The Indian economy is currently in an unenviable condition, and if the Budget were any indication, the government has not even fully absorbed the enormity of the crisis. It’s almost as if the economy is suffering from the coronavirus, and the diagnosis done and medicine administered is for the common cold. None of the measures announced in the Budget will positively affect the manufacturing, real estate or the shadow banking sectors, where the majority of the problems lie.
Unemployment is rising sharply, consumption, savings and investment are down and inflation is rearing its ugly head again. In addition, our banking sector is in shambles with one cooperative bank collapsing after the other. This, after we embraced the neoliberal economic order in 1991, and were poised for rapid growth from at least the first decade of the third millennium onwards. To get back on the high growth track, the government should have reduced the compliance burden, included impetuses to improve liquidity in the real estate sector, comprehensively addressed the trust deficit plaguing the shadow banking sector and most importantly addressed the growth slowdown by fixing the demand side of the economy. The Budget fails miserably on all these counts, as the finance minister’s announcements are a mere eyewash that will not produce either immediate or lasting gains for the Indian economy.
The Indian economy grew at roughly 3.5 per cent in the pre-liberalisation years, 5.4 per cent when the secular coalitions were in power from 1991 to 1998, 5.7 per cent during the Atal Behari Vajpayee years, 8.02 per cent during 10 years of the UPA government, and at 5.5 per cent (despite the change in base year to arrive at the new growth rate calculations) during the first NDA government’s tenure starting 2014. With a young population, industrial base and scientific education, these moderate levels of growth both in the era of the command economy and post-liberalisation show that both economic models have not been suitable for India. With growth down to a trickle at 4.5 per cent during the second quarter of FY20 and with the World Bank predicting further deceleration in FY21, we can safely say that we are now amidst a structural slowdown.
The entire financial ecosystem, including public and private sector banks, non-banking financial companies (NBFCs), housing finance companies (HFCs) and cooperative banks has become weak, fragile and prone to disasters. Glaring cases of financial misconduct have come to light starting from the “industrialists” who kept on taking debt despite the poor financial health of their companies. The IL&FS debacle then further hurt the shadow banking sector due to the contagion effect. Next to go was Dewan Housing Finance Ltd., which defaulted on its payment obligations. And then finally, it was the turn of the cooperative banks, with the Punjab and Maharashtra Cooperative Bank biting the dust after it loaned 73 per cent of its loan book to a certain Housing Development Infrastructure Ltd. (HDIL), which was already an NPA. The most recent casualty of the state of our economy has been Sri Guru Raghavendra Sahakara Bank, a Karnataka-based cooperative bank, on which the RBI has also placed withdrawal curbs.
But the collapse of our financial institutions is not surprising given that the fundamentals of the Indian economy have been under attack for a while now. The fundamentals, namely employment, consumption, savings and investment have been giving distress signals. Recently, released figures from thinktank CMIE peg the unemployment rate at 7.7 per cent in December 2019, which is an increase from over 7.48 per cent in November and 7.02 per cent in December 2018.
The economic slowdown was evidenced in the export sector too, with India’s exports contracting for a fifth straight month in December 2019 by 1.8 per cent to $27.36 billion. Imports were down as well by 8.83 per cent at $36.61 billion. Oil imports, which are used to gauge economic activity, were down 0.83 per cent last month from December 2018. Electricity production, another indicator of economic activity, too fell 5 per cent in November 2019. In fact, a leaked NSSO survey states that India’s overall consumption fell by 3.7 per cent from 2011-12 to 2017-18. The government refused to release the report citing “data problems”. Not only are people consuming less, but they are also saving less. Household savings declined from 23.6 per cent of GDP in 2011-12 to 17.2 per cent of GDP in 2017-18. This can only mean that people are earning a lot less.
A logical conclusion of reduced earnings and minimal savings is that people are investing a lot less too. Private sector investments declined by 59 per cent in the quarter ending September 2019. FDI as a percentage of GDP dropped to 1.55 in 2018 from a healthy 3.62 in 2008. What is even more troubling is that most of the new foreign investment coming into India has been speculative in nature. Hardly any new investment is being made into manufacturing or into greenfield infrastructure projects. A key reason for reduced investments is the compliance burden on the investor. A combination of capital gains tax and the Dividend Distribution Tax (DDT) had disincentivised investors altogether. Both were expected to be remedied in the Budget, but neither really was, save for a charade around scrapping the DDT, which effectively takes us back to the old regime of taxing the shareholder. In addition, rather than reducing the direct tax compliance burden, the government has increased it. Now the citizenry must choose from six slabs instead of three, and from two very different tax systems, one with exemptions and one without exemptions.
This government has paid mere lip service to its goal of putting more money in the hands of the people. MGNREGA, which is the government’s flagship rural spending programme, has seen no meaningful growth in outlay. And in spite of no increase in expenditure, government finances appear shaky, as was evidenced when the finance minister revised the fiscal deficit target for FY20 to 3.8 per cent up from 3.3 per cent and set a target of 3.5 per cent for the next fiscal. What is even more concerning is that the fiscal deficit target for FY21 will be primarily met via disinvestment revenues, which are unpredictable. So to place one’s money on disinvestment helping in meeting the fiscal deficit target is almost like betting on the wrong horse and setting one up for failure.
It’s almost like the Budget has done nothing to remedy our collapsing economy. The fundamentals of our economy have never been weaker, the banking system is in acute distress and to top it all, there is unrest in the entire country due to the BJP stoking the fire of communalism. With social strife spreading, it is only natural that more and more money will leave India, making us financially weaker and weaker. We are cruising for a severe bruising.
