‘Interesting’ would be an understatement, if used for the direction that our economy has taken of late. From a basket case till the 1970s, we are now the world’s third largest economy. Yet umpteen anomalies mar our growth story. Our per capita GDP rank is a lowly 139. Despite the ‘socialist’ tag in our Constitution, according to the Global Wealth Report, India is now the world’s second most unequal country.
Till the liberalisation of 1991, we followed the Keynesian path of an agricultural economy slowly acquiring manufacturing capabilities. However, the 1990s saw us skipping the secondary stage; leapfrogging straightaway into the tertiary stage of development. Riding high on the tide of the digital revolution, we graduated to a soft power; providing manpower and backend services to the giants of the computer world. Our growth trajectory could not be arrested even by the meltdown of 2007-08 because the digital services we provided were essential for all the economies of the world.
The present decade has witnessed a different story. The momentum acquired in the preceding decade could not be sustained; credit-led growth has limits that were thoughtlessly breached. A mix of naiveté, which made banks and their clients assume that things would be always as rosy, combined with lack of scruples, which prompted businessmen to scoot after things went wrong, resulted in failure of businesses, which at one time had looked as secure and as well-entrenched as the State Bank of India.
Debt-ridden failing businesses, with banks holding nonperforming assets of Rs 12 lakh crore saw the pendulum swing to the other extreme. The watershed moment came with the issue of the infamous circular of 12 February 2018 by the Reserve Bank of India, which enjoined banks to take note of a single day’s default and to send the borrower into bankruptcy if the lending banks were not able to resolve the loan within 180 days. Now, with the Supreme Court striking down the circular all decisions and consequent actions taken by banks and investors under the Insolvency and Bankruptcy Code (IBC), stand nullified.
These policy flip-flops have had a very deleterious effect on investments. Ever rising share prices indicate that there is sufficient liquidity in the market, but long-term investments are hard to come by. Unsure of the way the wind is blowing, new capital is staying away. Instead of taking decisive steps to treat the malaise in the economy, the Government is resorting to shortcuts ~ only to keep alive the illusion of a well-performing economy.
Even before the end of Financial Year 2018-19, the Government grandly announced that its disinvestment target of Rs 80,000 crore had been surpassed. Looking into the minutiae, one finds that the Government had simply offloaded the liabilities of one PSU onto another. Thus, the Government’s stake in Rural Electrification Corporation had been taken over by the Power Finance Corporation, Life Insurance Corporation had taken over Industrial Development Bank of India and so on.
In fact, the government has been unsuccessful in privatising a single state-run firm during its entire tenure. Rather, the Government’s disinvestment drive has resulted in the creation of a host of paradoxical situations like a life insurance company managing an infrastructure bank. With elections around the corner, more anomalous financial decisions were taken. At the Government’s behest, State Bank of India is now the majority shareholder in Jet Airways. Can a bank run an airline which is on a downward spiral? Again, at the instance of the Government, State Bank of India has taken over NPAs of Rs 45,000 crore from the much-lamented IL&FS which are in addition to its own NPAs of Rs 2.23 lakh crore. Surprisingly, the RBI and Finance Ministry, which position themselves as watchdogs of banks’ finances, had nothing to say in these matters.
Consider the fiscal deficit for the financial year gone by. Optimistically projected at 3.3 per cent in the Union Budget, the shortfall in both direct tax and GST collections has resulted in the fiscal deficit going through the roof. Understandably but uncharacteristically, the revenue collection figures have not been officially released so far. The shortfall in revenue collection targets is estimated anywhere between Rs 1 lakh crore and Rs 2 lakh crore. The shortfall is surprising because this was the time when the evaders identified during demonetisation were to be taken to the cleaners. A proper analysis of the economy is not possible because the real picture has been obfuscated by the suspect statistics being bandied about. GDP figures, even for earlier years, have been revised repeatedly leading to the unbelievable conclusion that our growth rate was highest in the financial year 2016-17 ~ the year of demonetisation. Official unemployment statistics have not been released; a set of statisticians are vehemently contending that we are faced with the highest unemployment in recent times while a set of reputed Chartered Accountants have taken a contrary view and branded the statisticians as putative deshdrohis and completely off the mark so far as their conclusions are concerned.
The public and serious students of economics are feeling confused by these developments. The new Government that will take charge after the elections, will have a lot to do on the economic policy front. Keeping food prices affordable while ensuring that the agricultural sector does not slide into permanent distress would be a formidable challenge. Another daunting task would be to finetune taxation policies so that the unchecked growth of Indirect Taxes, which make poverty more painful, is arrested and the ratio of Income-tax to GDP rises to acceptable levels. Then, the Government will have to reimpose taxes on wealth and inheritance so that inequality in our society is reduced. Imaginative solutions would have to be found to address the spectre of unemployment.
The NYAY Scheme of the Congress, which appears to have been first mooted in this column (“Universal Income”, The Statesman, 15 September 2018), would require a complete recast of the budget. A lot of thinking would be needed to identify the subsidies and schemes which could be subsumed in NYAY. Incidentally, the idea of filling vacant Government posts to kickstart employment generation is also part of the Congress manifesto.
The task before our planners can be well summarised in President Clinton’s words: “It turns out that advancing equal opportunity and economic empowerment is both morally right and good economics, because discrimination, poverty and ignorance restrict growth, while investments in education, infrastructure and scientific and technological research increase it, creating more good jobs and new wealth for all of us.”
The time for rhetoric and anodyne solutions is over. The challenges facing our economy have to be clearly identified, debated and addressed. Politics and good economics are almost always at odds. For our welfare, we have to ensure that good economics trumps politics.
(The writer is a retired Principal Chief Commissioner of Income-Tax)