Diagnosing an ailing economy
Already unsteady before the pandemic, the Indian Economy is now facing one of its greatest crises — the full impact of which is as yet unknown
India's Gross Domestic Product (GDP), at the constant price (2011-12), has contracted 23.9 per cent during Q1 (April –June) of this fiscal year, compared to 5.2 per cent growth recorded during the same quarter in 2019-20. GDP in Q1 is estimated at Rs 26.9 lakh crore as against Rs 35.4 lakh crore in Q1 of 2019-20.
This is the fastest decline of GDP during the pandemic period among the G-20 countries of the world. (refer to Table 1) China is the only country in the group that has grown during this period. The United Kingdom, which had ruled this subcontinent for nearly two centuries, has secured the second position in terms of contraction (20.4 per cent) of their GDP! However, economists, like Arun Kumar and Dr Pranab Sen, have estimated that the actual contraction of India's GDP could be much higher, ranging from 32 to 40 per cent! Dr Amit Mitra, an economist by training and Finance Minister of West Bengal, fears that in FY 2020-21, the GDP might contract to 15 per cent! India's fiscal deficit in the first four months to the end of July stood at Rs 8.21 lakh crores or 103.1 per cent of the budgeted target for the current fiscal year! Table 1 indicates that all the major sectors of the Indian economy, with the notable exception of agriculture, have been adversely hit.
These numbers don't reveal the extent of distress the citizens of this country are passing through. Pathetic medical infrastructure, coupled with prolonged unplanned lockdown, have devastated the life and livelihood of millions of common men of India.
The Union Government has failed to furnish any data to Indian parliament on the numbers of migrant labourers who died while returning home after a sudden lockdown had been imposed. However, a voluntary organisation, 'Stranded Workers Action Network', has revealed that between March 25 and July 4, 2020, a total of 972 migrant workers had died due to various reasons (hunger, absence of medication, Corona infection, road accidents, during a long journey, committing suicide, other reasons). Closures, layoffs, salary cuts have become rampant. Inappropriate actions of the bankrupt Union Government have worsened the situation further. At this hour of monumental crisis, the public sector banks and many government enterprises have announced voluntary retirement schemes (VRS), dozens of PSUs are on sale and thousands of contract workers of government undertaking, like BSNL, are deprived of their salary for months. These factors have continuously depressed the consumer and investment demands in the economy. The much-hyped incentive package and monetary measures have actually siphoned cheap cash from the consumers' and investors' market to the much lucrative share market for the benefit of a handful of big corporate houses and share brokers.
Flawed policies of the Union Government have aggravated the problem by creating vast gaps in the wealth distribution between the privileged one per cent and the rest of the ninety-nine per cent of the Indian citizens. Here, we discuss four specific policies that have adversely affected the economy:
On May 12, the PM announced a special economic package of Rs 20 lakh crore with the aim of making the country independent against the tough competition in the global supply chain and to help in empowering the poor, labourers, migrants who have been adversely affected by COVID. Following this announcement, the Finance Minister, through five press conferences, announced the detailed measures under the economic package. A careful analysis of this much-propagated package revealed that the entire responsibility of the Government was shifted to the Reserve Bank of India's monetary measures. The actual component of the Union Government's fiscal measures was limited to around 2-3 per cent of GDP. Economists expressed their concern on the efficacy of such monetary policy at the time of economic meltdown. They made suggestions for the Government to impose a progressive tax on wealthy citizens and print money to help the most vulnerable section of the citizens to boost demand. The Government did not heed such suggestions.
The so-called 'stimulus package' was actually aimed at using inexpensive public money to bail out big corporate houses and inflate the share market. A specific example will substantiate this ostentatious design. One of the components of the 'stimulus package' was the announcement of a Rs 3.7 lakh crore credit package for the MSME sector which employs (as per 2015 estimates) around eleven crore people in its 6.3 crore firms. 99 per cent of MSMEs were micro-enterprises and 84 per cent of these enterprises had no permanent employees and most of them did not take any bank loans in the past. The stringent conditions, like the existence of bank accounts and regular maintenance of income-expenditure accounts, imposed by the 'stimulus package' have excluded nearly most of this ninety-nine per cent micro-enterprises of the MSME sector. Then who has got the benefit? The rest of the one per cent well-heeled MSME firms! By changing the very definition of MSME to include larger firms in this sector, the Government actually had arranged credit facilities to major players of the global supply chains. It is very likely that due to insufficient demand, these huge funds, primarily meant for easing the working capital requirement of this sector, have ended up in the share market!
Atma Nirbhar Bharat
In May 2020, the PM announced the 'Atma Nirbhar Bharat Abhiyan'. The focal point of the concept is to make the nation self-reliant with more focus on local manufacturers and service providers. Atma Nirbhar Bharat is expected to strengthen the economy, improve the standard of living and most importantly improve the trade deficit and the exchequer balance of the country. It will also make the country self-reliant in all spheres- from manufacturing to supplying. The objective is primarily to reduce dependence on China which has penetrated very deeply in the multilayer supply chains of India's imports and exports. The slogan has been launched at a time when countries across the globe increasingly felt the need for global integration and strengthening mutual cooperation to come out of the pandemic crisis and economic recession. However, various developments, during the last three months, reveal that in the name of 'Atma Nirbhar Bharat', India has become more dependent on the USA and other western countries. The statement of the PM on July 22, 2020, is a case in point. "US-India friendship has scaled many heights in the past. Now it is time our partnership plays an important role in helping the world bounce back faster after the pandemic," said the PM, addressing the India Ideas Summit organised by the US-India Business Council (USIBC). Moreover, on September 17, the Department for Promotion of Industry and Internal Trade (DPIIT) issued a press note permitting foreign direct investment (FDI) in defence production up to 74 per cent on the automatic route. Till then, 100 per cent foreign investments were permitted in the defence industry — 49 per cent under the automatic route and Government approval was required beyond that.
Atma Nirbhar Bharat would remain as another political slogan unless a proper long term programme for human capital development is implemented with utmost earnestness. The 'Import substitution and export promotion' policy of the last century and 'Make in India' policy of the present government have miserably failed due to the poor quality of human capital in India. India has been ranked at the 116th position in the latest edition of the World Bank's annual 'Human Capital Index (2020)' that benchmarks key components of human capital across countries. The 2020 Human Capital Index update includes health and education data for 174 countries — covering 98 per cent of the world's population — up to March 2020, providing a pre-pandemic baseline on the health and education of children.
Unfortunately, the Union government of India is using the 'Atma Nirbhar Bharat' propaganda to shed off its responsibilities to the citizens and provincial governments. Answering specific queries by two members of Parliament on the measures are taken by the Union Government on economic losses suffered by the states due to prolonged lockdown and COVID 19 pandemic, the Minister of State, Ministry of Finance stated in the Parliament on September 14, 2020, that the Union Government has made no assessment to find out the loss of revenue suffered by the states due to pandemic and the slow recovery of economic activities so far. And on the question of how the Union Government proposes to assist the states to meet such challenges, the Minister replied, "As part of Atma Nirbhar Bharat Abhiyaan, announced by the Government of India, State Government were allowed an additional borrowing limit of up to 2 per cent of gross state domestic product (GSDP) equivalent to Rs 4,27,302 crore. Out of the additional borrowing limit of 2 per cent of GSDP allowed to states, consent of 0.50 per cent of GSDP amounting to Rs 1,06,830 crore has already been issued to the states to raise through open market borrowing (OMB) during the year 2020-21'! As per this formula, the state of West Bengal is allowed to 'borrow' Rs 6,787 crores (0.5 per cent of its current GSDP of Rs 13.57 lakh crore). This is how the idea of 'Atma Nirbhar Bharat Abhiyan' is misrepresented by the Union Government itself.
Figures in Table 1 indicate that only agriculture has registered some growth during the Q1 period of this financial year. But this good harvest has not benefited the common man of this country as the Union Government has allowed export of subsidised food grains, depriving the citizens of the country the benefits of higher output. Compared to the Q1 period of the previous financial year, in the Q1 period of 2020, the export of non-basmati rice has increased by over 56 per cent, wheat by 130 per cent and pulses by nearly 28 per cent. This has been made possible due to two factors: one, good harvest and second, the deregulation of agricultural markets affected by the promulgation of three ordinances by the Government, to 'scout for new markets, boost exports and double farm incomes', (a) The amendment of the Essential Commodities Act effectively deregulated the market for food grains, among others, (b) the Farming Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 and (c) The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020. Reacting to these ordinances, Biswajit Dhar has rightly pointed out that the ramifications of the government policies on the emphasis on export, orientation has not been considered. The implications of the change in agricultural policies being ushered in by the Government will have far-reaching implications in the future. In India's bilateral FTA engagements as well as in the WTO, partner countries are unlikely to accept New Delhi's export-oriented stance, while its own market remains largely protected behind high tariffs. But before comprehensively opening India's market to imports, the Government must have a plan in place to sustain domestic food security and also protect the livelihoods of almost 60 per cent of the workforce that is directly or indirectly dependent on agriculture. But the Government has not paid any heed to rational advice. On September 17, Lok Sabha passed the 'Farmers' Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020', and 'Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020' by a voice vote.
Earlier, the Government has permitted 100 per cent FDI through automatic route in the manufacturing of food products. India received foreign direct investment (FDI) of USD 463.44 million in the food processing sector in the first half of FY 2019-20. The country had received USD 628.24 million FDI in the food processing sector during the full fiscal year 2018-19 and USD 904.90 million during 2017-18, These policy changes and huge inflow of FDIs will certainly boost exports of food products by transnational food corporations, but it will also endanger the food security of millions of economically disadvantaged citizens of the country. Moreover, along with food grains, India will also export its precious water, in virtual mode, as food production consumes huge quantities of freshwater which is increasingly becoming scarce in every passing day.
Non-cooperation with states
GST collection during April-August has declined on account of COVID-19 induced lockdown, and the compensation due to states stands at over Rs 1.51 lakh crore, Minister of State for Finance Anurag Singh Thakur said to Parliament on September 14. Unable to compensate the states, as promised earlier, the Union Government has asked the state governments to borrow money from the market though there are several good reasons why the Centre should do the borrowing to pay the GST compensation. The Reserve Bank has itself stated that it would be simpler for the Central Government to borrow. Instead, the Union Government has proposed to split the GST compensation into two separate categories, revenue loss as a result of GST implementation and revenue loss as a result of an act of God. The Finance Minister of West Bengal has very rightly pointed out that this distinction breaches both the spirit and the letter of the 'GST Compensation Act'. According to Dr Mitra, "The states will simply sink if they are forced to borrow to obtain the GST compensation".
The Indian economy has not sunk in a day. It was sinking during the last few years. COVID-19 is just an excuse that might have worsened the condition of the ailing patient. It is a classic case of co-morbidity
The writer is an academic and economic analyst