Without course correction, the economy will not redeem itself

India is still one of the fastest growing large economies in the world. At 7.1 per cent in 2017-18, there is a sense of achievement all round and as Indians we must feel great satisfaction. However, it is only when we look a little closer that achievements start appearing confusing and there are questions that we would wish to ask policy makers.

In 2012-14 period, the country went through volatile external and internal economic turmoil. Oil was averaging $110 a barrel, the world economy was on its knees with export orders virtually drying up (we would do well to remember the Euro-zone crisis with a near meltdown in Greece and Spain, and the unprecedented slowdown in the US economy). Our imports bill was burgeoning and CAD was inching close to 6% of the GDP. Due to the combined impact of CAG, hostile media, an aggressive judiciary and an over-zealous environment ministry, a very large number of infrastructure projects (with substantial equity and debt commitments) were stranded. Private investment was slowing down, and three successive fiscal stimulus packages had induced high inflation rate and alarmingly high fiscal deficit.

In 2013, the “taper tantrum” caused by pull back from quantitative easing (QE) resulted in a sudden outflow of FPI investments causing a near collapse of Re, which hit almost 68 to a dollar, with non deliverable forward markets in Singapore and elsewhere punting at ₹70-75 a dollar. Then of course there was the political storm of 2G and the like. India, at a sovereign rating barely making investment grade, was under serious threat of sovereign rating downgrade which would have resulted in an estimated $100 billion of capital outflow immediately.

Under such trying circumstances, swift and many unconventional policy decisions were taken at course correction, which included an unprecedented bold move to cut government expenditure by almost one lac crore in the election year to tame the fiscal deficit. The results are quite revealing. The GDP numbers clearly demonstrate that by March end 2014, the economy had made a remarkable recovery by growing almost 1% above the previous FY and this trend is visible in the next two FYs. However, from FY17, the picture changed dramatically. Domestic investment rate has declined from close to 37% in 2011-12 to 27% in 2016-17.

Deceleration in 2016-17 and 2017-18 largely caused by demonetisation resulted in loss of about 1.5% of the GDP. Demonetisation also disrupted the informal economy. About 81% of India’s employed population – with about 81% men and 81.5% women – are employed in the informal sector, according to ILO. Informal sector also accounts for roughly 45 per cent of India’s GDP. Economic survey 2017 admits that there was a spike in demand for work under MGNREGA after demonetisation in November 2016. As jobs vaporised, train loads of landless labour returned to their villages and demanded work under MGNREGA. Interestingly the job guarantee scheme, which was much derided by several economists and political parties, acted as a safety valve and prevented very large scale social unrest in the country.

The slump in private investment, which generates more durable jobs per unit of expenditure than public investment, ground to a near halt. As a consequence, there has been virtually no job growth in the formal sector in the last few years. There is also a sharp decline in the confidence index concerning foreign institutional investors. Due to rise in US interest rates and fear of rising CAD on account of global commodities and oil prices, 2018 has witnessed the biggest outflow of FPI money in any calendar year since 2008. So where do we stand today?

The bane of India’s economy is a lack of strategic thinking on how to pump prime growth and bring up the confidence level of the private investors. Whereas there are several initiatives being tried, there is no coherent over-arching policy framework which would provide a credible road map for recovery. While bankruptcy law is beginning to resolve the problems of NPAs, the absence of simultaneous recapitalisation of banks is inhibiting credit growth. Make in India, Start Up India and similar programmes have been initiated but a policeman approach to dealing with “bank frauds”, arrests, IT and ED raids have sent even the honest investors scurrying to safer environs.

GST, a very progressive tax, has been perverted with multiple and high tax rate slabs and complex and draconian compliance requirements that have wiped out a very large number of small and micro enterprises and caused havoc in business of traders across the entire spectrum of economic activity.

The intention of reaching medical facility through health insurance may be laudable, but the abysmal access of the poor to private hospital facilities, specially for common ailments, under the existing health insurance scheme should have been enough to dissuade the policy makers from pursuing it and instead endeavouring to strengthen public healthcare system. The economic story is just not holding up and the results are there to see.

From 1991, irrespective of the party in power, economy drove politics and policy consensus ensured steady reforms and higher growth trajectory. The reversal of roles with politics driving economy since 2014 has resulted in the flattening of all economic parameters which in turn is fuelling social unrest as manifested in farmer and dalit agitations across the country. Without drastic course correction, irrespective of what everyone may wish to believe, there shall be no redemption.

(The author was Finance Secretary to the Government of India)