Nuts & Bolts: Close, But No Cigar

Finance Ministers take on a certain air when they think things are going swimmingly and nothing can rock the economy when it is cruising along.  Even if all the lookouts are calling out to them to mind the shoals, they brush off the warnings with intimidating certitude.  Usually they are confronted by deferential journalists who come ill-prepared and ask timorous questions that are cut off or barely tolerated.  

I remember P. Chidambaram sounding positively euphoric about the torrents of foreign money pouring into the country ten years ago, and sounding blasé about rising inflation.  So he could – gross domestic product (GDP) grew well over 9% annually between 2005 and 2008, the rain gods were smiling, and we were a breath away from double-digit growth.  

We all know what happened thereafter: eager to prove that India could weather the global financial collapse after 2008, we (that is, Pranab Mukherjee, who had by then replaced PC) overdid the stimulation by opening the floodgates of government spending, writing off rural debt, and the fiscal deficit be damned.  GDP growth decelerated steadily, averaging 5% in the last two years of the UPA government.

So why was I beset by déjà vu when I heard Arun Jaitley the other day talking up three years of the Narendra Modi government?  Despite a bad monsoon, GDP grew 8% in 2015/16, but slid to 7.1% in 2016/17 (when we had good rains).  Once again foreign direct investment (FDI) and huge government spending are only partly lubricating the sticky gears of comatose private investment, supine manufacturing, and a sickly banking system.  Meanwhile, some chief ministers like Yogi Adityanath and Devendra Fadnavis are merrily forgiving huge farm loans.  And there is just no sight of the one million jobs we need to create every month.

Jaitley told his first questioner: “What you think is clear is not very clear” and said any assumption of disruption caused by last November’s demonetisation, and the possibly rocky roll-out of the Goods and Services Tax (GST) in a few weeks, is “erroneous”.

Let’s examine a few of Jaitley’s assertions. First, he said the world economy was in poor health, so the “Indian normal” of 7 to 8% growth was fairly reasonable.  No longer true. Things are looking up overseas, so India is not an outlier. In April, the International Monetary Fund said global growth is expected to rise to 3.5% in 2017 from 3.1% in 2016, and rise further to 3.6% in 2018.  Asia-Pacific growth is seen rising to 5.5% in 2017 from 5.3% last year.  

Second, Jaitley said FDI into India was the world’s highest. Again, not correct. FDI totalled $60 bn in 2016/17 (a record for India, helped by market-opening and business-friendly reforms by the government) but China was still No.1 - $118 bn FDI in 2016, $32 bn in Jan-March this year.

Third, Jaitley did not repeat Modi’s four big reasons for demonetisation: the elimination of black money, corruption, terrorist funding and counterfeiting. Instead, he said the three note-ban gains were a greater push for digitisation of financial transactions, an increase in the taxpayer base, and a loud and clear message “that it is no longer safe to deal in cash”.

He said tax revenue had risen 18%. But this was just a smidgen above 17.6% in 2015/16. This despite the addition of nine million new taxpayers flushed out by notebandi and two tax amnesties. The second of which during demonetisation netted only Rs 5,000 crore.

What lies ahead? A messy GST roll-out could be one shock too many after demonetisation.  A second good monsoon will boost rural employment, but may not increase purchasing power – inflation is seen rising again. The bad news will continue on manufacturing jobs. The economy is treading water.  Are we prepared for choppy seas?