There was a chorus from some economists with former Finance Ministers (FMs) joining against the transitory decline in the gross domestic product (GDP) growth as though GDP is a strong determinant of growth. High growth and high inflation are good friends (see the table below) and the net result has resulted in poor becoming poorer and rich, the richer.
(Source: RBI Annual Report 2016-17 and monthly Report September 2017)
Notwithstanding some of the good things that the National Democratic Alliance (NDA) government has done like the laws to regulate the real estate sector and the Insolvency & Bankruptcy Code (IBC), amending 87 rules for foreign direct investments (FDIs) in 21 sectors, abating corruption in some quarters and the introduction of goods and service tax (GST), resounding alarm has been the faulty(ed) demonetisation, the GST glitches and the high oil prices that have lost relationship with the crude price variations.
In the context of monetary policy announcement, there is another chorus for reduction in interest rates as though such reduction in the backdrop of risk aversion of the banks due to the unrelenting non-performing assets (NPAs) would kick start fresh demand for credit. All the rate cuts thus far failed to result in any fresh credit or a pass through to the existing clients to spur demand. It is doubtful that the Reserve Bank of India (RBI) would have the luxury of another rate cut in the emerging economic uncertainties and falling rupee on the forex front. Stock markets became nervous with the global undercurrents of rising unrest between North Korea and the US.
While demonetisation set in a trail that closed around 1 lakh and odd shell companies and disqualified 3 lakh directors apart from around Rs30,000 crore tax evasion, GST is in the process of bringing in better tax compliance. Going by global experience, GST will take a minimum of two years to stabilise. However, what the GST missed out is a big worry: skipping the petrol, diesel and trade in waste and scrap. A rough estimate says that Mumbai alone has a turnover of Rs1 lakh crore a year in waste and scrap. Huge black money hides here because all deals are in cash even now.
Rising fiscal deficit is another major concern. The States in the emerging political context and certain states by habit have been indulging in distributive justice without productive gains. Gujarat elections are a case in instance where the insurance companies against no fall in agriculture production are in line for responding to unsustainable claim settlements under Pradhan Mantri Bima Yojana (PMBY).
In addition, dragging farm sector despite good monsoon, education and health sectors are the other bigger causes for the present imbroglio in the economy.
Pragmatic government would have started addressing more worrisome issues like the rising unemployment and declining manufacturing, certainly not as a consequence of the reforms but as a cause.
The nation with more young population in the backdrop of consistent unemployment rate of 7-8% during the last three years is also facing rising aged working population with bulging demand for high pension budget. The National Sample Survey Office (NSSO) 2011-12 Employment Survey – the one quoted by NITI Aayog in its Vision 2017-20 – admits to 51% of the workforce employed in manufacture and services, contributing to 83% share in the economy.
The Vision Document failed to make MSMEs the centre of manufacturing and employment growth. MUDRA should move to targeting micro manufacturing enterprises in the ‘Tarun’ window. A crore of Rupees investment in manufacturing micro, small and medium enterprises (MSME) would give rise to average of six persons while Rs6 crore in medium and Rs600 crore in large enterprises would give rise to employing no more than 10 and a couple of 100s respectively. Its emphasis on the high-productivity high-wage jobs in the large industry sector is misplaced while its focus on infrastructure investment is laudable.
Before any strategic corrective interventions are made, the government must listen to dissenting voices both from within and outside. While fresh investments in infrastructure like rail, road and ports are welcome, corrections to the failed infrastructure would require less investments if the industrial estates of the yester-era do not turn into havens of real estate instead of manufacturing hubs.
If the next budget typically focuses on elections and fails to provide the much needed investments in education, safe drinking water, health and bolstering manufacturing sector realising that the Make-in-India and Start-Up India remained as slogans both the economy and the NDA are going to witness a decent burial. If every citizen in the country can get safe drinking water, the health budget of the poor would come down by 70-80%. This should be the next mission of the Government.
(Dr B Yerram Raju is an economist and Risk Management Specialist. The views are personal.)
