Made-in-India Slowdown Made to Benefit the Haves

I am sure nobody was surprised when news of India’s Q2 GDP trickled in a few days ago. It was anticipated that the slowdown will be worse than the previous quarter. In fact, I was surprised to hear business news channels breathing a sigh of relief that GDP growth rate hadn’t come in at 4% or 4.2% and that therefore it wasn’t so bad after all. Never mind that their own poll of economists’ forecasts had estimated it to be 4.6%, so it was lower than expected.

The point is not to quibble about a few basis points here or there, but that we have lowered our own expectations and standards to such ridiculous levels that we are content to accept any growth at all. And we have cabinet ministers saying that we are still the fastest growing economy in the world.

Just throwing money at farmers in the form of income support or loan waivers, is hardly a prescription for solving the problem of falling agricultural wages or for long-term growth.

Almost all sectors of the economy have slowed considerably, with manufacturing contracting by 1%. Hardly surprising when you consider that the automobile industry alone has announced significant production cuts and several “no-production” days at their factories to deal with the fall in demand and rising inventories. Listening to the corporate earnings news and reading about them in newspapers too, one is also aware of how much demand in the Indian economy has weakened. Especially in rural India, where wages have been falling or are stagnant and which have contributed significantly to consumption demand growth in past years. According to a Nielsen Report, cited in this article, rural consumption has fallen to a 7-year low.

Which is why this government’s economic policies and its budget are so baffling. I had written in my previous post about the budget presenting neo-liberal policies, with no mention of farmers’ distress or the rural economy, when that as well as unemployment were the two biggest crises facing the country. Just throwing money at farmers in the form of income support or loan waivers, is hardly a prescription for solving the problem of falling agricultural wages or for long-term growth.

To make matters worse, the government decides to give a fiscal stimulus, but to the wrong areas of the economy. When the problem is clearly weak demand, why would anyone pump money into the supply side of the economy and that too in the form of tax breaks to corporates? Worse, the RBI has been on a rate-cutting spree in the past year or two. I had written about this as well before, saying that the government was hoping this would boost investment and consumption but as expected, it hasn’t had any impact so far. They have surprised us this time by holding on to rates, when they were widely expected to cut them again this month. The transmission of these rate cuts has been negligible and slow, and when people are unable to find jobs and are cutting back on consumption of necessities, are they really expected to buy new cars or homes?

The tax breaks to corporates as well as sops to the real estate sector will do little to revive the economy, because they are not directed at the ailing parts of the economy: rural distress and unemployment.

Which makes the so-called reforms even harder to fathom. The real estate sector – BJP’s key constituency – has been given sops in the hope that that will revive the industry. Rs. 25,000 crore have been offered to stalled real estate projects in India’s biggest cities. What would happen to the already huge unsold inventory of housing projects in Mumbai, Delhi-NCR and Bangalore, if buyers are not willing to make such investments? “Build, and they will come” is probably what their supply side mindset is telling policymakers, when several housing projects are in NCLT and new buyers are simply not interested at the moment.

The tax breaks to corporates as well as these kinds of sops are not just worsening India’s fiscal situation, with a huge shortfall in GST revenue last year, but will do little to revive the economy, simply because they are not directed at the ailing parts of the economy: rural distress and unemployment. In fact, the latest news on India’s fiscal deficit is that the government has already breached the fiscal deficit target for FY20 at 102.4% and Rs. 7 trillion, with another four months to go before the financial year ends.

Instead, money in the form of a fiscal stimulus should have been pumped into the rural economy, especially into job creating schemes such as MNREGA, as well as helping small industries, which have been worst hit by the economic slowdown ever since demonetization in the latter part of 2016. I agree with the view of economists such as Pronab Sen, Ajit Ranade and Jayati Ghosh who have been advocating this as an immediate remedial solution. This will not solve longer term structural problems such as stagnant agriculture, high unemployment, skills shortages, labour reforms, etc. but will provide immediate impetus to growth in the short term.

The stock market and the real economy are on divergent paths, bearing little or no relation to one another.

I don’t think I am exaggerating when I say that the policies are willfully created to benefit the already well-off and wealthy sections of Indian society. It is almost as though the BJP, having been bankrolled in the last elections by India Inc felt it necessary to offer a return present in the form of tax goodies and lower interest rates. It has led to no new investment; according to CMIE, new investments are at an all time low, with even the revival of stalled projects at a low level. From financial performance data that I see on the CMIE website, it appears to me that in the last quarter, most corporates might have used the tax breaks to retire some of their debt.

Such policies are also being designed, I suspect, to make India an attractive investment destination in the eyes of global investors, since this government is obsessed with rising in the World Bank’s Ease of Doing Business Rankings. I have nothing against that, provided we set our own house in order first, and that means fixing the stressed sectors of the economy.

Unemployment is the other burning issue that isn’t being addressed. There are conflicting sets of data being reported, but the fact is that the situation has been grim right from the days of demonetisation.

Another sign that the government’s actions are only benefitting the rich, is the rollback of tax surcharges on FPIs (Foreign Portfolio Investors) and the effect it has had on the stock markets. This was, of course, a knee-jerk reaction to foreign investors pulling out money from India in the aftermath of Nirmala Sitharaman’s original budget announcement of a tax surcharge when markets continued to collapse through July and August 2019. Investors are believed to have pulled out over Rs 22,000 crore, and this led the government to panic. The policy was reversed and you could see the immediate impact on the stock markets. Despite the low GDP growth rates of the previous two quarters, the Indian stock market is rallying to new highs. The BSE Sensex went from 39,395 on June 30 2019, to 37,481 on July 31, 2019 and rallied back to 38,667 on September 30, 2019 on the news of the rollback. What’s more, it reached all-time highs of 41,000 on November 27, 2019. The Nifty index too has been keeping company and crossed all-time highs of 12,000. The stock market and the real economy are on divergent paths, bearing little or no relation to one another.

The attitude of this government to the poor, is that of throwing money at them, instead of solving the underlying problem. Farm loan waivers galore – starting with the huge one at the time of UP state assembly elections – have ruined the overall fiscal situation (central plus state fiscal deficits) but are nowhere near solving the issues farmers face. They have ruined the fiscal probity of the country and I am surprised that bond markets haven’t reacted more violently.

Unemployment is the other burning issue that isn’t being addressed. There are conflicting sets of data being reported, but the fact is that the situation has been grim right from the days of demonetisation. The government’s own report said it was at a 45 year high of 6.1% (when the government tried to suppress the report and statisticians resigned in protest), CMIE’s website has been putting the figure at around 7.3%-7.4% and another government report citing an NSO survey says the January-March 2019 unemployment figure was 9.3%.  Recent newspaper reports citing CMIE data say the urban unemployment rate is at 8.9%. In a country with over 12 million coming out of universities and looking for jobs each year, this is clearly a ticking time bomb.

Things usually get this dreadful when governments use economic policies as tools of political expediency, when economics becomes the handmaiden of politics. Enough examples abound: from Stalin and Mao’s policies in Soviet Union and China to Hugo Chavez and Maduro’s policies in Venezuela and many others, when millions have died of famine and disease or have fled their countries. These have usually been under authoritarian socialist regimes. However, a few examples in right-wing regimes, though less extreme, also exist, as in Bolsanaro’s Brazil and Pinera’s Chile. Right now, it is also playing out in the US in a different way, where Trump is using economic tools to bully other countries in order to be able to defend his political turf at home. It’s just that his policies are already hurting farmers – despite his US $16 billion bailout package to them – and it’s only a matter of time before the consequences are felt. December 15 is the next deadline looming in the never-ending US-China trade war.

Our Indian government, while claiming to be pro-poor, is doing everything to legitimize the rights of the wealthy over the poor. It is on a dangerous path to not just divide the country by religion and caste, but by our capacity to create wealth. Did our Prime Minister not say in the first speech of his new term that we should not chastise wealth creators? What would he say now to the millions of poor whose votes he sought when he suddenly pivoted to pro-poor policies prior to elections in UP, even pitching demonetisation as a fight against the rich (believed to be corrupt)? Nobody reports the Indian Gini coefficient of income inequality in the Indian media – and the World Bank website itself has Indian data only till 2011 when it was .35 – but I think it would be well over .50 by now, an alarmingly high level.

My biggest fear for my country is that we are headed for much darker, bleaker times ahead, because this is not just the road to a Hindu Rashtra, but to economic ruin. Forget the pipe dream of a US $ 5 trillion economy. The only ones who will see that kind of money are New India’s wealthy classes. After hearing the refrain of “acche din” (good days) for years, I was surprised to read about Amit Shah’s talk of “accha samay ayega” (good times will come) to India Inc at a glittering ceremony of ET Awards for Corporate Excellence. It sounded ominous to me. The last time we heard such an expression, we got demonetization; wonder what is in store for the country this time!

Meanwhile, on almost every economic indicator, our smaller neighbours are surging ahead. Cheers to that.