Placebos as palliatives

If there is one leader at the Centre who is respected and trusted for integrity and sincerity, it is the Union Finance Minister, Nirmala Sitharaman. While Modi and Shah go about invoking nationalism and creating several illusions on falsities, to aggressively push the agenda of the RSS and others to safronise the country, she is seriously engrossed in her business of finances. However, the moot question is, whether her efforts to pull the country out of the deep woods it has landed in would work as curative medicine, or only as palliatives, or simply as placebos.

PM Modi envisions a $5 trillion economy and 10 million jobs annually while the economy is in doldrums. In his first term too, he had promised happiness, 10 million jobs per year, Rs 15 lakh cash in every citizen's account, etc., but handed the country only pain and a shattered economy. Yet, Kashmir and NRC have taken precedence since elections in some states are in the offing. He does not regret the misery caused, nor does he have the majesty to admit his mistakes. Buddha said, 'Ego never accepts the truth.'

Official data shows GDP growth steadily slid from 8 to 5 in the last five quarters. While NITI Aayog Vice Chairman, Rajiv Kumar, said that the liquidity situation is unprecedented in 70 years, BJP's Subramanium Swamy says, 'Goodbye to $ 5-billion dollar economy.' 'Our economy has not yet recovered from the man-made blunders of demonetisation and a hastily implemented GST,' is the opinion of Dr Manmohan Singh. Importantly, ex-CEA Arvind Subramanian's research concludes that as against the annual growth of 7 per cent projected, GDP was actually around 4.5 per cent. If the methodology used by the government is applied to the period prior to 2014, the GDP at that time would be much higher. Moreover, public debt went up to Rs 83 lakh crores in six years as against Rs 53 lakh crores in the preceding 70 years, and fiscal deficit touched Rs 5.47 lakh crores or 77.8 per cent of the budget target, during the recent quarter. People are confused about whether to trust the rhetoric of 'achche din,' when they are facing a financial nightmare in their homes.

As such, household savings have been going down over the years; the Economic Survey shows a decline from 23.6 to 16.3 per cent in 6 years. White-collar wages in the private sector have stagnated in the last few years. At this juncture, with the SC deciding that special allowance is part of the salary, Companies deducting higher PF from April this year has reduced the take-home pay of employees. As a result, the growth in private consumption expenditure, the backbone of India's economic growth, has nosedived from 7.2 to 2.1 per cent in the recent quarter, and consumer demand slumped, bringing down the Gross Value Added (GVA), i.e., GDP minus taxes, from 7.7 per cent to 4.9.

Although Modi is reluctant to admit, the reality is that demonetisation and the attendant money supply restrictions almost wiped out the disorganised sector, the MSMEs and self-employment ventures. The ad hoc implementation of GST has compounded problems, like in the case of Parle G which is retrenching over 10,000 workers. Only 15 per cent of taxpayers have filed annual GST returns citing the complexity of forms, eluding the hopes of raising the revue.

Now, there is only widespread unemployment, empty pockets, agrarian crisis and slump in the industry. The rate of unemployment, at 7.91 per cent, is the highest in 45 years. Markets cannot absorb the job-seeking labour. If we go by the World Bank figures, for every one per cent rise in GDP 7.5 lakh jobs are created; so at 7 per cent growth, it should have been 5.25 million. It has not happened, questioning the veracity of the GDP figures. Now, the slump has led in the dumping of millions of jobs.

With the purchasing power of people on the wane, the growth in the three crucial sectors – manufacturing, agriculture and construction sectors have fallen miserably. In one year, it tumbled to 0.6 per cent from 12.5 in the manufacturing sector. The sales in the auto industry, which accounts for 22-25 per cent of GDP and gives employment to over 32 million people, and adds Rs 1.8 lakh crore taxes to the government coffers, have seen the worst fall to 31.57 per cent in August this year. The demand is also greatly hit by agricultural distress, and millennials preferring Ola or Uber and others seeking second-hand cars. Obviously, there is stoppage of production on some days, or shutting down in some cases. About 3.5 lakh people have already lost jobs since April, with a further loss of 10 lakh jobs hovering over the horizon. It will have a cascading impact on ancillary and other industries. More job losses are sure to follow in other sectors. Another important indicator, Agricultural growth, has also been a dismal 2.7 per cent, down from 5 per cent in the previous year, whereas the construction sector slowed down to 5.7 from 9.6 per cent earlier. SBI Chairman said, 'Almost all the sectors are showing slowdown', and Housing Development Finance Corporation Chairman admitted that lakhs of homes are finding no takers.

It is too obvious that demonetisation was a quixotic decision. Like every other Constitutional institution, the government tried to bulldoze RBI into submission. When its governor Raghuram Rajan resisted, Urjit Patel was brought in to comply with the political wish. But, although it ended as a fiasco – black money has only multiplied, the government went on expanding expenditure and squandered the windfall from low oil prices and higher oil taxes. The bungled GST yield is far below expectations. With other sources also drying up, the government began eyeing for RBI surplus to revive the economy.

But, this time Urjit Patel resisted and quit; so did the deputy governor, Viral Acharya. The latter had even warned, 'Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire'. Packing the RBI with compliant people, the government ultimately got its way. In fact, an inkling of it was seen when the Budget showed the estimated dividend of Rs 90,000 crore from the RBI. Now, they got Rs 1.76 lakh crore, which includes Rs 1.23 lakh crore (including the Rs 28,000 crore already paid) as dividend and Rs 52,640 crore surplus capital. However, danger looms large that, time and again, the government would dip its hands into RBI reserves.

Be that as it may, with the immediate infusion of Rs 70,000 crores into state-run banks, there was new buoyancy in the market. Global brokerage houses turned bullish. The Sensex and Nifty, particularly stocks of banks, NBFCs and infrastructure surged. Further, with RBI lowering the repo rate, and issuing instructions to banks to pass on the benefits to boost affordable housing, auto, MSME, and consumer sectors, things appeared good.

However, soon, with the merger of 10 public sector banks into 4 for focussed lending, plans have gone awry, at least for the immediate future. Since the amalgamation process would take at least six months and may delay the loan transactions, many brokers began advising buying of the shares of rival lenders. There are also apprehensions that the infused money would be utilised by the banks only to get rid of bad loans, thereby depriving capital for growth. Investors are also not convinced about the ability of anchor banks to absorb their weaker partners. They began dumping PSB' shares. In general, the share market slumped; every fall of 800 points on the BSE leading to a wiping out of over Rs 2.5 lakh crores of investor wealth. As foreign portfolio investors continued their spell of heavy selling to the extent of equities worth Rs 2016.20 crore, they set a panic selling in the broader market; and rupee crashed to Rs 72.39 per dollar. Although the government has made a course correction by restoring the surcharge on long and short-term gains on foreign portfolio investors to the pre-budget position, some damage had already been done; Rs 23,000 crore was withdrawn from domestic markets post-budget.

The economic scenario is in flux. Economists describe it as a quasi-recession when GDP slips for two consecutive quarters; we have slipped in five quarters. Investment and consumption have both failed. Therefore, very bold structural changes are needed – by breaching the fiscal deficit target of 3.3 per cent of GDP and by having a radical relook at the GST rates. At the same time, unethical 'crony capitalism' that has nurtured a politico-business nexus has to end. Below-value collaterals, doctored appraisals of project cost, loan disposals against goodwill, etc., should stop, since we already have NPAs of around Rs 8.8 lakh crores, primarily of large corporates. Added to this is the over Rs 70,000 crore bank frauds, which is ever-increasing. Unless there are appropriate mechanisms in place to fix both the lenders and the borrowers in a time-bound manner, the situation would go beyond redemption. Further, unless banks are freed from the stranglehold of the government, matters would not change. For example, the Rs 1 lakh crore for PM's Jan Dhan Yojana foisted on the banks was never compensated. In addition, the FM should pay more focus on MSMEs and self-employment, which are the real job-creators. Agricultural distress can be ameliorated by promoting export of agri-products, as we have 60 per cent surplus.

Unless hard and radical decisions are taken, all the efforts of Sitharaman would only amount to giving placebos as palliatives. The country is watching her with bated breath.

(Dr. N Dilip Kumar, IPS (retd) is a former Member of Public Grievances Commission, Delhi. The views expressed are strictly personal)