Not surprisingly, the Economic Survey’s analysis of the impact of demonetisation has grabbed the most public attention though, while estimating the growth impact of this at between 25 bps and 50 bps in FY17, the chief economic adviser (CEA) has made it clear this could be quite erroneous since there is no playbook, anywhere in the world, on the impact of demonetisation at the scale India attempted. More important, as the CEA underscored, growth in India was slowing even before November 8—the fact that the Survey estimates FY18’s growth at between 6.75-7.5% is testimony of the weak growth momentum. The top-end of the scale is dependent upon global growth, and India’s exports, picking up—but the possibility of a trade war and certainly greater protectionism starting from the US suggests caution is in order. It doesn’t help that, in India’s case, the only growth-driver, consumption, was moderating despite the pay commission, dramatically lower inflation and a good monsoon. Thanks to global oil prices rising, the chances of the government not being able to spend too much more—the Survey expects excise duties to contract a bit as a proportion of GDP in FY18 due to this—to stimulate demand need to be kept in mind. While there has been a shortfall in divestment receipts and telecom spectrum in FY17, FY18 may not be much better since the telecom sector cannot afford another mega-auction in the next year or two.
This is where matters get intractable and suggest India will settle into a low-growth path—with low employment creation—unless there is a gear-shift in the governance strategy; and this is despite the big reforms like GST, the Bankruptcy Bill and putting the main components of an Aadhaar-based subsidy system in place. The biggest problem, evident for years, has been India’s consistently slowing investments and the government’s inability to fix this despite all its efforts—while investments have fallen from 36% of GDP in FY12 to 27% in FY17, as the CMIE data shows, stuck projects rose to Rs 11.7 lakh crore in December 2016, or 12.1% of projects under implementation, probably the highest level since 1995.
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Linked to this is the rapid worsening in NPAs in PSU banks—as a share of lending, these rose from 4.5% to 12% between FY15 and FY17—as a result of which, the Survey shows, credit growth has been contracting over the years. Real loan growth to MSMEs slowed significantly in 2014-15, and actually turned negative during the past two fiscal years. Since all RBI’s loan-restructuring programs have failed to make a serious dent, nor has economic growth as the government kept hoping, the Survey repeats the need for a bad bank—it calls this Public Sector Asset Rehabilitation Agency (PARA)—which can take tough decisions like loan write-offs as high as 75%to firms. Since capitalising PARA will be expensive, the Survey suggests using the demonetisation dividend—in the form of proceeds from the amnesty scheme—as well as using RBI’s reserves to fund this; the consequences of the latter on RBI’s ability to operate are not clear, but Raghuram Rajan had opposed the measure on these grounds. Considering the government has been hobbled for so long on resolving legacy tax cases—Vodafone, Cairn, Shell … all the big UPA tax cases remain untouched—due to its desire not to be labeled a suit-boot-ki-sarkaar, it is an open question as to whether PARA can be set up and the loans restructured with big write-offs.
Even within the gloom, the Survey points to areas of hope—such as getting 1 lakh new jobs from increased exports of $2 billion in apparel—but all of these require a significant step-up in reform, from fixing logistics to bad tax policies. A simple reform, like allowing workers to move from EPFO to NPS, promised in the last Budget, has not yet been cleared and labour reforms are proving quite intractable. From a political point of view, that presents a peculiar problem since, if growth slows and there are few jobs, nearly three years into its tenure, the chances of the government getting more populist will increase. But even making an impact there, the Survey shows, requires radical changes. With huge leakages in even schemes like MGNREGA and non-poor states being able to get the lion’s share of such benefits—districts with 40% of India’s poorest receive just 29% of funding—a modified Universal Basic Income (UBI) is the best way out; but this is too expensive to attempt unless all existing anti-poverty schemes are replaced. Doing that requires a very bold government.