1. So did Narendra Modi kill the Indian economy?

So did Narendra Modi kill the Indian economy?

Demonetisation dealt a big blow to the economy, but it was slowing anyway, and GST would always have destabilised things

By: | Updated: September 22, 2017 9:02 PM
modi, narendra, narendra modi economic reforms, economic reforms by modi, demonetisation impact on modi Prime Minister Narendra Modi addresses during a function for the launch of various developmental projects, in Varanasi. (PTI)

So did prime minister Modi kill the economy by following up demonetisation with GST as many seem to be suggesting? Even if the government does not agree with former prime minister Manmohan Singh’s prediction of a DeMo-induced disaster, the fact that it is talking of the need for a stimulus package means it agrees the economy is sluggish and that jobs are not getting created.

There are, however, many caveats.The economy was slowing when Modi took over and with inflation at 9.4% and the fiscal deficit at 4.5% in FY14, India’s macros were poor (see graphic). Investment, which was growing at 16% in FY08, fell to 1.6% in FY14, private consumption slowed from 9.4% to 7.3% and government expenditure from 9.6% to 0.6%. Also, India was knee-deep in the twin balance sheet problem—both bank and corporate balance sheets were deeply in red—and getting out of this takes at least 5-6 years as the global experience shows.

None of this is to say Modi didn’t make major mistakes, he did. This newspaper has catalogued his wasted three years in fixing telecom, gas-pricing, freeing agriculture—this aggravated the rural crisis, and prolonged the slowdown in a big way —and poor progress in reforming labour laws or genuinely easing business or resolving the Pranab-era retrospective taxes… Indeed, Modi went the other way by imposing more controls in drugs pricing and even cotton-seeds and in creating bigger PSUs instead of privatising them… Even simple solutions such as the apparel package put together by chief economic advisor Arvind Subramanian took forever to put in place.

Yet, there has been good progress in fixing subsidies other than food, and even in that case, there is some progress. The pro-poor measures like JanDhan accounts, direct benefit transfers and low-cost life/accident/crop insurance are by all accounts a success. And at a time when there were few growth drivers, it was prudent budgeting that saw the government raise petroleum taxes and use the money to dramatically hike government capex in roads/rail—though Suresh Prabhu had to resign due to railway accidents, he began major reforms. In FY14-17, thanks to inflation collapsing, nominal GDP has slowed from 13% to 11% but tax-GDP still rose from 10.1 to 11.2, very unusual in low-growth periods.

While most macros like inflation or the twin deficits improved under Modi, it goes beyond good luck with lower global inflation—by that logic, the go-go years of the UPA were surely influenced by high global growth. Exports growth that averaged 26.4% in FY05-08 played a big role in the average GDP growth of 9.1% — in FY14-17, exports contracted 3.8% on average. The role of RBI in keeping interest rates high—and thereby the rupee getting stronger—is also a big factor in sluggish GDP growth as it restricted local production and encouraged greater imports — Modi is guilty of accepting inflation-targeting (IT) that made RBI behave this way, but IT was pushed by the UPA.

There can be little doubt that demonetisation added to the problem by badly hitting supply chains, especially in the informal sector, and it could be years before they revive, if at all—this is Manmohan Singh’s point. Demonetisation hit the real estate sector the most since that was a large user of black money, and this has large implications for jobs creation as well—along with the new RERA rules, though, reforming real estate will be a big plus if it makes housing affordable in the medium-term.

But, at a fundamental level, demonetisation and GST are not too different in their impact on the cash-rich informal sector—in both cases, informal sector units have no option but to get into formal chains and start paying taxes and, as happens with greater formalisation, pay higher wages, etc. Bringing in GST so soon after demonetisation surely accelerated the pain but which politician, including Manmohan Singh, has not been pushing for GST for years due to its long-term benefits? And we can quibble about the timing, but GST had to be brought in 2-3 years before the elections so that the pain associated with it was absorbed over time. That is, if DeMo hadn’t hit the informal sector, GST would have, albeit at a more gradual and more manageable pace.

Once DeMo or GST were brought in, MSMEs lost their tax-arbitrage-driven USP. The only way to fix this was to raise their efficiency —that requires big reforms in labour rules, tax policies … what are called ease-of-doing-business (EoDB) rules. Modi’s failure is that he felt EoDB had been fixed and was unwilling to accept any criticism of this. Nothing cures hubris better than a slowing economy though Modi’s 2019 plank will be more money in the hands of the poor and much lower inflation.

  1. R
    Richard
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        Doctor Richard Smitt
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          Doctor Richard Smitt
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          1. #
            #AADHAARFAIL
            Sep 25, 2017 at 8:11 am
            When your bank account gets looted via aadhaar pay, you will call 1947, wait for 3 hours to get connected, the call center folks will simply ask you to visit aadhaar enrollment center, waiting list being 3 months, you will bribe 1000 INR and get an appointment with aadhaar enrollment center to resolve aadhaar misuse, they will ask you to email help at uidai dot gov dot in, you will send 10 emails in 10 days and then get a generic mail, asking you to specify all your details including preferred condom b , etc, you will respond with all details, you will follow up for 3 more days, then you will get a generic FINAL response, "Please lock your bio-metrics in UIDAI , Jai Hind!", after that even if you send 100 emails you will NOT get any response. You lock your bio-metrics, the criminal go to an aadhaar enrollment center, unlock your bio-metrics using stolen fingerprint and keep on looting your hard earned money.
            Reply
            1. #
              #AADHAARFAIL
              Sep 25, 2017 at 8:11 am
              Link aadhaar with everything 2. Your aadhaar has been deactivated til you voluntarily give DNA and pay $100 as DNA extraction fees 3. Your aadhaar is deactivated till voluntarily sleep with aadhaar mongers and satisfy them completely 4. Your aadhaar is deactivated till you donate eye/kidney/liver/pancreas You will not be able to refuse once you link aadhaar with everything else, since once aadhaar gets deactivated your bank, mobile, internet, property, gas, electricity access will be blocked. Stop linking aadhaar with anything else now, apply Fevicol in both thumbs before you are forced to give fingerprint, without bio-metrics aadhaar is just a piece of paper. Jai Hind.
              Reply
              1. #
                #AADHAARFAIL
                Sep 25, 2017 at 8:10 am
                Mitrons, Link your aadhaar to bank, properties, gold, cows and give up all of them voluntarily just like what you did with "gas subsidy" and old currencies. Otherwise your bank a/c, properties, gold, cows will be forcefully seized by government. You could also be arrested under AML, APL, BPL, CPL acts! Be a good follower of Mahatma Gandhi and link aadhaar with everything and give them up voluntarily. Soldiers are dying in borders, farmers are committing suicide, my pal aadhaar babaji Arun Jaitley is working 24x7 to make sure honest tax payers, businessmen also meet same fate as our farmers and soldiers. Jai Hind.
                Reply
                1. B
                  Babin
                  Sep 24, 2017 at 1:28 pm
                  Wrong on all counts. Wait till the ders find a way around gst. And why is the rupee falling then? Ha!
                  Reply
                  1. Ravi Seshadri
                    Sep 24, 2017 at 1:26 pm
                    First PM FM would have seriously taken decision on NPAs, cleaned up balance sheets of banks. Secondly they would have rolled out GST after monitoring GST for six months then they would have taken this demo. In a macro level developing economy, corruption black money can be contained only by politicians and bureaucrats. Comparatively we need lot of investment on infra, power agriculture. Govt should make people to understand these vital areas so that direct indirect taxes are imminent to become third largest economy.
                    Reply
                    1. V
                      veeraraghavan vs
                      Sep 24, 2017 at 8:07 am
                      Irrespective of the rights and wrongs, I am sure that the INTENT of the government in cleansing the system and making things more transparent, making or forcing the informal economical sectors to become formal and pay taxes are laudable. Once these informal taxes come inside the tax net, present tax burden on the formal tax payers - especially the direct taxes - is likely to be relaxed, I believe. Another important factors, in spite of the closest scrutiny by the media on the performance of the government, there were no BIG SCAMS. No nepotism, not encouraging touts or brokers. I am sure the government COULD have done better, on hindsight. But the INTENT is good, I believe!!
                      Reply
                      1. akkount waste
                        Sep 23, 2017 at 10:12 pm
                        cheap comments on UPA rule..every government had some luck factor and some things that cannot simple handle(bad luck) associated with a 13 net export growth rate in UPA-1 is may be magic/global growth. it has atleast try to do it in every possible way...NDA-1 too is on the same track
                        Reply
                        1. D
                          db
                          Sep 23, 2017 at 8:26 pm
                          2004 to 2014 . upa printed 10 lac caror rupee. so every year 1 lac caror. inflation was 10-12 and gdp was 2004 to 2008 around 8 and then 2009 to 2014 4 i still not understand 12 inflation and 8 growth is actually gdp increase !! my simple thought on progress is gdp should be more then inflation. no need any economist advice..
                          Reply
                          1. P
                            PRADIP ROY
                            Sep 22, 2017 at 11:57 pm
                            FAILED TO UNDERSTAND HOW CROP INSURANCE ALL ACCOUNT A SUCCESS FOR FARMERS ? WE HAVE SEEN CROP INSURANCE PAYMENTS OF EVEN IN RS 0.01 CERTIFICATES. YES IT IS SUCCESS FOR INSURANCE COMPANIES.
                            Reply
                            1. W
                              webindra
                              Sep 22, 2017 at 11:50 pm
                              such analysis good for politics etc..i think now is the time wen no rising demand to be missed.. but modi had a motive against corruption and some defined steps taken..so we sud tend to support such moves..yet to know how to make economy more stabilised nd increase..economy is the movements primarily and less in exchange items-solid reserves..wich govt does manage the dynamics well, manages economy well. except mediaworld more memory driven "indigenous" work is not good for modi govt's make in india broader vision..also i hav seen it commonplace practice that people do not want to spend..its a compounded problem..
                              Reply
                              1. Gopalakrishnan Krishnan
                                Sep 22, 2017 at 10:44 pm
                                Rome is not built in a day. The damages caused to the economy need to be set right first and the measures takn in that direction have not gone on well due to resistence from all corners. Besides though PMs intentions are good tp bring welfare for all through development of the economy , he has got his own limitations as he is dependent upon his own party members and bureaucrats who have their own axe to grind which the PM is perhaps not able to fully dictate. These setbacks are to be taken as initial hiccupus and once the senior cabie members realise their own follies , things can be easily set right. As long as public support is for Mr Modi, the PM , not much damage can be expected. Perhaps the FM has to change his approach to augment revenue at any cost and should turn his attention to expand the economy by being liberal in his tax policies, in providing incentives to investors, savers and employment providers and by making the ease of doing business by removing the tax terrorism.
                                Reply
                                1. G
                                  Girish
                                  Sep 22, 2017 at 9:16 pm
                                  One Chief Minister can not be successful of Prime Minister of India , It has multi complexity, one has to always wait and watchful, there is no point in dreaming big with Empty stomach, Economy so nicely grew few years ago, with win win situations , major draw back for India , they got trapped with US president , especially when Obama was on virtue of retirement India should have applied the breaks on tie ups with out going and Incoming Triumph , they are using Indian PM for their personal benefits, frequent visits to US by our PM is totally unnecessary, Terrorism is not only our priority , they always behaved diplomatically with India Pak during Obama , while choosing best friend one should have proper long term vision,policy, one should their own limitations, need of the country's essential requirement for leading life, one has to run with our pace with US,No US president will call on phone so frequent as their selfish motto , we Indians should not get so excited .
                                  Reply
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