, with a population far less educated and technologically savvy, has saddled businesses with an incredibly complex mix of rates and exemptions.

Reports in Scroll.in document how hard the introduction of GST has hurt livelihoods of people in industries as diverse as paper products and sari weaving. But if the small business owner is under dreadful stress, it is not as if big businesses are happy. Shankar Raman, Chief Financial Officer of Larsen & Toubro, delivered an unusually frank assessment of the GST rollout in an interview. He said:

“I remember the government saying that it was ready but the private sector wasn’t. But today, the government is not ready. The systems are not ready. It is extending the time for filing returns. Things are still being done manually. Today, we are paying GST after computing it ourselves, instead of the government architecture telling us how much to pay based on our purchases and sales. “As and when the system configures this and starts coming out with the figure, god knows how different that would be to the figure we have arrived at. Then there will be a whole host of issues in reconciling the two numbers and the first reaction of the government will be that private sector is cheating.”

It is possible, as the government maintains, that these are teething pains, but it seems equally likely that the architecture of GST is fundamentally flawed, placing too high a compliance burden on small businesses for perpetuity. If the latter proves to be the case, it will serve as a lesson that policy paralysis, with all its drawbacks, is preferable to policy dementia.