BITTER TRUTHS
New Delhi: Indian economy since April has taken a far bigger coronavirus pandemic hit [to GDP and national income accounts] than any other major economies in the world. According to the Finance Minister, this hit is caused by an “act of God”. Most Indians consider this as not the right way of looking at the economy.
Economics is a science based on mathematical analysis and statistical scrutiny. The Finance Ministry personnel appear clueless about this. They seem to be still in the era of “Shakespearean economics” of the 18th century.
Today the reality is that we all had celebrated the much publicised “fastest growing economy” of the last five years, without knowing the real data. Now the whole nation knows since the economy is floundering in the “red” in every sector and in the aggregate, i.e., rates of growth declining month after month.
The aggregate GDP growth rate has been decelerating since 2015, and now has gone into “red”—collapsed to minus-23.9% as per Ministry of Finance’s published estimates for the FY21 first quarter. In the second quarter too, preliminary estimates place the decline at minus-21%. These figures are the highest for any G20 nation [the second quarter data FY21 ending 30 September will be published next month].
At this rate, it is estimated that in financial year 1 April 2020 to 31 March 2021, the GDP decline will probably be minus-18%, with unemployment based on income elasticity of employment, at 40% unemployed. There is also a large increase in the Gini coefficient of income inequality reaching the highest since 1947.
Hence there will be no sighting of a V-shaped recovery except perhaps in the North Block of the Central Secretariat complex on Raisina Hill in New Delhi.
The economy thus will probably end up in the financial year 2021-22, as a gigantic mess, robbing millions of their livelihood, huge unemployment and all will end up as part of the bloated 50% poor of the nation—unless within the next two months we begin seriously to turn around the economy on a cohesive structured strategy. By then hopefully the coronavirus pandemic would have petered out by itself.
However, contrary to popular belief, the first major economic shock for all of us was not Covid-19 or the fizzled out demonetization of November 2016, but the collapsed credibility of the GDP estimates of the Government with the introduction of a half-baked, highly defective new GDP series at the base year prices of 2011-12 in January 2015.
The new GDP series based on 2011-12 price base increased the GDP growth rate artificially for FY14 jumped from 4.7% (under the old GDP 2003-04 price series) to 6.9%, taking it past China’s growth and creating a false narrative of India being “the fastest growing economy”.
Since agencies as the World Bank, International Monetary Fund, and other UN bodies use only data provided by the Government of India, the Ministry of Finance got another opportunity to spin the “economic miracle” by fraudulently highlighting the internationally “approved” estimates of IMF/WB, when these estimates were provided by the Government of India!
The graph here (Figure 1) highlights the trend in GDP growth rate, which has been published by the Central Statistical Organization and republished by Business Today magazine.
Chief Economic Adviser (CEA) Arvind Subramanian [who was handpicked by Finance Minister Arun Jaitely in 2014 despite he having authored in Business Standard in 2013 an op-ed stating Narendra Modi was of a mediocre mind and his touted “Gujarat reforms” were bogus], had participated in the spin during his tenure as CEA since 2014, and then four years later in June 2019 he resigned, then wrote a paper for a Harvard University Center, stating India’s growth rate “had been exaggerated” by around 2.5 percentage points between 2011-12 and 2016-17.
When he was challenged on why he did not say so when he was CEA, he delivered another shocker: “Since the underlying data are not available publicly, nobody outside the CSO can ‘estimate GDP’.” But then what was he doing as CEA in the Ministry of Finance?
Even though he was lying, thus distancing himself from the intellectual crime of the Finance Ministry, I was writing op-eds in The Sunday Guardian and other media outlets based on obtained CSO data, speaking about it in public meetings around the country, while some crazies in the BJP IT cell used fake IDs to publish nasty tweets—KGB style disinformation—about me. Now all the data are in the open. The crazies now have gone incognito.
Besides the bogus boost given to the GDP numbers, the defective data also drastically fudged the sectoral composition of the economy. The share of services was lowered, and manufacturing raised by a big margin.
A comparative analysis of the fiscals for which the old 2004-05 and new 2011-12 GDP series provide data is presented here (Figure 2) to show the dramatic overnight change.
Comparable data exist for FY14 under the two GDP price base series, by which we see the share of services fell to 59.9% from 67.4% and that of manufacturing went up from 14.9% to 17.2%, without any change in the output data!
The much publicised “Make in India” policy had been launched (September 2014) to turn India into a manufacturing hub and raise its share in GDP to 25%. With the flawed new GDP series (2011-12 base), manufacturing’s share had inched 2.3% closer to 25% without making anything substantial in India.
The “Make in India” and similar hyped programmes like “Skill India” and “Stand up India” have now have been given a quiet burial. Instead we have the “Atma Nirbhar Bharat” slogan.
The RBI’s Resolution Framework for Covid-19 on moratorium of loans (DOR.No.BP.BC/3/21.04.048/2020-21 dated 6 August 2020) says especially that loans to farmers and agriculture filed will not cover the moratorium package. In the ongoing case in Supreme Court, Government of India as Respondent has produced this backing, leaving the RBI to defend itself.
The Annexure to this Notification states vide Para 2(b) and (c) that farm credit and Loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) for lending to agriculture will not be covered by this Resolution Framework.
This means that farmers and similarly vulnerable segments of society are excluded from the benefit of this Resolution Framework in the moratorium package sanctioned due to Covid-19 pandemic.
Presumably, the RBI thinks farmers are not affected by the Covid-19 related stress. But Covid-19 is a National Disaster under the NDMA Act and farmers’ incomes have also been affected. This Resolution Framework leads to another anomaly. If a farmer has taken a housing loan or a personal loan that can be re-phased/restructured but not his tractor loan or mainly crop loans.
Therefore, in the larger interest of the farmers now the Government must give instructions to RBI and Ministry of Finance to include the farm and agricultural loans in the moratorium package.
As the matter is before the Supreme Court, this requires urgent attention from our Government which stands committed to farmers’ welfare first and foremost. PM Modi must find out who in PMO is behind this issuing of such circulars or not applying mind while issuing circulars since the RBI Governor is a crony of the Principal Secretary in the PMO.
In the meantime, the Modi Government has taken out an Ordinance on restructuring the subsidies and the administration of levies for the farm sector, which caused widespread revolt amongst even the allies of the BJP in the NDA government. The Akali Dal Minister in the Government has resigned, and the Dal is likely to stoke a farmers’ agitation which at this juncture the nation can do without.
I have not yet formed an opinion on the Bill to replace the Ordinance that had been introduced and passed in Lok Sabha. But it would have been better in the present climate to have had a compromise worked out with BJP’s allies before going to Parliament to introduce the Bill.
THE HARD DECISIONS TO BE TAKEN
The situation of crisis in the Indian economy today is also, according to this writer, retrievable and that the turnaround can be achieved within three months after certain “real” economic policy changes. Some of what needs to be done as per my economic analysis I have presented in my earlier columns herein. There I had focused on the objectives of a new policy. In this column herein I focus on the priority steps that need to be taken:
First, the Gross Capital Formation [roughly the rate of investment] is expected to fall by minus-43% in Q1 2021 compared to the level in Q1 2020. GDP growth rate cannot be turned around and overtake the FY20 growth rate unless the rate of investment recovers to 36% of the GDP.
Thus the hard decision is to restructure income taxation [by abolition or sharp reduction by allowed deduction], reducing interest rates especially for MSMEs and raising fixed deposit rates for household savings. It also needs a strategic use of printing new notes for those spenders who form the demand for industries with large inventories.
Second, drastic write-off for the MSME, salaried classes and certain of the service sectors such as transportation, drivers of auto-rickshaws and taxis of pending debt in public sector banks scheduled to be discharged.
Third, large-scale building of turnpikes and highways especially intra-rural areas, and connection to wholesale markets, financed by expanding money supply.
Fourth, sharp reduction in airline fuel taxes and landing charges, and clearing of pay dues of the Air India pilots and air hostesses because the national airline has performed a yeoman service during this pandemic. Also private airlines have been declared as defaulters by public sector banks. This must be done.
Fifth, the Indian economy issue today is demand deficit and nothing else. Hence we need a new stimulus which is nothing but a stimulus and not a spin as in the last occasion of the Rs 21 trillion so-called stimulus.
I may be permitted to repeat again in this column what I had said earlier: Indian economy has the potential to recover and accelerate even faster than ever before, provided we usher in the required reforms with determination as Lal Bahadur Shastri for ushering in the “green revolution” in the late 1960s. Again P.V. Narasimha Rao in the 1990s ushered in a transformation of the industrial service sectors to move from 3.5% growth rate to 8% by the mid 1990s. Modi has the mandate and the reach to bring real reforms and accelerate the GDP growth rate to 10-12% annually to transform the economy to be able to compete with the United States. The nation expects him to rise to the challenge. There is no serious obstacle blocking him from doing what is required.
Dr Subramanian Swamy is an MP nominated by the President for his eminence as an economist. He is a former Union Cabinet Minister for Commerce and Law & Justice.