After being in denial mode all this while, the Centre is finally waking up to the fact that the economy is in trouble. Yashwant Sinha’s scathing criticism of the government’s handling of the economy seems to have hit its mark.
At an event at the Institute of Company Secretaries of India (ICSI), Prime Minister Narendra Modi defended the government’s track record. The speech was full of numbers and statistics, trying to drive home the point that the three-year-old Modi government’s economic record was far better than the erstwhile UPA regime’s. Whether one buys the Prime Minister’s argument or not depends on two factors — one’s political leanings and the time-frame one uses to compare the economic record of the UPA and NDA governments.
The fact that the government decided to reconstitute the Prime Minister’s Economic Advisory Council — the Modi government wants to call it EAC-PM instead of the UPA’s PMEAC — shows that it is finally heeding — the criticism it has been attracting.
The EAC-PM, headed by NITI Aayog member Bibek Debroy, met for the first time on Wednesday and listed out 10 priority areas which need urgent attention to revive the economy. These include economic growth, job generation, informal sector and integration, agriculture and animal husbandry, and social sectors.
Apart from these broad areas, the government also plans to provide sector-wise assistance.
So there is some movement on the economic front; and the government probably realises that it needs to show some results before the 2019 elections, less than two years away.
To be fair to the NDA government, the economy was not in great shape when it came to power. The world economy was still feeling the after-effects of the 2008 financial meltdown and was sluggish. Also, economic growth had been slowing since 2011, and the UPA government was charged with ‘policy paralysis’.
But there is little doubt that the Modi government’s two most important, ‘showpiece’ reform initiatives — demonetisation and the Goods and Service Tax (GST) — have contributed substantially to the current economic mess.
Demonetisation woes
Demonetisation, announced with much fanfare by the Prime Minister in November 2016, wreaked havoc on the informal/unorganised sector, which relies largely on cash for its working capital requirements. Despite the deep misgivings the current political dispensation has about the informal sector, there is little doubt that it is a major job generator. It also plays an important role on the exports front.
The government’s undue haste in making this informal sector ‘formal’ through demonetisation and promoting digital payments has left it in complete disarray. Though there is still no hard data available, anecdotal evidence, collected largely by the media, tells us that there have been massive job losses in this sector. Maybe it is time the government admitted that the note ban was unable to achieve its objectives. But there is little chance of that happening.
Early this week Finance Minister Arun Jaitley, who’s in the US to attend the IMF-World Bank annual meetings, spoke about the benefits of demonetisation and bragged about the absence of social unrest in an address at Columbia University.
GST confusion for small biz
To compound matters further was the launch of the much delayed GST. After much debate and discussions the government went ahead and launched this important indirect tax reform on July 1. The government, never short on theatrics, convened a special midnight session of Parliament in a rather vain attempt to recreate the ‘tryst with destiny’ moment. GST was initially meant to have just one uniform tax rate for all goods and was suppose to unify all the markets in the country. But, in the end, the government compromised and had five different tax rates, keeping alcohol and petro products out of the GST’s ambit.
So far, compliance has been a nightmare, especially for small businesses. The government has been tweaking not only the rates for various goods but also providing ease to small businesses on the compliance front. The government’s defence so far has been that these glitches are temporary and, once things settle down in the long term, the benefits will start kicking in.
Pump-priming, the solution?
So what’s the way ahead? Many economists — chief among them are Pulapre Balakrishnan and Amiya Bagchi — have called for a massive Keynesian-style ‘pump priming’ of the economy. They have urged the government to undertake a substantial spending programme on infrastructure projects. This is not only expected to create jobs and boost demand in the economy but also help in improving the country’s creaky infrastructure. Some have even suggested that the government must revisit the golden quadrilateral project — the showpiece of the NDA I government under AB Vajpayee.
But going by the EAC-PM’s recommendations, the Government doesn’t seem to be thinking about a stimulus programme.
Finance Minister Arun Jaitley said at the recent IMF-World Bank meetings that a stimulus package is the invention of the media and the Government is not thinking on those lines.
This Government came to power with the libertarian promise of ‘minimum government, maximum governance’. But in these three years the government’s imprint on the lives of the people has only increased. Ironically, on this front, there seems to be little difference between the Modi and the UPA governments.