Indian economy plagued
The Modi Government unveiled its third Cabinet reshuffle giving primacy to the gender factor by elevating a woman to the defence portfolio while dropping, interchanging and adding a few new and familiar faces as the spotlight now naturally shifts to governance. But in the run-up to the reshuffle, a lot of ill-tidings gripped the government with the RBI announcing its final count of old currencies that were returned to the system to apprise the country rather than obliquely state how the entire demonetisation bid was a mountain laboured to spawn a mouse! As if, there is a distinct disconnect between official claims of demonetisation and the stark ground reality, the Central Statistical Organization (CSO) came out with its first quarter gross domestic product (GDP) figures.
The CSO number on growth was a damp squib as real GDP growth slipped to 5.7 per cent in the first quarter (April-June) of 2017-18 from 6.01 per cent in the previous quarter, reflecting the resurgence of growth concerns. This is by far a 13-quarter low, even as the governing class has not refrained from the chest-thumping that India continues to be one of the few fastest growing economies in the globe. Government functionaries including ministers had the unenviable task of defending demonetisation as demonising it would cost them dearly.
But a reality check reveals that there is not a scintilla of doubt that the demonetisation exercise of declaring high denominational currencies of 500 and 1000 rupees invalid from the midnight of November 8, 2016, has had a deleterious impact on the economy, besides pushing the informal sectors into a state of disrepair as it was widely reliant on cash for conduct of its everyday affairs. Even before demonetisation, the factors swaying the slide of five straight quarters beginning from 9.1 per cent in March 2016 are many and varied as the Central government was hamstrung by leadership attention towards the State Assembly polls in Uttar Pradesh and a few other States. Still, there is scarcely any doubt that the demonetisation bid coupled with the uncertainty shrouding the July 1 adoption of a new indirect regime, viz., the goods and services tax (GST) remain the real culprits for slowing down activities in the tangible sectors of the economy under the fear of the unknown.
Though the initial teething troubles concerning the GST might be partly overcome in the second quarter as firms get entrenched to the new milieu of the indirect tax regime, the crucial question of demand for industrial output getting any impetus remains shrouded in mist. The central bank last month said that its industrial outlook survey had signalled "a waning optimism in the second quarter about demand conditions across parameters, especially on capacity utilisation and profit margins and employment." A cursory glance at the sector-sector trends reveals that manufacturing expansion in gross value added (GVA) terms had slowed down to a near stagnancy at 1.2 per cent. This, from 5.3 per cent in the last quarter (January-March) of 2016-17 and 10.7 per cent a year earlier, is an unmistakable signal that things are not hunky-dory on the industrial front. The persistent balance sheet problem of highly-leveraged industries on the one hand and a lack of affordable credit from the banking system on the other, which also suffers from identical balance sheet woes, meant that there is virtually an investment famine gripping the crucial industrial sector. With private investment not picking up the requisite pace and mojo, the issue of meaningful job creation through the real sector activities is on the back burner.
It is in this context that a beleaguered finance minister acknowledged that the challenge before the government now is to work out both policy and investment measures. This is absolutely necessary now to impart the needed thrust and momentum to keep the growth engine in at least half-throttle. But the issue of keeping the fiscal deficit at the ceiling prevents the government from loosening the fiscal tap lest any laxity should result in high inflation, high borrowing cost and crowding out private investment from the scene outright. This being the penultimate year to the next electoral gambit in 2019, the Modi Sarkar can ill-afford to keep its powder dry now as the people who were promised of acche din precisely three years ago would turn restive.
Be that as it may, economists, policy analysts and critics of the government now contend whether the demonetisation disruption was worth the effort, especially after the RBI, conceded in its latest annual report that well-nigh 99 per cent of banned high-value currencies were back. In the aftermath of demonetisation, there was widespread belief that it would bring a windfall to the Centre. To the extent that the demonetised high-value notes were not deposited or exchanged at banks—particularly by those who hoarded their booty markedly in cash—the resultant reduction in the apex bank's currency liabilities would produce a 'profit', which could then be distributed as a dividend to the government. But this did not supervene.
As the annual report has corroborated, Rs 15.28 lakh crore or 99 per cent of the Rs 15.44 lakh crore worth of the notes rescinded overnight on last November 8, was turned in. Instead of fostering revenue boost—the original estimates put it at Rs 4-5 lakh crore— the RBI's surplus payable to the Centre out of its earnings for 2016-17 fell to Rs 30,659 crore from Rs 65,876 crore the year before. With the central bank having had to incur extra costs on printing new notes of high denomination, disbursing interest on the excess cash it was compelled to absorb from banks and making an unexplained additional provision of Rs 13,140 crore towards a contingency fund, there was simply less surplus to distribute. The Centre's expectations on demonetisation on this score had sorely been belied.
In retrospect, were the long queues to exchange old notes, the overstretched bank staffs behavior towards their own customers of all hues, the manipulative capability of some egregious and errant elements within the banking system to help people wriggle out of their ill-gotten wealth and the money laundering that assisted people's dubious proclivities really worth the troubles they caused to the economy?
It is time, the government did a serious introspection as to how to revive demand and investment cycles so that the real sectors of the economy get a leg-up instead of placing its faith in legerdemains of ugly upshot, analysts wryly say.
(The views expressed are strictly personal.)