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Opinion

Roaring stocks; mewing economy

Government must focus on prudent measures based on expert advice rather than pursuing stop-gap measures to derive an illusory recovery for a floundering economy

The common man is looking askance at the roaring stock market while he suffers so much. There is little doubt that if this spurt to record highs were to be sustained, it would help in some industrial expansion and job creation after a few years. But, in the absence of demand, will it? At the same time, the economy is not all about the companies listed in this official gambling den, since there are thousands of other income-generating areas which are passing through a crisis of existence. Therefore, while shareholders are celebrating, experts are worried about the unprecedented economic slowdown which is largely man-made.

It was a puzzle as to how Modi won a record 303 seats in the Lok Sabha when his actions had led to perceivable economic distress. Now, after the economy has further worsened, the behaviour of the share market is another puzzle; tumbling records, Sensex racing over 40000 and Nifty breaching the 12000-mark. The answer to the first is the illusions created on falsities. There is no Modi magic in the latter, since share market itself is an illusion based on sentiments, while the economy is a ground reality. It is for this reason that several experts have been trying to impress upon the country the nature of this reality.

Similar to the alleged infamous words of Marie Antoinette in 1789, suggesting to the French people to 'eat cake' when they desperately craved for bread, the present government is asking people to 'celebrate success' of nationalism, Hinduism, Kashmir and now, the share market, when their businesses and industries closed down in the lakhs and jobs and livelihoods were lost in the millions. For Smriti Irani, Modi is a great economist. He is omniscient, although he bulldozes his opinion to say that clouds prevent radars from detecting our aircraft and that the trunk of Ganesha was cosmetic surgery, etc. But, experts, who spend their lifetime studying economics, especially international institutions, are not impressed.

While BJP's own Subramanian Swamy puts the GDP growth rate at as low as 1.5 per cent, Global Competitive Index of the World Economic Forum, ADB, DBS Bank of Singapore, Somura, ACRA and Kotak Securities slashed it. Our own RBI has revised it downward from 6.9 to 6.1. SBI also sharply cut it down from 6.8 to 4.3 and predicts a further downfall to 4.2 per cent. In all, the GDP growth projection is hovering at less than 5 per cent. Of late, Moody's Investors Service changed its outlook on India's rating from 'stable' to 'negative'. They observe that credit crunch in banking, as well as non-Banking Financial Institutions (NBFIs), mostly paralysed retail businesses, carmakers, home sales and heavy industries. The government, however, is unfazed as they take solace from IMF's findings that the GDP growth would be around 7 per cent in 2020, notwithstanding the fact that it has rightly slashed it from 7 to 6.1 per cent for the current year because people have no money.

Economic Surveys show the decline of household savings from 23.6 to 16.3 per cent in 6 years. Consumer demand slumped, bringing down the Gross Value Added (GVA), i.e., GDP minus taxes, from 7.7 per cent to 4.9, leading to reduced production by factories. The messing up of the economy and the manipulated figures need to be seen in comparison with the world record of 10.5 per cent of GDP during Manmohan Singh's time.

Furthermore, consumption of electricity dropped by 13 per cent in October and coal output crashed by over 20 per cent. The Index of industrial production has seen a contraction of 1.1 per cent, sinking the manufacturing sector down to 0.6 per cent and forcing companies to either drop or defer their expansion plans. It all affects the capital goods sector adversely.

The negative growth of bars and rods shows the decline of activity in construction, slowing its growth from 9.6 to 5.7 per cent. The sentiments in real estate stakeholders are thus as low as 42, indicating the 'pessimism' in this sector. Similarly, agriculture growth at 2.7 per cent was half of the previous year with farmer suicides continuing unabated. It also hit the auto sector along with other factors like liquidity crunch and people preferring Ola or Uber and second-hand cars. Already, 3.5 lakh people have lost jobs and a million more are on the brink. The cascading effect of it on ancillary and other industries would further aggravate the 46-year high unemployment rate of 7.51 per cent. With a deep fall in primary products, consumer goods and consumer non-durables, experts feel that the country's economic woes are set to deepen.

Now, food and vegetable prices have escalated in October, making the consumer retail inflation rate of 4.62 per cent breach the RBI's four per cent target. Even the value growth in Fast Moving Consumer Goods market has dropped, as rural growth, which contributed 36 per cent to overall FMCG spends, fell below urban. The growth rate for small manufacturers has also slumped by 23 per cent. While all the cash-based activities like handicrafts have suffered, even in the jewellery industry skilled artisans are staring at the prospect of job losses. Most of the experts thus feel that we would have been better off had there been no demonetisation and the hurriedly implemented GST.

Demonetisation almost wiped out the disorganised sector, the MSMEs and self-employment ventures. As the experts had predicted, the country has lost 1-2 per cent of GDP growth. On the other hand, instead of curbing black money as the country was asked to believe, it has made the BJP flush with slush money. Electoral Bonds helped them in laundering black money as well. They could spend 27000 crore rupees in general elections; Yediyurappa could contribute 1700 crore rupees to his leaders and thousands of crores are being used in engineering defections of legislators, the latest being the attempt to woo the Shiv Sena MLAs.

The GST system came on the heels of demonetisation. Trade in farm goods was obliterated. The textile industry was similarly hurt and off-take slumped. FMCG showed slowing demand growth and soon inventories were piling up. The faulty GST is fetching taxes only from 15 per cent of tax-payers because of the complexity of forms, etc., thus increasing public debt to 83 crore rupees recently, from the 53 lakh crore rupees over 70 years. With all this and with the business confidence in the private sector also dropped by 15.3 per cent, there is a real crisis.

Even RBI's 1.76 lakh crore rupees dividend to the government and its consistent cutting of repo rate to boost several sectors and resurrect the NBFCs have only met with partial success. Fiscal deficit stands at 77.8 per cent of the budget target and is growing, while debt-ridden banks are using funds to protect their loan margins and are even investing them in government securities for safety.

Worried, the government has taken some steps like infusing liquidity in several sectors, merging banks for easy lending and simplifying procedures for ease of doing business. Also, under pressure from foreign direct investors and others, it has already rolled back super-rich surcharge and other corporate taxes. However, with hardly any savings in households, consumer demand has fallen. The market sentiment is so bad that neither businesses nor consumers are lining up to apply for loans. Now with retail inflation also rising, RBI would be in a dilemma as to whether it should cut the repo rate further or not. When matters are in such a precipitous state, it is the 'crony capitalists' who would exploit it.

For quite some time, they could borrow, use funds inefficiently, share the proceeds and rely on public sector banks to paper over the resulting rocky finances while indulging in collusion and blatant frauds. NPAs have gone up to over 70,000 crore rupees during this present regime and in the first half of this financial year, PSBs were discovered to be defrauded to the tune of Rs 96,000 crore. However, the reluctance of the government and the RBI to conduct an asset quality review is puzzling. Poor and middle classes are sufferers of the greed and frauds of this small segment of the population. Modi's own Anil Ambani is insolvent of 45,000 crore rupees.

Perhaps exempting the middle class from Income Tax would place more money at their hands to spend and boost the economy. Similarly, SEZs, in which lakhs of crores have been already invested, need to be activated and their work rationalised to promote exports that would offset the slowdown of domestic demand. A lot more has to be done.

When the economy is in doldrums, how can the stocks rise so high? First, they rose when Modi came to power again because shareholders and companies expected deep structural reforms. They fell flat when, instead, heavy taxes were imposed and there was a flight of capital from the country by the foreign direct investors setting panic in the market. Now, it is booming, thanks only to the unprecedented rollback — 10 points slash of corporate tax rate and 17 per cent slash for new manufacturing companies. It is not Modi magic that is at play.

Like other illusions, the government cannot showcase the stock market buoyancy to divert country's attention from economic woes, since it is a simple unproductive gambling activity. If at all the dream of a $5 trillion economy has to be realised, GDP has to grow at a rate of 8 per cent, since a change of 1 per cent would amount to hiring or firing of 30 lakh people. It is imperative that the government pays heed to the alert and advice of experts before it is too late. A leader is not an expert, but an expert can be a leader.

Dr N Dilip Kumar is a retired IPS officer and a former Member of Public Grievances Commission, Delhi. Views expressed are strictly personal

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