ECONOMIC SLOWDOWN HAS PUT FEAR OF GOD ON THE GOVERNMENT
Four major steps have been taken by the FM Nirmala Sitharaman in the last one month, and as TOI puts it, to fire "booster shots" to some of the worst immediate pain points of the economy to revive sluggish growth across affected sectors. Even the government has also endorsed her acknowledgement to the slowdown in Indian economy by initiating 4 big steps by our FM to revive our economy, 2 press conferences and big announcement of FDI -- all one after the other during the last one and a half months can never be attributed to a hoax or a hype created by "unfair" economists, media experts and intellectual community who understand the crisis situation in the country's economy as against the government's tendency to withhold uncomfortable data or give incorrect or continuously revised version of data to confuse and misguide the nation. The RBI report has also acknowledged the economic slowdown. However, experts are sceptical if these measures announced by our FM may prove adequate remedy for the short-term solution. Let's review 4 steps taken by our FM.
1. Nirmala Sitharaman in her first press conference as FM announced rollback of a few many proposals in the Budget 2019-20 to soothe economic worries and ease the liquidity situation. Important among these have been rollback of enhanced surcharge on foreign portfolio investors (FPIs) levied in the Budget 2019. The government relented because FPIs pulled out Rs 23000 crore from the domestic equities as levy of surcharge on higher income tax groups affecting 40 per cent of FPIs, operating as trusts or Association of Persons (AoPs) as levy of increased surcharge made investment in Indian equities unattractive.
Withdrawal of 'angel tax" i.e., income tax payable on capital raised by unlisted companies is another one as it aimed at giving a major relief to entrepreneurs and startups.
2. Heavy surplus fund transfer of Rs 1.76 lakh crore by RBI to the government has been for the first time in the history of Indian economy. Such surplus reserve funds are utilized in economic emergency or war like situation. Infact government has already shown around Rs 1 lakh crore to be used up in the budget 2019. It has to be seen as to how and on which heads the balance money is going to be used.
3. The announcement of relaxing FDI norms for sectors like Aviation, Media and Single-brand retail may help to find buyers for Air India and Jet Airways. But then FDIs are for long term solutions. What do we have as an immediate solution to tide over the present economic slowdown? Hence government's claim that FDI has been a great success sounds irrelevant as it did not generate the kind of employment expected by the nation. On the contrary, the online business rather crushed employment generation.
4. The latest being ten public sector banks (PSBs) are merged into four large entities. Now there will be only 12 public sector banks instead of 27 in 2017. The mounting NPAs affected the credit flow of merger banks. Government feels the consolidation will ease the banks to disburse loans. While the experts feel that consolidation of banks is a route towards privatization. Personal gains are most likely to override the needs of the industry for investment to increase production, boosting employment, consumption and demand.
However, there is a fall in lending rate. Loan has become cheaper. At the same time savings have been disincentivized. That means it will affect spending as well as saving.
All productive sectors have slowed down except mining and power generation. GDP kept falling in FY 2018. GDP in Q1 2018-19 was 8%, 7℅ in Q2, 6.6℅ in Q3 and 5.8℅ in Q4 2018-19.
There has been a steep fall in current GDP to 5%, the lowest since Q4FY13.
Hence India's economy is under stress. Even global rating firms like
1. India Ratings and Research and
2. Moody’s Investors Service
are acknowledging that India's economy is passing through a slowdown. While Moody's forecast for GDP growth is around 6.2℅ in FY 2019, India Ratings and Research put it to all time 6 year low at 6.7℅ in FY 2020 due to weak consumption demand, uneven monsoon, and slowdown in manufacturing growth.
Minimum wage is so low that it is mockery of lifting the level of suffering of the poor labour. The Wage Code Bill approved by the Union cabinet raised the national minimum wage by ₹2 to ₹178 per day, despite an internal labour ministry committee recommending a much higher amount of ₹375. Insensitive and arbitrary hire and fire policy with the exception of back door entry of workforce by party supporters and promoters will not help the ailing economy to revive. Industry cannot be run by cheap labour.
Therefore the genesis of economic crisis is more due to structural flaw than the cyclical one. Structural flaw is very dangerous to the economy as flaw in policy is much graver than operational flaw. The economy has been in shambles ever since industries in unorganized sector faced the blows of GST, demonetization, non banking financial companies (NBFC) facing liquidity crunch to lend money and NPA crisis. NBFCs borrow money from banks or sell commercial papers to mutual funds to raise money. They on-lend these money to small and medium enterprises, retail customers and so on. When NBFCs don’t have money to lend, that reduces the credit flow to the economy, hits economic growth and causes many borrowers to default on loans. IL&FS, an NBFC, defaulted on payments to lenders triggering panic in the markets, that resulted in squeezing on loan disbursement by banks to unorganized sector that has 94℅ employment capacity. The production capacity came down to 45℅ due to financial squeeze.
The measures announced by FM is to provide succour to big industries than to unorganized sector. The nation has seen so far that ease of doing business is benefiting big business houses in organised sector than vast multitude of unorganised sector. The unorganized sector is getting systematically crushed due to persistence of inspector régime and complications in rules and regulations. Non taxing of digital economy of 20 lakh crore is one of the major causes of today's economic crisis as this sector is still booking profits than the tax paying unorganized sector. Therefore slow down is there in traditional industrial sector than digital sector. People have started smelling conspiracy to crush unorganized sector. It has impacted the job market of 94℅ workforce for low production, low consumption and economic slowdown. Main indicator of slowdown is dwindling job market that creates consumption and demand necessary for growth in production. As per CMIE employment data our total workforce declined from 45 crore to 41 crore -- 1.1 crore jobs lost in 2018 out of the total job loss of 4 lakh crore. At the moment the government has decided not to publish employment data in India anymore. All surveys are banned after report of highest unemployment in 70 years. The government is unable to take it any more the embarrassment of horrific figures and ever bulging data of unemployment..
Decline in investment causes decline in employment. Today PM Modi is talking about achieving $ 5 trillion economy by 2024. The country will need to grow by 9℅ every year for five years continuously and raise aggregate investment rate to 38 per cent of GDP to achieve PM's target. But as per current expert opinions on country's economic condition India may require 16℅ nominal growth rate to achieve the target. We must also keep in mind the rupee devaluation.
Now regarding investment Modi has announced to arrange Rs 100 lakh crore in 5 years to achieve USD 5 trillion economy and for that we may need Rs 20 lakh crore yearly for capital expenditure. Last year Rs 9.2 lakh crore allocated for capital expenditure was cut down to Rs 8.5 lakh crore in FY 19. Even if capital expenditure is allocated in the budget around Rs 15-16 lakh crore we may require Rs 28 lakh crore to top up in average in the 5th year. But now Rs 32 lakh crore we may require at the end to make it a Rs 100 crore capital expenditure due to the condition we are in.
As per RBI report the capacity utilization in our industries is less than 75℅, resulting in fall in production. The manufacturing sector is worst affected. There is a steep fall in production which leads to fall in growth.
I, and presume so you all, wish to view Indian economy, wherein government should encourage investment so that there is growth in production and employment; the economy should encourage savings so that there should be growth in both – demand and expenditure. The growth in demand will generate growth in production and employment to complete the cycle.
While some, especially those supporting the economic policies of government, see it as a temporary or “cyclical” issue whose effects will soon wane, others view this as a more serious crisis created by a barrage of supply-side shocks to the economy; a stressed banking sector, demonetisation and GST implementation as well as disruptions in the agrarian sector that have all contributed in strong measure to the ongoing economic slide. With reference to the latter, I identify two standpoints; first, that while the longer-term story of structural reforms remains intact, there is a need for immediate stabilisation policy – fiscal and/or monetary policy – so that the short-term shock does not pull the economy into a deflationary spiral and second, that these shocks have impacted agriculture and industry so severely, especially the informal and unorganisedl sector, that the crisis is now a deep structural issue rather than merely a short-run - a cyclical one. In this case, India’s growth story has been derailed and the pain must be endured by the masses for a long while to come. The blame for ending up in this mess rests on the government because of its poor understanding of economic realities and adventurism in policymaking and implementation. Even Modi's loud talking of $ 5 trillon economy also may not be of any help.
1. Nirmala Sitharaman in her first press conference as FM announced rollback of a few many proposals in the Budget 2019-20 to soothe economic worries and ease the liquidity situation. Important among these have been rollback of enhanced surcharge on foreign portfolio investors (FPIs) levied in the Budget 2019. The government relented because FPIs pulled out Rs 23000 crore from the domestic equities as levy of surcharge on higher income tax groups affecting 40 per cent of FPIs, operating as trusts or Association of Persons (AoPs) as levy of increased surcharge made investment in Indian equities unattractive.
Withdrawal of 'angel tax" i.e., income tax payable on capital raised by unlisted companies is another one as it aimed at giving a major relief to entrepreneurs and startups.
2. Heavy surplus fund transfer of Rs 1.76 lakh crore by RBI to the government has been for the first time in the history of Indian economy. Such surplus reserve funds are utilized in economic emergency or war like situation. Infact government has already shown around Rs 1 lakh crore to be used up in the budget 2019. It has to be seen as to how and on which heads the balance money is going to be used.
3. The announcement of relaxing FDI norms for sectors like Aviation, Media and Single-brand retail may help to find buyers for Air India and Jet Airways. But then FDIs are for long term solutions. What do we have as an immediate solution to tide over the present economic slowdown? Hence government's claim that FDI has been a great success sounds irrelevant as it did not generate the kind of employment expected by the nation. On the contrary, the online business rather crushed employment generation.
4. The latest being ten public sector banks (PSBs) are merged into four large entities. Now there will be only 12 public sector banks instead of 27 in 2017. The mounting NPAs affected the credit flow of merger banks. Government feels the consolidation will ease the banks to disburse loans. While the experts feel that consolidation of banks is a route towards privatization. Personal gains are most likely to override the needs of the industry for investment to increase production, boosting employment, consumption and demand.
However, there is a fall in lending rate. Loan has become cheaper. At the same time savings have been disincentivized. That means it will affect spending as well as saving.
All productive sectors have slowed down except mining and power generation. GDP kept falling in FY 2018. GDP in Q1 2018-19 was 8%, 7℅ in Q2, 6.6℅ in Q3 and 5.8℅ in Q4 2018-19.
There has been a steep fall in current GDP to 5%, the lowest since Q4FY13.
Hence India's economy is under stress. Even global rating firms like
1. India Ratings and Research and
2. Moody’s Investors Service
are acknowledging that India's economy is passing through a slowdown. While Moody's forecast for GDP growth is around 6.2℅ in FY 2019, India Ratings and Research put it to all time 6 year low at 6.7℅ in FY 2020 due to weak consumption demand, uneven monsoon, and slowdown in manufacturing growth.
Minimum wage is so low that it is mockery of lifting the level of suffering of the poor labour. The Wage Code Bill approved by the Union cabinet raised the national minimum wage by ₹2 to ₹178 per day, despite an internal labour ministry committee recommending a much higher amount of ₹375. Insensitive and arbitrary hire and fire policy with the exception of back door entry of workforce by party supporters and promoters will not help the ailing economy to revive. Industry cannot be run by cheap labour.
Therefore the genesis of economic crisis is more due to structural flaw than the cyclical one. Structural flaw is very dangerous to the economy as flaw in policy is much graver than operational flaw. The economy has been in shambles ever since industries in unorganized sector faced the blows of GST, demonetization, non banking financial companies (NBFC) facing liquidity crunch to lend money and NPA crisis. NBFCs borrow money from banks or sell commercial papers to mutual funds to raise money. They on-lend these money to small and medium enterprises, retail customers and so on. When NBFCs don’t have money to lend, that reduces the credit flow to the economy, hits economic growth and causes many borrowers to default on loans. IL&FS, an NBFC, defaulted on payments to lenders triggering panic in the markets, that resulted in squeezing on loan disbursement by banks to unorganized sector that has 94℅ employment capacity. The production capacity came down to 45℅ due to financial squeeze.
The measures announced by FM is to provide succour to big industries than to unorganized sector. The nation has seen so far that ease of doing business is benefiting big business houses in organised sector than vast multitude of unorganised sector. The unorganized sector is getting systematically crushed due to persistence of inspector régime and complications in rules and regulations. Non taxing of digital economy of 20 lakh crore is one of the major causes of today's economic crisis as this sector is still booking profits than the tax paying unorganized sector. Therefore slow down is there in traditional industrial sector than digital sector. People have started smelling conspiracy to crush unorganized sector. It has impacted the job market of 94℅ workforce for low production, low consumption and economic slowdown. Main indicator of slowdown is dwindling job market that creates consumption and demand necessary for growth in production. As per CMIE employment data our total workforce declined from 45 crore to 41 crore -- 1.1 crore jobs lost in 2018 out of the total job loss of 4 lakh crore. At the moment the government has decided not to publish employment data in India anymore. All surveys are banned after report of highest unemployment in 70 years. The government is unable to take it any more the embarrassment of horrific figures and ever bulging data of unemployment..
Decline in investment causes decline in employment. Today PM Modi is talking about achieving $ 5 trillion economy by 2024. The country will need to grow by 9℅ every year for five years continuously and raise aggregate investment rate to 38 per cent of GDP to achieve PM's target. But as per current expert opinions on country's economic condition India may require 16℅ nominal growth rate to achieve the target. We must also keep in mind the rupee devaluation.
Now regarding investment Modi has announced to arrange Rs 100 lakh crore in 5 years to achieve USD 5 trillion economy and for that we may need Rs 20 lakh crore yearly for capital expenditure. Last year Rs 9.2 lakh crore allocated for capital expenditure was cut down to Rs 8.5 lakh crore in FY 19. Even if capital expenditure is allocated in the budget around Rs 15-16 lakh crore we may require Rs 28 lakh crore to top up in average in the 5th year. But now Rs 32 lakh crore we may require at the end to make it a Rs 100 crore capital expenditure due to the condition we are in.
As per RBI report the capacity utilization in our industries is less than 75℅, resulting in fall in production. The manufacturing sector is worst affected. There is a steep fall in production which leads to fall in growth.
I, and presume so you all, wish to view Indian economy, wherein government should encourage investment so that there is growth in production and employment; the economy should encourage savings so that there should be growth in both – demand and expenditure. The growth in demand will generate growth in production and employment to complete the cycle.
While some, especially those supporting the economic policies of government, see it as a temporary or “cyclical” issue whose effects will soon wane, others view this as a more serious crisis created by a barrage of supply-side shocks to the economy; a stressed banking sector, demonetisation and GST implementation as well as disruptions in the agrarian sector that have all contributed in strong measure to the ongoing economic slide. With reference to the latter, I identify two standpoints; first, that while the longer-term story of structural reforms remains intact, there is a need for immediate stabilisation policy – fiscal and/or monetary policy – so that the short-term shock does not pull the economy into a deflationary spiral and second, that these shocks have impacted agriculture and industry so severely, especially the informal and unorganisedl sector, that the crisis is now a deep structural issue rather than merely a short-run - a cyclical one. In this case, India’s growth story has been derailed and the pain must be endured by the masses for a long while to come. The blame for ending up in this mess rests on the government because of its poor understanding of economic realities and adventurism in policymaking and implementation. Even Modi's loud talking of $ 5 trillon economy also may not be of any help.
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