The real trouble with the economy: it’s time to move from Sholay to 3 idiots

Shiv Sena has put it best about the economy. Itna sannata kyun hai bhai? The iconic dialogue from “Sholay” best sums up the current unease with Indian economy, notwithstanding Prime Minister Modi’s brave words in Bangkok.

Most of the steps taken by the Government in the last couple of months by themselves will not change the situation. Reduction in corporate tax, predictably, has not led to a flurry of fresh investment.

Afterall if you have the capacity to produce 100 units, but in the past several years have not been able to sell more than 70 or 80 units due to lack of demand, you are unlikely to invest and create more capacity, no matter how cheap the cost of money may be. Expectations of the Finance Minister that Corporations would lower product prices have also not been fulfilled.

The announcement of the RBI Governor while announcing the 5th consecutive Repo Rate cut that if this did not stimulate the economy, he was prepared to go further down the path, may well have an effect quite opposite to what he intended.

If I am contemplating buying a house with a house loan, I may postpone it by a few months in anticipation of cheaper loans; on the other hand, if I am contemplating selling a house, I may also decide to wait for cheaper interest rates in anticipation of buyers willing to pay a higher price in view of the cheaper loan.

It is futile to expect corporate India to come out with any solution. They apparently cannot look beyond tax-cuts and interest rate cuts. Soon after the cut in corporate tax rates, prominent Industrialists came out with a suggestion that personal income tax rates should also be cut to boost demand.

Indisputably such a cut would boost consumption, but only of the taxpaying families or about 10% of the people, about 3% income tax payers and their family members. Rathin Roy, the recently removed member of the PM’s Economic council had pointed out that we must look beyond this 10% population and expand our product range to cater to the demand of the masses. We must shift our focus from producing shirts costing Rs. 2000 to Rs. 200 shirts. But it doesn’t seem likely to happen in the near future.

Amidst all the nose-diving economic indices, there is one index, however, that is showing a healthy growth. In 2018-19 the number of people reporting income above Rupees one Crore, grew by 19%, and those reporting an income of more than Rs. 5 Crores grew by 29%. With Income Tax rates likely to come down next year i.e. in 2019-20, we can expect a faster growth in these numbers and inequality to rise. However, that is unlikely to gladden too many hearts.

Supply side solutions are clearly not working. Of late a few non-Marxist economists have been talking about Keynesian solutions, albeit not with much conviction. Now that our latest Nobel Laureate has also spoken in favour of pumping more money into the economy with the caveat that this money should go to the poor, we may expect a little more support for this prescription.

However, there are doubts. Even if more money reaches the poor, will it increase consumption or will it be hoarded for contingencies in view of the prevailing uncertainty?

Doubts are not entirely misplaced.

The mood of the country is unfortunately bleak. There is perceptible fear- fear of the unexpected. The Modi Government has been too unpredictable. Too many changes have been brought about at too rapid a pace and people do not know what to expect next.

The mood, to be fair, stated going sour in 2008. The global meltdown started a phase of uncertainty. By 2010 it was clear that India had weathered that tsunami rather well. Then came the Commonwealth Games. For a few months immediately before the Games were scheduled, the media went to town with stories of mismanagement and corruption, darkly hinting that the event was headed for a disaster. As it happened the Games went off very well, with some international sports officials suggesting India could aim for staging the Olympics. Some corruption cases were started but so far there has been no conviction.

Then came the 2G case. After raising a lot of dust all the accused were let off. This was immediately followed by the Coal block allocation scam. So far, no conviction has taken place of any consequence. The then Prime Minister and Kumarmangalam Birla may have been summoned by the CBI court. But this is perhaps more a testimony to the resourcefulness of investigating agencies rather than the criminality of the two gentlemen. Nobody really expects either of them to be convicted.

In the meanwhile, it just helps reinforce the popular perception that “Sab chor Hai”. To ventilate a case of one corruption a day, while most of them do not lead to convictions only helps erode people’s faith in the system. In the meanwhile, as Harish Salve said, by cancelling the 2G licenses and allocation of Coal Blocks the confidence of investors was seriously dented.

The new Government appeared to be in a great hurry. In a complete U-turn it gave up its opposition to Aadhaar and sought to link it to PAN cards, mobile phone numbers, bank accounts and what not. The issue is not whether it was a bad thing or not, the issue is of a change being brought in, in too much of a hurry without people getting used to the idea.

For decades People have lived with the notion that their money in nationalised banks at least was safe. The Government suddenly brought a bill which would permit a bank in distress to encroach upon the bank deposits. True, the bill was withdrawn, but the issue is kept alive by periodically discussing the merits of increasing the limit of insurance on deposits from Rupees one lakh to Rupees three lakh.

Demonetisation and introduction of GST gave further shocks to the economy. In the older system, shopkeepers would not give cash memos and evade the sales tax. Now people find that while in restaurants and tailoring shops, they have to pay these taxes but they are never sure that they are getting the credit for refunds which these establishments get.

Thus, the faith of people in the system, which is already low, is being further eroded and the fast pace of change are leaving people bewildered.

The need of the hour is to usher in a period of stability, give the people a chance to get used to the new environment and make them feel ‘ALL IS WELL’. Time to move from Sholay to 3 Idiots.