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Talk Point: What is to blame for the Indian economic slowdown? How can growth be revived?

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India’s GDP growth has slumped to a three-year low of 5.7 percent in the first quarter of the current fiscal year. The unemployment rate remains stubbornly high. The Goods and Services Tax and demonetisation were meant to transform the economy, but are presently cited as roadblocks that have disrupted growth.

Former Finance Minister Yashwant Sinha has sparked a debate by questioning the handling of India’s economy by the current government. Finance Minister Arun Jaitley and other ministers have defended the government’s performance and the reforms it has undertaken. But what then is to blame for the economic slowdown? We asked a panel of experts.

What is to be blamed for the slowing Indian economy? What were the missteps and what can be done to revive growth? We ask experts

There are some changes for big companies, but small and medium scale businesses are not benefiting

Rahul BajajRahul Bajaj
Chairman, Bajaj Group

The government has announced Ease of Doing Business and Make in India among its objectives. These are unexceptionable, except that I have not yet seen major positive effects. Yes, there are some changes for the big companies, but small and medium scale businesses are not benefiting.

While there is no corruption at the cabinet level, of the kind we saw under UPA-2, there is no reduction in corruption at lower levels.

For the smaller companies especially, environmental clearances, land acquisitions etc., are still a problem.

The smaller companies are also hurting as they mostly depend on the cash economy, and demonetization soon followed by GST has further hurt them. Farmers, shop owners, small-scale operators, small-scale industry, they need cash flows and they have no idea how to manage.

I do not believe that demonetization has done long term damage. Less cash and a larger digital economy is a desirable objective. But one has to be realistic.

In even the most capitalistic societies in the world, like the US, if all the number of transactions are taken into account, like small shopping, tipping your waiter, paying your taxi driver or buying groceries, then more than 50 percent are still in cash. To have a less-cash economy is a desirable idea, but dis-incentivizing cash transactions should not be the way to do it. The correct way to do it, in my view, is to incentivize non-cash transactions.

Similarly, GST is a very good idea and essential in the long-term. GST in my view has come much too late. Both the Congress and the BJP have delayed it.

But the way in which it has been done — small shopkeepers, farmers have no idea which forms to fill. Also, government needs to be more careful regarding the implementation of e-way bills which are required to determine which goods have gone from which state and come to which state which will receive the tax. E-way bill proposal may be implemented after the glitches of the GST network are sorted out.

Exporters work on tight cash flows and need the refunds on GST to come back to them quickly. Today the tax credits are not coming, timely refund of duties paid are taking a long time and that has stressed the export businesses.

Some depreciation of the Rupee will surely help exports. What the real effective exchange rate should be again is left to the RBI’s prudence.

On the value of Rupee and the interest rate, if the objective of inflation so far has been to hold inflation around 4 percent (±2 percent), it’s a good objective. But at the same time, we have to have a balance. I hope RBI’s monetary policy committee’s meeting next week will take a prudent decision. Lower interest rates at this point will help industry. Hence, RBI will have to take a balanced view and look not only at inflation but also growth which is badly needed. Without growth we cannot get more jobs, which ultimately is what the country needs.

GST will help GDP growth in the second half of the year pick up considerably

Adi GodrejAdi Godrej
Chairman of Godrej group

I feel the state of the economy currently is reasonably good. The April-June GDP growth was low because June was the month before the GST commencement and that led to destocking and lower production. I feel, as a result of GST, the GDP growth in the current quarter and in the second half of the year will pick up considerably.

I feel the government should concentrate on sorting out the GST problems faced by people and the GST IT situation. Another thing that the government might look at is to implement the lower corporate tax rates that they had promised earlier, but did not implement.

India’s economy is not flying today. It is grounded

Praveen ChakravartyPraveen Chakravarty
Visiting Senior Fellow at IDFC Institute

“The world is predicting that it is India’s chance to fly” said Finance Minister Arun Jaitley, in his budget speech on February 28, 2015. He was not wrong.

Oil was at $40 a barrel, one-third of its levels from two years ago. Global GDP growth was accelerating. India’s GDP was growing at 7.4%. Inflation was tamed. Stock markets were up 30%. India had a Prime Minister with a massive reputation for economic development. Most importantly, the Prime Minister had a full parliamentary majority, a first in three decades. This was a dream launch pad for the Indian economy.

But, Jaitley was also aware that the banking system needed help. Non-performing loans were rising. Credit growth was slowing. Public sector banks needed to be recapitalised. Jaitley gave them a paltry Rs.25,000 crores. Perhaps, in the assumption that a rising GDP will lift all leaky banks. That bravado in 2015 has cost the country dear today. An already anaemic private sector was further dealt a body blow with demonetisation, arguably the most ill-conceived economic policy decision. India’s economy is not flying today. It is grounded.

To revive growth, a simple two step approach. Capitalise on the stock market’s exuberance, disinvest public sector undertakings to raise at least Rs.1 lakh crores. Get a one time special dividend from all PSUs.  Use this money to clean balance sheets of banks and recapitalise them. It will not be sufficient but enough to hope for animal spirits to kick in soon. This is perhaps the cleanest way to revive growth than messy affairs such as exchange rate management, printing phantom money or injecting sector specific booster shots.


The trend decline in growth started three quarters before demonetization

Arvind VirmaniArvind Virmani
President, Forum for Strategic Initiative and Former Chief Economic Advisor, Government of India.

India’s economic growth plateaued out between 7 percent and 7.5 percent in 2015-16, before plunging to below 6 percent in 2016-17. The trend decline in growth started three quarters before demonetization. A detailed analysis based on the new GDP series, which are available from 2011-12 suggests the reasons for the trend decline and the sectors most affected by demonetisation. This analysis also allows us to separate out temporary from continuing factors and thus project forward.

The bottom line, the major effect of demonetisation was it disrupted supply chains in agriculture and manufacturing and consequently raised manufactured imports, and disrupted construction activity. The net effect was to reduce GDP growth by about 1.2 percent point in first half of 2017. This effect is now over.

The downtrend in growth is also pronounced in manufacturing on the production/supply side and in investment on the demand side. The former is partly due to the disruption caused by global deflationary pressures, which have reversed, but mostly due to high real interest rates, the consequent appreciation of the real effective exchange rate of the rupee and the loss of competitiveness caused by it.

The greater transparency in and stricter definition of NPAs since 2014 on bad debts incurred mostly during 2010-11 to 2013-14 also reduced lending capacity of public sector banks and along with high interests led to a collapse of credit growth. Investment slowdown is largely due to a dramatic slowing of household investment but also due to reduced stocks. The latter is a temporary factor and deflation in construction is also coming to an end.

However, the tension between anti-black money measures at the centre and continuing corruption in land and real estate in the states is unlikely to end soon.

Overall growth during second half of 2017-18 will be at least 2% points higher than in Q1.

Private investment announcements have declined significantly from 2011 onwards 

Ajay ShahAjay Shah
Professor, National Institute of Public Finance and Policy

We in India do wrong by assuming that because a certain data series is called `GDP’ it deserves full trust. The Indian GDP data have many flaws. A good measure of economic activity is constructed from the quarterly results of listed companies. This measure is more volatile than overall GDP: in good times, listed companies do much better than GDP, and vice versa. This shows that India got remarkable growth from 2002 to 2011, and sharply slower growth thereafter.

The essence of Indian business cycle conditions is private investment demand. Private investment announcements have declined significantly from 2011 onwards. Supplanting private investment by public investment is neither feasible nor advisable. It is infeasible because the capacity of the Indian state to run up large deficits is weak. It is inadvisable because the quality of investment by the government is poor. In the field of infrastructure, we have gone from 2:1 private to public investment to a 1:1 private to public; this does not bode well.

Why has private investment lost heart? There is a crisis of confidence that stems from institutional weaknesses of the Indian state. Whether it is police, courts, regulators, tax men, etc. – the Indian state has displayed failures ranging from incompetence to venality. The need of the hour is fundamental institutional reform which will create state capacity, which will result in a competent and efficient administration.

This is not a matter of hiring good people, it is not a matter of crisis management or what is called `field’ capabilities in India. Intensification of effort around broken institutional arrangements will not deliver results. What is required is intellectual capacity, deep understanding about why the existing systems fail, and setting up systems of checks and balances. This requires capable teams, who fully understand the strategy for reforms, who are able to chip away over long years at building state capacity.

The government underestimated the overall negative impact of various decisions

Ajit RanadeAjit Ranade
Economist and commentator

For six consecutive quarters we have had a declining GDP growth rate. There is a structural aspect to this slowdown. It is not as if global conditions are not conducive. So we must look for domestic answers as well.

Maybe the government underestimated the overall negative impact of various decisions — for example the cost of demonetization especially on the rural and the informal economy and the lingering effects of it even two or three quarters later.

Secondly, the delay in resolution of the NPAs for almost five years now is costing the economy and the NPA portion of banking assets is growing. We have a new bankruptcy code but now we need to speed up resolution. Fourthly, the roll out of GST, which was a high point after we managed a national consensus. But the GST council ended up having too many slabs, multiple rates, too many classifications prone to discretion and obfuscation and the GST network was not ready. GST is a landmark reform but its implementation is proving to be messy.

The fifth is the impact of the strengthening Rupee – this year, it’s up almost 7 or 10 percent not just against the US dollar but also against some East Asian currencies. It not only hurts exports but also domestic industry where imports take away the market share. This has got aggravated by the GST/ Demonetization phenomenon where they just find it easier to import, rather than sourcing in domestically.

The sixth reason could be the corporate sector, which has been deleveraging, reducing the size of balance sheet, paying off loans and reducing the amount of leverage ratios.
Then the deflationary impact of farm prices and the impact of excise taxation or higher taxation on petroleum and diesel.

All these will need to be addressed right away by the policy makers.

After a long time, macro fundamentals are robust

NK SinghN. K. Singh
Former Rajya Sabha member

Aristotle had said that “one swallow does not make a summer”. Equally, two-quarter data and some accompanying features cannot mask the reality. Long-term growth trends must be differentiated from short-term blips. The economy is poised for a rebound due to several reasons.

First, after a long time, macro fundamentals are robust. Monetary and fiscal policies are strongly aligned. Investor expectations are represented by strong FDI flows, $ 36 billion in FY 2014 rising to $ 60 Billion in FY 2017.

Second, the NPA issue is a cancerous legacy inherited by this government. This government had the courage to recognise its true incidence. Bankruptcy Law and RBI’s new power are the first serious initiatives to cure the twin balance sheet conundrum.

Third, the problem of a parallel economy and multiplicity of state and federal tax had stymied growth potential. Demonetisation necessitated painful attitudinal changes. GST had eluded successive governments. It is to the credit of the present government particularly negotiating skills of Jaitley to have secured far-reaching constitutional amendments and making the Fiscal Council a true federal compact. Multiplicity of rates and simplification are familiar problems. We had a jungle of excise and custom rates. These would further be rationalised as revenues become clear.

Finally, the basic driving force of a consumption-driven economy, the demographic profile, significant infrastructural improvements fuelled by a digital economy and financial inclusion – all support longer term growth trends. Innovation and improved total factor productivity can overcome a transient decline in gross capital formation.

India’s long-term growth story by all reckoning remains positive and buoyant. It is ironic that the rest of the world has more faith in us than we in ourselves.

Growth revival will happen when the political leadership infuses greater confidence within the investing class about future prospects

Sanjaya BaruSanjaya Baru
Author and Secretary-General, FICCI

Several factors have contributed to the slowdown over the past five years. Global economic challenges, policy uncertainty at home, weak monsoons, return of heavy handed bureaucratic interventions that many call Regulation Raj, non-supportive monetary policy, over-valued exchange rate.

Equally, the over-estimation of potential demand and the creation of excess capacity with borrowed funds during the decade 2004-2014 has left many legacy issues, often referred to as the ‘twin balance sheet’ problem.

The Union and State governments, cutting across political parties, have imposed an excessively high rate of GST in several sectors. Moreover, some uncertainty has been created in the rolling out of the GST.

The government of India is aware of these issues. The members of the GST Council from various states are also being sensitized to the problems created. One hopes that the government will address these issues sooner rather than later. GST is a welcome step and its introduction was long overdue. Teething troubles are natural.

Growth revival will happen once the political leadership infuses greater confidence within the investing class about future growth prospects. Once expectations turn positive, both investment and growth will rise.

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  1. The best and practical way to increase growth is to allow corruption first, then chase up the corrupt people, like hunting with the hounds and running with the mare. This will cause the corrupt people to spend the money in a frivolous way on a buying spree and thus it will cause goods and services to move. What I meant is , as corruption goes down people choose to spend less on frivolous and unnecessary items. For example, one may chose to use a Rs 10000/- mobile instead of a 40,000/- one, and this occurs in chain reaction across all section of society, because in our society , corruption is at micro level. Thus the items which are high priced and luxury gets the hardest hit and the shock goes down the entire economic chain.
    So we will have to bear with this loss of growth is we want to weed out corruption, and the only way out is to increase Govt spending.

  2. as Rahul Bajaj said Govt should give 1% or 0.5% incentive/discount for digital transactions, then every one will com forward for contributions

  3. I read Mr Rahul Bajaj most keenly and he is the only one I wish to engage … Nothing works well like a Danda and it was is time the SMEs got tax and system compliant .. For far too long they have been fudging their books and I dare say Big Business benefitted Indirectly!!! … As for incentivising digital payments . Well simply say no to bank drafts .. Just say Yes to NEFT detialed bank slips or Receipts and that’s half the battle … Reducing cash withdrawals to about Rs 25,000/- per Aadhaar account was a very good idea and must be now enforced as a rule with no let up!!!! Pay by cheque NEFT or Card but no cash beyond the Reasonable Rs 25000/- pm. Even casual labourer must be/ needs to be paid by Cheque or NEFT … That would lead to compliance with minimum wages also!!!

  4. Very Realistic ! Particularly , Rahul Bajaj _ Always Very Candid , Impartial & “Sawa Sau Crore”_ Aawaz!!

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