New Delhi: The National Democratic Alliance (NDA) won a landslide in the 2014 general election with the promise of fast-tracking economic growth and creating jobs. It replaced the Congress-led United Progressive Alliance (UPA) government that was mired in corruption scandals and had mismanaged the economy. Three years on, it is the economy again that is proving to be the Achilles’ heel for the Narendra Modi government.

Sample this: Economic growth decelerated to a three-year low of 5.7% in the June quarter of 2017-18. The current account deficit (CAD) hit a four-year high in the same quarter at 2.4% of gross domestic product (GDP) despite benign oil prices that have cushioned government finances. While investment demand was anyway weak when the NDA assumed office, private consumption has also started decelerating, impacted by the government’s demonetization drive. Exports have picked up recently, but they are no longer the economic drivers they once were and exporters have been hit hard by a rising rupee. The goods and services tax (GST), which unified India into a single market, has added to the woes because of complex tax filing procedures.

Over the past weeks, news of the economy has dominated the headlines. The government went into a huddle and on Wednesday, finance minister Arun Jaitley said the government is working on a stimulus package to revive the economy.

What went wrong?

Pronab Sen, former chief statistician of India and someone who has worked in the government for the last 25 years, said the problem started with the reversal of rural growth, which remained high during the 2004-2012 period, propelling overall economic growth. “While farm output was growing at 3%, farm income was increasing by 7.5%. Income of the poorest was growing rapidly (and) that drove growth as well as inflation," he said.

The problem began in 2013-14 when things started to reverse. Global food prices came down while the Reserve Bank of India (RBI) still maintained a restrictive monetary policy. Growth in the minimum support price (MSP) of selected farm products slowed dramatically to 3.5% per year from an average of around 8% earlier.

After 2014, the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), which assures 100 days of manual work a year to at least one member of every village household, became resource-driven rather than demand-driven.

Less focus on MGNREGS, especially during the two consecutive droughts years of 2014-15 and 2015-16, aggravated the rural demand situation and dampened rural growth. While growth was slowing, two back-to-back structural changes, the withdrawal of high-value banknotes and implementation of GST gave a body blow to the unorganized and organized sectors respectively.

With the government overnight withdrawing 86% worth of currency in circulation (by value) on 8 November, the cash-dependent unorganized sector that makes up 40% of India’s GDP came to a standstill with anecdotal evidence showing farmers being forced to dump their produce for want of buyers and small businesses laying off employees.

The implementation of GST barely eight months after the note ban further unsettled the supply networks with dealers reducing stocks and companies drastically cutting production, leading to the three-year low GDP print of 5.7% in the June quarter.

Technical glitches in filing GST returns and huge delays in refund of input tax credit for exporters have further dampened business sentiment.

Sen says that if concerns surrounding refund of input tax credit are not quickly resolved, there will be a huge spurt in demand for working capital by companies which banks won’t be able to handle. “So far we have a demand-side problem. If a supply-side problem is added to it, it will further bring down our GDP for next two quarters," he said.

While the Modi government inherited many of the current problems, including the mounting non-performing assets (NPAs) of public sector banks, Sen said it has to be faulted for not diagnosing the problems properly and adding to the woes through demonetization and flawed implementation of GST.

The share of working capital loans in total lending has fallen from 76% in 2002 to 48% at present; lending for housing and fixed capital rose from 24% of total lending to 52% without a resolution mechanism such as the current insolvency and bankruptcy law in place. Sen says such a law should have been in place seven-eight years ago and blames the UPA for the mess in the banking system.

NPAs, or bad loans, in state-owned banks touched Rs6.41 trillion by 31 March 2017 from Rs1.56 trillion on 31 March 2013. This excludes restructured loans.

Sen said restrictions on cattle trading have further aggravated the situation in the rural economy. “Animals act as an insurance at time of crisis in rural India as they can be easily sold for meeting daily needs. The restrictions on selling cattle is one of the reasons growth in animal husbandry came down in the June quarter of 2017-18, thus affecting agricultural growth," he added.

What now?

It will be an uphill task to come out of the economic trough at a time private investment as a driver of economic growth is missing and government spending has been the sole driving force for the economy. “Monetary policy-based solutions are not going to work in such a situation as banks are not going to increase lending substantially in the current scenario. Only an aggressive fiscal push with a dedicated timeline can take the economy out of the current slowdown," Sen said.

“Think small, not big and begin now" is the one line prescription by Sen. “No bullet trains, no eight-lane highways. Focus on rural housing, rural roads, minor irrigation projects where results can be delivered quickly," he said.

Sen said that to boost spending on infrastructure, the fiscal deficit can be allowed to slip to 3.5% of GDP from 3.2% budgeted for 2017-18 and then to 4% of GDP for next two years after which it can be gradually brought down.

“In a crisis scenario like the present one, homeopathic solutions will not work. The economy needs steroids," Sen said.

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